Housing and Net Worth

The part of the country you choose to live in, as well as the type of dwelling you select, can make a major difference in your net worth over time. Once you've already put down roots somewhere, you may not be interested in moving, regardless of the possible financial benefits, but if you're looking for a fresh start or you're about to graduate from college, the financial implications of moving to different areas should factor into your decision. The chart below shows the cost of entry-level home ownership in three cities with varying costs of living.

Example 1: Los Angeles, California

Single, claiming 2 exemptions

$40,000 per year salary

$2593.95 monthly take home (source: Paycheckcity.com)

$100,000 per year salary

$5436.26 monthly take home

Starter condo in untrendy part of town

2 bd, 2ba

Purchase price: $300,000

Down payment: $15,000 (5%)

30 year fixed mortgage rate: 6.0% (source: BankofAmerica.com; December 13, 2007 rates)

Monthly payment: $1708.72

Points: 1.185

15 year fixed mortgage rate: 5.75%

Monthly payment: $2366.67

Points: 1.028

Starter house in untrendy part of town

2 bd, 2 ba

$500,000

Note: this is considered a jumbo mortgage, and the rate is substantially higher.

Down payment: (5%, or $25,000 since even 10%, or $50,000 is not a reasonable down payment for most people)

30 year fixed mortgage rate: 7.375% (source: BankofAmerica.com; December 16 rates)

Monthly payment: $3280.71

Points: 0.952

15 year fixed mortgage rate: 6.75%

Monthly payment: $4203.32

Points: 1.046

Note: The house payment is impossible in any of these scenarios if you make $40,000 per year.

You wouldn't even qualify for the loan.

Example 2: St. Louis, Missouri

Single, claiming 2 exemptions

$40,000 per year salary

$2594.58 monthly take home (source: Paycheckcity.com)

$100,000 per year salary

$5627.44 monthly take home

Starter condo in slightly trendy part of the city

2 bd, 2ba

Purchase price: $125,000

Down payment: $12,500 (10%)

Note: condos are not as common here because houses are so affordable.

30 year fixed mortgage rate: 6.125% (source: BankofAmerica.com; December 13, 2007 rates)

Monthly payment: $683.56

Points: 1.035

15 year fixed mortgage rate: 5.875%

Monthly payment: $941.76

Points: 0.966

Starter house in most parts of the city (in other words, you'll have plenty of options at this price point)

2 bd, 2 ba

$175,000

Down Payment: 17,500 (10%)

30 year fixed mortgage rate: 6.125%

Monthly payment: $956.99

Points: 1.035

15 year fixed mortgage rate: 5.875%

Monthly payment: $1318.46

Points: 0.966

Example 3: Houston, Texas - no state income tax, so your paycheck automatically goes further

Single, claiming 2 exemptions

$40,000 per year salary

$2727.58 monthly take home (source: Paycheckcity.com)

$100,000 per year salary

$6057.44 monthly take home

Starter condo in untrendy part of town

2 bd, 2ba

Purchase price: 75,000

Down payment: $15,000 (20%)

30 year fixed mortgage rate: 6.25% (source: BankofAmerica.com; December 16, 2007 rates)

Monthly payment: $369.43

Points: 0.998

15 year fixed mortgage rate: 6.0%

Monthly payment: $506.31

Points: 0.863

Starter house in a nice part of town $200,000

3 bd, 2 ba

Down payment: $20,000 (20%)

30 year fixed mortgage rate: 6.125

Monthly payment: $1093.70

Points: 1.153

15 year fixed mortgage rate: 5.875

Monthly payment: $1506.81

Points: 0.960

You'll notice that these scenarios are not perfectly comparable. The square footage of these condos and homes is not identical and neither are the neighborhoods I chose. These are all cities I am pretty familiar with and in some cases types of neighborhoods don't really compare well across cities because the size and character of the cities are so different from one another. Instead of trying to create perfect comparisons, I thought about where a financially savvy young professional might choose to live in each of these cities and chose home prices relevant to those areas.

Another reason why it is difficult to make exact comparisons is that a starter home in LA is likely to be 1,000 square feet or less and have no more than 2 bedrooms, while a starter home in Houston is likely to have 3 or 4 bedrooms and be close to 2,000 SF.

Finally, the down payment amounts I used for each city are different. I tried to choose an amount that a young professional in each purchasing situation might be likely to put down, but I don't have any hard data showing the average down payment amount for these types of dwellings. I tended to assume that someone buying a condo would not have as much money saved up for a down payment (because if they had more income or more savings, they might go for a house) but that if 20% of the purchase price was a small enough amount, as in the Houston condo example, that the purchaser might still put that amount down.

As you can see from these numbers, home ownership is easier in some areas than in others. If the idea of being monthly-payment-free in a short amount of time appeals to you, choosing a city with a low cost of living can allow you to quickly save up money for a down payment, get a fifteen year mortgage, and own a home free and clear for the rest of your days. Since the cost of housing is one of the biggest, if not the biggest, expense for most people, it can have a massive effect on both your short and long-term net worth. If the benefits of living in an expensive city are worth the trade off to you, go for it, but know what you're sacrificing in the process.