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Questions about HCOL area.
I'm a long time lurker here with just a few questions. I'm just curious what all of you consider a HCOL area verses a LCOL area.
Also, why do you say if you live in a HCOL you should spend 30-35% of your take home pay on a home verses 25-28% in a normal area? I apologize, but this makes no sense to me. Why would the percentage go up when you're going to be spending more on everything else? Example: more on groceries, more on gas, etc. These are things you can't control. The price of the home you buy you can control.
Thoughts?
ETA- Sorry, I didn't mean what areas, I meant the prices. I know NYC and LA are VHCOL. What I'm trying to gage is the area we a looking into. We rent now and are looking for a home in the same area. Would you consider a medium cost of homes in the $700K range HCOL or MCOL? I guess I consider it high. Not VHCOL, but still high.
Re: Questions about HCOL area.
You make a good point but I think the percentage increase for HCOL just exists out of necessity. A lot of people could not afford a house that suits their needs at the 25% mark in a HCOL area.
You're correct, that the higher percentage puts greater pressure on your finances, which are already under siege from HCOL inflation (groceries, gas, etc.). So I think you need to cut back in other areas to compensate. On the other hand, people in HCOL areas usually have larger incomes. So if housing is 35% of take home, but you take home $10K, you still have $6500 a month to deal with other expenses and savings. And other expenses are not as exponentially greater as housing prices (a gallon of organic milk here is $6, it's $5 in my folks' LCOL area).
As for identifying particular areas, the following areas are your classic HCOL (or VHCOL) areas: NYC, San Fran, Washington DC, and Hawaii (Boston?). Seattle, Chicago, Philly, and most other large cities are MCOL. I guess everything else is LCOL. I'm probably leaving out some exceptions and nuances but I'm sure OPs will correct me or add details.
I'll add LA to the list of HCOL. Part of what makes it HCOL is the price of housing, overall- buying, renting, leasing, etc. These are the areas that are in high demand, with lots of perks generally (jobs, good schools, access to shopping, restaurants, jobs, culture, moderate weather, good police, night life, etc) and you are basically paying for these perks. The cost of other items (groceries, for example) is nothing compared to the price of housing.
I do live in a HCOL area in Los Angeles, and my brother, about 90 miles away, pays significantly less for housing (maybe moderate COL), but I love the *perks of my neighborhood and I'm willing to pay for it, as well as access to my job without significant commuting. But we do pay basically the same for milk, he maybe pays a tiny less for gas, and we pay the same for a sweater at Old Navy.
I agree with pp and would just add that it's not only that groceries/gas are more (though they are, but not outrageously) it's that everything else is much more expensive: housing (median house price in my area is about a $1M), taxes (I pay about $15K a year in taxes, and I have a teeny house with almost no land), daycare, schooling, etc etc.
ETA: Oh and I live in a suburb right outside NYC
I'd consider a $700k median HCOL. I think Los Angeles is HCOL rather than VHCOL (the neighborhoods and median prices vary greatly in the metro area).
If you look at national housing statistics, anything that is much, much greater than the average price of a home in the US will be HCOL or VHCOL. Think of it like gas prices. When gas is $3.90/gallon near me and I hear that the average price in the US is $3.25, I think, "Okay, what jackholes are able to buy gas for $2.65?!" Because in order for something to average out like that, someone's way over the top and someone else is way under the bottom.
40/112
Not everything increases equally for cost of living. Our local home prices are much higher but our food prices are only somewhat higher than LCOL areas. Car/transportation prices stay about the same. Salaries are generally a bit higher (not as much higher as the real estate).
I am often shocked how much people in many parts of the country will pay to get around. Personally, I think all the cars in the household should not be more than 25% of one year's household income (total purchase prices, not as depreciated nor the payment). I also believe in buying fuel efficient cars and keeping them for about 15 years. Plenty of people spend more like 20% of their salary on transportation. That seems insane to me. As a result, we can put a great % towards housing than a family with a similar income but driving a mercedes or lexus SUV which they trade in after 5 years.
ETA: we live in the cheapass neighborhood of a very expensive town where median list price for a house is 2.8 million. I can promise you that a loaf of sliced bread at the expensive gourmet specialty grocery store downtown does not sell for 4 times as much as in a 700K median price town, nor 10x a 280K town. We still don't buy their over priced bread. We drive a few towns over instead.