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Historically this ratio has been around 15. Depending on ones personal situation, this number may be different. Regionally the number varies, but it is also affected by other independent variables such as location, school system, safety of neighborhood, population growth of town, etc. Only you can determine what is best but keeping all this in mind puts the actual sales price in rational perspective. Buy something you can afford: An acceptable standard is to never pay more than 3 x annual household income. In other words, if the household generates $100K per year, a $300K mortgage is within reach. Never stretch for a home. It is just not worth the risk in the long run and may result in sleepless nights. It is not prudent to be house rich but cash poor. Remember, a house is not as liquid as cash or stock, so you are significantly at mercy of a downturn more so than any other asset.

In closing, while now may be an opportunistic time to purchase that first home please do not make the decision solely based upon tax credits and low interest rates afforded by the government. The tax credit may turn out to be a short term incentive in that it could get wiped out entirely if prices fall further and without a respectable down payment. Moreover, mortgage rates have a negative correlation with home values. That is when rates rise house prices fall because the affordability of that home decreases and vice versa. It would be nave to think that interest rates, already at historical levels, will stay depressed for the foreseeable future. Especially given the deteriorating conditions and debt loads that our country is facing. I refer you to the 70s and 80s when a home could be purchased for $80,000 at a mortgage rate of 15%. By utilizing a strategy that incorporates knowing whether your job and family income status is stable, having an ample security cushion, not overpaying for a home, and buying something you can afford, would collectively minimize to an extent market dynamics that are entirely out of your control. Is now the time to buy? Buyer beware.

Learn more about this author, Luis Garcia.
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