California Homebuying Insanity

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anoop
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Re: California Homebuying Insanity

Post by anoop »

There’s an absolute ton of funny money from the bazillion IPOs that have happened over the last year, not to mention crypto millionaires.
Tingting1013
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Re: California Homebuying Insanity

Post by Tingting1013 »

I think part of the sticker shock is just a misframing of the real cost of hard assets that sit on your balance sheet.

The cost of a $100k Tesla Model X is not $100k, it’s $10k/year, the expected depreciation plus maintenance over the lifetime that you own it.

The cost of a $2M house is not $2M, it’s $70k/yr in carrying cost / imputed rent.

A $600k/year income household could easily afford both.
Last edited by Tingting1013 on Thu May 06, 2021 10:42 pm, edited 1 time in total.
Afty
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Re: California Homebuying Insanity

Post by Afty »

We’ve lived in CA for 10 years, and real estate has been crazy expensive the entire time. If you’re planning to stay long term, it makes sense to hold your nose and take a leap. You can mitigate some risk by putting the bare minimum as a down payment and relying on the fact that CA mortgages are non-recourse, i.e., you can walk away from the house and the bank can’t come after your assets.
anoop
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Re: California Homebuying Insanity

Post by anoop »

Tingting1013 wrote: Thu May 06, 2021 10:29 pm
anoop wrote: Thu May 06, 2021 10:26 pm
Tingting1013 wrote: Thu May 06, 2021 10:21 pm
anoop wrote: Thu May 06, 2021 4:49 pm
Tingting1013 wrote: Thu May 06, 2021 4:26 pm

$1.6M mortgage costs $80k/year (and don’t forget a portion of that increases your net worth)
Property taxes are $22k
Insurance is $1k
Maintenance is $5k
Tax benefits are -$5k

Total annual cost is $103k (and again a portion of this is principal pay down). Excluding principal the true cost is only $71k.

How is that not affordable on $600k income?
Yeah the numbers work out but it's about my comfort level. With my rough calculation, I look at post tax income as being 50% of gross and 30+% of that going to housing is too high for my comfort. If that income is secure like a pension, maybe. In a job, no way. Loss of job, sickness/disability, all become a major issue if one is overstretched on housing.
If the numbers work out but you’re still in fear, the problem isn’t with the numbers...
The numbers will work out until one is buried in debt. That doesn’t make it a good idea. If you actually try and plan for contingencies like a job loss then it becomes much harder to show that the numbers work.
If you lose your job and you can’t find another one that pays enough to cover the mortgage, you can just sell the house and downgrade. Why is that not a sufficient contingency?

And what kind of apocalyptic scenario would leave a $600k dual earner family permanently unable to cover a $70k housing cost?
If it happens at a bad time (usually does for me) it could mean loss of down payment.

I’ve lived through the dot com bust where I had to take a 30% pay cut and relocate. Fortunately I wasn’t a house owner back then (even though I had been thinking about it).

The out flow is $100k not $70k.
Tingting1013
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Re: California Homebuying Insanity

Post by Tingting1013 »

anoop wrote: Thu May 06, 2021 10:43 pm
Tingting1013 wrote: Thu May 06, 2021 10:29 pm
anoop wrote: Thu May 06, 2021 10:26 pm
Tingting1013 wrote: Thu May 06, 2021 10:21 pm
anoop wrote: Thu May 06, 2021 4:49 pm
Yeah the numbers work out but it's about my comfort level. With my rough calculation, I look at post tax income as being 50% of gross and 30+% of that going to housing is too high for my comfort. If that income is secure like a pension, maybe. In a job, no way. Loss of job, sickness/disability, all become a major issue if one is overstretched on housing.
If the numbers work out but you’re still in fear, the problem isn’t with the numbers...
The numbers will work out until one is buried in debt. That doesn’t make it a good idea. If you actually try and plan for contingencies like a job loss then it becomes much harder to show that the numbers work.
If you lose your job and you can’t find another one that pays enough to cover the mortgage, you can just sell the house and downgrade. Why is that not a sufficient contingency?

And what kind of apocalyptic scenario would leave a $600k dual earner family permanently unable to cover a $70k housing cost?
If it happens at a bad time (usually does for me) it could mean loss of down payment.

I’ve lived through the dot com bust where I had to take a 30% pay cut and relocate. Fortunately I wasn’t a house owner back then (even though I had been thinking about it).

The out flow is $100k not $70k.
So you lost a bunch of home equity- that would have happened to your net worth even if you owned it outright.

The $600k household could withstand a 30% paycut and still afford the mortgage (and the Tesla).

The $30k is entirely an optional addition to net worth for those who choose not to opt for interest only mortgage.
BogleMelon
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Re: California Homebuying Insanity

Post by BogleMelon »

Overseas investors seem that they decided to buy the entire country! I think this is the main reason for the current craze and all cash offers
Last edited by BogleMelon on Fri May 07, 2021 10:42 am, edited 1 time in total.
"One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather
anoop
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Re: California Homebuying Insanity

Post by anoop »

BogleMelon wrote: Thu May 06, 2021 10:52 pm Overseas investors seem that they decided to buy the entire country! I think this is the main for the current craze and all cash offers
Dollar milkshake theory at work!
tj
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Re: California Homebuying Insanity

Post by tj »

poppy42 wrote: Thu May 06, 2021 10:26 pm Thanks everyone for the thoughtful responses. Definitely food for thought!

We’re not leaving CA - family is here, friends are here, jobs are here in a CA-centric industry. Taxes are high and cost of living is insane, but for better or worse it’s where we live.

I see the same things happening to some degree in many other states - MA and NY for sure, along with WA and OR in this coast. It feels a lot like 2008, but I know the circumstances are quite different.

I know we are fortunate in our circumstances, but if we are having a hard time, those making less are completely shut out. We aren’t looking in “fancy” areas. The average working person should be able to afford to buy a home, and as a country I don’t know if we will ever get back to a place where that’s possible.
Yes, as someone who is completely shut out. I grew up in SoCal, and I've effectively been priced out of even the less desirable neighborhoods that are near where I grew up. I'm unlikely to ever clear $100k annually as a government employee unless inflation erodes away the value of the dollar that the salary reaches that level but doesn't really help.

I was considering buying 6 months ago when I knew that I was moving back, and it's so out of control now that it's just not even mathematically possible. I wouldn't just be cash poor, I'd be out of cash, and probably not even get approved for a loan in the first place. It sucks. And it's not like rent is cheap.

I'd be surprised if I'm still here past the end of my current lease, and I have healthy assets. The math just makes zero sense when I look at my income and the costs to be here.
Last edited by tj on Thu May 06, 2021 11:21 pm, edited 1 time in total.
tj
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Re: California Homebuying Insanity

Post by tj »

Afty wrote: Thu May 06, 2021 10:42 pm We’ve lived in CA for 10 years, and real estate has been crazy expensive the entire time. If you’re planning to stay long term, it makes sense to hold your nose and take a leap. You can mitigate some risk by putting the bare minimum as a down payment and relying on the fact that CA mortgages are non-recourse, i.e., you can walk away from the house and the bank can’t come after your assets.
I can't agree with this. 10 years ago, everything was significantly more affordable. There were short sales and foreclosures all over the place!
Marseille07
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Re: California Homebuying Insanity

Post by Marseille07 »

tj wrote: Thu May 06, 2021 11:16 pm
Afty wrote: Thu May 06, 2021 10:42 pm We’ve lived in CA for 10 years, and real estate has been crazy expensive the entire time. If you’re planning to stay long term, it makes sense to hold your nose and take a leap. You can mitigate some risk by putting the bare minimum as a down payment and relying on the fact that CA mortgages are non-recourse, i.e., you can walk away from the house and the bank can’t come after your assets.
I can't agree with this. 10 years ago, everything was significantly more affordable. There were short sales and foreclosures all over the place!
Yeah, it was easier 10 years ago in hindsight. The only problem is, that's when people were freaking out on falling housing prices and they didn't look like good deals. Unlike stocks, it's harder to buy the dip in RE.
PowderDay9
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Re: California Homebuying Insanity

Post by PowderDay9 »

Tingting1013 wrote: Thu May 06, 2021 9:49 pm
PowderDay9 wrote: Thu May 06, 2021 6:48 pm
investingfan wrote: Thu May 06, 2021 3:10 pm Why the advice always out of state? There are many nice towns in California where home aren't $1,000,000 or even $700,000 and schools are 10/10.
Because the OP is paying over $3k a month in CA income taxes. You could buy the $2M house for $500k in a tax-free state and the $3k would cover the mortgage.

Even if the OP had to take new jobs at half their income they'd still come out ahead unless the CA housing market goes to the moon. I wouldn't bet on that but many people do. Regardless, OP still pays half a million in CA taxes over the next decade.
This is just bad math.

$600k income in CA
-$130k Federal income taxes (assuming 2 maxed out 401ks and standard deduction)
-$40k CA income taxes
-$30k payroll taxes
-$100k housing
-$100k other expenses
= $200k for savings

$300k income in LCOL TX or FL
-$50k Federal income taxes (assuming 2 maxed out 401ks and standard deduction)
-$20k payroll taxes
-$40k housing ($500k house with $400k mortgage, 2% property tax)
-$75k other expenses (let’s assume non-housing costs in CA are 1/3 more expensive than LCOL, which I think is being generous to LCOL, since everything bought online costs the same no matter where you live)
= $115k for savings

The savings in each scenario are invested in the same stock market. So every year you stay in CA the compounding on your extra savings is that much more impactful.
My comment was a general statement, not a math equation. But since you nicely laid out the math, can you explain how a $500k house has an annual cost of $40k while a $2M house is only $100k?

I also said the $3k would cover the mortgage, not equal the mortgage. In FL you can spend about $2.3k per month for PITI on a $400k mortgage. You'll get 4 bedrooms and about 2500-3000 sq feet.

I think those federal income taxes are off a bit too. I got a higher number for the $600k couple and lower for the $300k couple. Also the $600k couple is phased out for child tax credits. Assume 2 kids so that's another $4k savings for the lower earning couple.
Last edited by PowderDay9 on Fri May 07, 2021 1:36 am, edited 4 times in total.
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ApeAttack
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Re: California Homebuying Insanity

Post by ApeAttack »

Marseille07 wrote: Thu May 06, 2021 11:21 pm
tj wrote: Thu May 06, 2021 11:16 pm
Afty wrote: Thu May 06, 2021 10:42 pm We’ve lived in CA for 10 years, and real estate has been crazy expensive the entire time. If you’re planning to stay long term, it makes sense to hold your nose and take a leap. You can mitigate some risk by putting the bare minimum as a down payment and relying on the fact that CA mortgages are non-recourse, i.e., you can walk away from the house and the bank can’t come after your assets.
I can't agree with this. 10 years ago, everything was significantly more affordable. There were short sales and foreclosures all over the place!
Yeah, it was easier 10 years ago in hindsight. The only problem is, that's when people were freaking out on falling housing prices and they didn't look like good deals. Unlike stocks, it's harder to buy the dip in RE.
In 2010-2011, after the housing market tanked and prices stabilized, it was clear to many in SoCal that it was a great time to buy if you had the down payment and a good income stream (unlike a few years before when anyone with a pulse could get a loan). Unfortunately I had to wait until 2015, but still got a decent deal compared to today's prices.

If I had to buy today and wanted a home within 20 miles from the coast where temperatures are fairly mild throughout the year... forget it. I would rent until this madness ended. But my household income isn't even close to 600k/yr. :P
Just another lazy index investor who recently found out about I-Bonds (https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm).
marcopolo
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Re: California Homebuying Insanity

Post by marcopolo »

willthrill81 wrote: Thu May 06, 2021 5:25 pm
Marseille07 wrote: Thu May 06, 2021 5:18 pm
willthrill81 wrote: Thu May 06, 2021 5:11 pm
Tingting1013 wrote: Thu May 06, 2021 2:53 pm
poppy42 wrote: Thu May 06, 2021 1:15 pm We also don't want to switch schools (and we can't afford to buy in the area where we currently rent - decent houses run about $2M here).

We have $400K in savings dedicated towards down payment, closing, and making up an appraisal shortfall (you pretty much have to waive appraisal contingency to compete in this market). We make $600K a year combined.
If you make $600k you can afford a $2M house
That reminds me of the Spandex rule: just because you can doesn't mean that you should.
I don't disagree, but if they can spend more and don't, and keep getting outbid by others...what exactly are they complaining?
True. If you want to live in a VHCOL area, then you should expect to pay VHCOL prices. If you simply cannot or will not pay those prices or adjust what you consume, then you may have little option other than moving elsewhere, which is what a great many are doing.

When we moved to our current area, we initially wanted a few acres of land on which to build our 'dream home'. However, county regulations don't permit SFHs to be built on under 10 acres of land outside the city limits, and there was no way we could afford to buy a few acres in the city limits or to buy 10 acres outside the city and then build our home. So we had a very lovely but very modestly sized home built in a well run HOA and haven't regretted anything. Incidentally, the value of our home has nearly doubled in the 6.5 years since we closed on it.
It is odd to see the various comments about how crazy CA is and so many people moving away in the same thread discussing the rapidly rising home prices. It is almost like a forum full of people that follow markets and the economy don't understand how supply and demand work to set prices. :oops:
Once in a while you get shown the light, in the strangest of places if you look at it right.
marcopolo
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Re: California Homebuying Insanity

Post by marcopolo »

PowderDay9 wrote: Thu May 06, 2021 6:48 pm
investingfan wrote: Thu May 06, 2021 3:10 pm Why the advice always out of state? There are many nice towns in California where home aren't $1,000,000 or even $700,000 and schools are 10/10.
Because the OP is paying over $3k a month in CA income taxes. You could buy the $2M house for $500k in a tax-free state and the $3k would cover the mortgage.

Even if the OP had to take new jobs at half their income they'd still come out ahead unless the CA housing market goes to the moon. I wouldn't bet on that but many people do. Regardless, OP still pays half a million in CA taxes over the next decade.
unless you live in the cheapest place in the country, isn't there similar math for most people. Why do people live in Philadelphia, PA when they could live in Philadelphia, MS for a fraction of the cost? There are other reasons people choose their place to live than just cost of housing. OP needs to decide if the cost is worth it for them. With their income, they can certainly afford it.
Once in a while you get shown the light, in the strangest of places if you look at it right.
59Gibson
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Re: California Homebuying Insanity

Post by 59Gibson »

marcopolo wrote: Fri May 07, 2021 2:25 am
PowderDay9 wrote: Thu May 06, 2021 6:48 pm
investingfan wrote: Thu May 06, 2021 3:10 pm Why the advice always out of state? There are many nice towns in California where home aren't $1,000,000 or even $700,000 and schools are 10/10.
Because the OP is paying over $3k a month in CA income taxes. You could buy the $2M house for $500k in a tax-free state and the $3k would cover the mortgage.

Even if the OP had to take new jobs at half their income they'd still come out ahead unless the CA housing market goes to the moon. I wouldn't bet on that but many people do. Regardless, OP still pays half a million in CA taxes over the next decade.
unless you live in the cheapest place in the country, isn't there similar math for most people. Why do people live in Philadelphia, PA when they could live in Philadelphia, MS for a fraction of the cost? There are other reasons people choose their place to live than just cost of housing. OP needs to decide if the cost is worth it for them. With their income, they can certainly afford it.
marcopolo wrote: Fri May 07, 2021 2:25 am
PowderDay9 wrote: Thu May 06, 2021 6:48 pm
investingfan wrote: Thu May 06, 2021 3:10 pm Why the advice always out of state? There are many nice towns in California where home aren't $1,000,000 or even $700,000 and schools are 10/10.
Because the OP is paying over $3k a month in CA income taxes. You could buy the $2M house for $500k in a tax-free state and the $3k would cover the mortgage.

Even if the OP had to take new jobs at half their income they'd still come out ahead unless the CA housing market goes to the moon. I wouldn't bet on that but many people do. Regardless, OP still pays half a million in CA taxes over the next decade.
unless you live in the cheapest place in the country, isn't there similar math for most people. Why do people live in Philadelphia, PA when they could live in Philadelphia, MS for a fraction of the cost? There are other reasons people choose their place to live than just cost of housing. OP needs to decide if the cost is worth it for them. With their income, they can certainly afford it.
This is true, there are always other cheaper options but at what cost. I think the CA hits come from the fact that there are tons of posts of people making 500-700k+/yr in CA complaining/asking about affordability of housing. Moving could be an enormous option, otherwise bite the bullet. If someone in South Carolina complained about a $260k house- folks would say try to earn more income, moving out of state may not be necessary.
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lindsayinsf
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Re: California Homebuying Insanity

Post by lindsayinsf »

59Gibson wrote: Thu May 06, 2021 5:53 pm
willthrill81 wrote: Thu May 06, 2021 5:41 pm
In that scenario, one can almost certainly substantially reduce one's tax burden. The combined federal, state, and local taxes on those making seemingly high incomes in VHCOL areas can be obscenely high, well over 50%.
No doubt. The tax differences can be like an extra p/t income in the household
Which VHCOL locations have an effective tax rate well over 50%? By my calculations the combined federal & California state effective tax rate on $600k is 40.8%, and on $1M is 44.2% (unless my math is incorrect). What am I missing?
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lindsayinsf
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Re: California Homebuying Insanity

Post by lindsayinsf »

OP, how long have you been looking? How long have you been saving your down payment? If you continue to save you should approach a down payment/mortgage ratio that feels more comfortable to you within a few years. If you continue to make offers, eventually one will work out.
poppy42 wrote: Thu May 06, 2021 1:15 pm ...I also fear we will be majorly overpaying for whatever we buy...
Would you still consider it overpaying if you stay in the house for 30 years and housing prices continue to go up over the next 10 years? Or if they go down over the next 10 years, then back up in 20 years, and increase after 30 years?

It seems like you are feeling squeezed because of the time pressure of your child starting school? Think about how you can get what is most important to your family if buying a house by that date doesn't work out.

Re: homes selling for $100-600K over asking, hopefully you are including that expectation in your search by looking at homes listed 10% to 30% lower than your max. I don't understand why sellers (or sellers' realtors ;)) do this, when everyone knows they will sell for more, but that seems to have been they way it's been for the past few years, at least where I've been looking.

I would not expect home prices to go down any time soon. There is a severe housing shortage, nearly everywhere in the U.S., and I don't foresee local governments building massive amounts of housing in the near future when they've been under-building for the past 40 to 50 years. IMO, the market feels unusual to higher income folks now because they have not historically been affected negatively by the shortage, but the current situation has been a long time coming.

As someone who makes about 1/4th of what you do, I'm wondering why you can't afford a $2M home on a $600k income. That's about 3 times income. To me, stretching your budget by a lot would mean $3M, not $2M. $1.6M seems really conservative, especially in this market. You don't have to stretch your budget beyond comfort levels, that's your choice, but it most likely means continuing to rent for the time being. There's nothing wrong with renting.
Tingting1013
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Re: California Homebuying Insanity

Post by Tingting1013 »

PowderDay9 wrote: Fri May 07, 2021 12:43 am
Tingting1013 wrote: Thu May 06, 2021 9:49 pm
PowderDay9 wrote: Thu May 06, 2021 6:48 pm
investingfan wrote: Thu May 06, 2021 3:10 pm Why the advice always out of state? There are many nice towns in California where home aren't $1,000,000 or even $700,000 and schools are 10/10.
Because the OP is paying over $3k a month in CA income taxes. You could buy the $2M house for $500k in a tax-free state and the $3k would cover the mortgage.

Even if the OP had to take new jobs at half their income they'd still come out ahead unless the CA housing market goes to the moon. I wouldn't bet on that but many people do. Regardless, OP still pays half a million in CA taxes over the next decade.
This is just bad math.

$600k income in CA
-$130k Federal income taxes (assuming 2 maxed out 401ks and standard deduction)
-$40k CA income taxes
-$30k payroll taxes
-$100k housing
-$100k other expenses
= $200k for savings

$300k income in LCOL TX or FL
-$50k Federal income taxes (assuming 2 maxed out 401ks and standard deduction)
-$20k payroll taxes
-$40k housing ($500k house with $400k mortgage, 2% property tax)
-$75k other expenses (let’s assume non-housing costs in CA are 1/3 more expensive than LCOL, which I think is being generous to LCOL, since everything bought online costs the same no matter where you live)
= $115k for savings

The savings in each scenario are invested in the same stock market. So every year you stay in CA the compounding on your extra savings is that much more impactful.
My comment was a general statement, not a math equation. But since you nicely laid out the math, can you explain how a $500k house has an annual cost of $40k while a $2M house is only $100k?

I also said the $3k would cover the mortgage, not equal the mortgage. In FL you can spend about $2.3k per month for PITI on a $400k mortgage. You'll get 4 bedrooms and about 2500-3000 sq feet.
“General statements” are what mislead people, rules of thumb are often dead wrong.

$500k house with $400k mortgage:
Principal & Interest: $20k
Taxes: $10k
Insurance: $5k
Maintenance: $5k

I did the math for the $2M house above, I don’t care to retype it. The bottom line is that home insurance & property taxes are much higher as a % of home value in LCOL than in CA.

Bottom Line: in order to save the amount as a $600k CAer, the LCOLer would need to earn much more than $300k. Probably closer to $450k. How many jobs in LCOL pay $200k each?

People are at a loss how folks have the money they have to be bidding up all these houses. And then they poo poo the compensation that can only be made here??
Last edited by Tingting1013 on Fri May 07, 2021 9:00 am, edited 1 time in total.
Firemenot
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Re: California Homebuying Insanity

Post by Firemenot »

lindsayinsf wrote: Fri May 07, 2021 3:48 am
59Gibson wrote: Thu May 06, 2021 5:53 pm
willthrill81 wrote: Thu May 06, 2021 5:41 pm
In that scenario, one can almost certainly substantially reduce one's tax burden. The combined federal, state, and local taxes on those making seemingly high incomes in VHCOL areas can be obscenely high, well over 50%.
No doubt. The tax differences can be like an extra p/t income in the household
Which VHCOL locations have an effective tax rate well over 50%? By my calculations the combined federal & California state effective tax rate on $600k is 40.8%, and on $1M is 44.2% (unless my math is incorrect). What am I missing?
I assumed he was talking tax rates on the margin. The tax rates on the margin are brutal. I’m a CA resident and I pack as much away into deferred comp plans and am hesitant to exercise any options. Someday I’ll take the hit though but it’s just so unappealing.
Last edited by Firemenot on Fri May 07, 2021 8:50 am, edited 4 times in total.
Tingting1013
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Re: California Homebuying Insanity

Post by Tingting1013 »

marcopolo wrote: Fri May 07, 2021 1:24 am
willthrill81 wrote: Thu May 06, 2021 5:25 pm
Marseille07 wrote: Thu May 06, 2021 5:18 pm
willthrill81 wrote: Thu May 06, 2021 5:11 pm
Tingting1013 wrote: Thu May 06, 2021 2:53 pm

If you make $600k you can afford a $2M house
That reminds me of the Spandex rule: just because you can doesn't mean that you should.
I don't disagree, but if they can spend more and don't, and keep getting outbid by others...what exactly are they complaining?
True. If you want to live in a VHCOL area, then you should expect to pay VHCOL prices. If you simply cannot or will not pay those prices or adjust what you consume, then you may have little option other than moving elsewhere, which is what a great many are doing.

When we moved to our current area, we initially wanted a few acres of land on which to build our 'dream home'. However, county regulations don't permit SFHs to be built on under 10 acres of land outside the city limits, and there was no way we could afford to buy a few acres in the city limits or to buy 10 acres outside the city and then build our home. So we had a very lovely but very modestly sized home built in a well run HOA and haven't regretted anything. Incidentally, the value of our home has nearly doubled in the 6.5 years since we closed on it.
It is odd to see the various comments about how crazy CA is and so many people moving away in the same thread discussing the rapidly rising home prices. It is almost like a forum full of people that follow markets and the economy don't understand how supply and demand work to set prices. :oops:
Not surprising to me at all. A forum full of buy-and-holders has no need to understand anything about economic principles.
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Watty
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Re: California Homebuying Insanity

Post by Watty »

Yesterdaysnews wrote: Thu May 06, 2021 10:23 pm Who are these people showing up with $3M cash to buy a house on the spot? Where is this money coming from, the tech industry? I don’t see that kind of liquid folks around where I live.
A lot of "cash sales" are not really actually for cash, they are just offers with no financing contingency so that the buyer would lose their earnest money if they cannot get financing by the closing date.

I don't know what sort of earnest money people people are using in that area but in a hot market most sellers would love to take $100K in forfeited earnest money and relist the property in 31 days.
quantAndHold
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Re: California Homebuying Insanity

Post by quantAndHold »

Tingting1013 wrote: Thu May 06, 2021 10:29 pm]
If you lose your job and you can’t find another one that pays enough to cover the mortgage, you can just sell the house and downgrade. Why is that not a sufficient contingency?

And what kind of apocalyptic scenario would leave a $600k dual earner family permanently unable to cover a $70k housing cost?
Because it doesn’t work that way. OP works in tech. Tech is cyclical. People forget that, because it’s been on an upswing for awhile now.

If OP gets laid off and can’t find another job right away, it will be in a situation where most of OP’s neighbors are also laid off and not able to find a new job right away. They might not be able to sell the house at all, much less for enough to get their down payment money back. Their other investments will probably be in the dumper at the same time.

The other thing is it’s not all about the layoff. I would guess that OP’s compensation includes a lot of RSU’s and bonus money. Those things go away in a downturn, and if they’re out on a limb with debt, it could leave them in a squeeze, at the same time that their neighbors are in a similar squeeze. When I was in a similar situation, my base pay was only $160k.
Yes, I’m really that pedantic.
Tingting1013
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Re: California Homebuying Insanity

Post by Tingting1013 »

quantAndHold wrote: Fri May 07, 2021 9:04 am
Tingting1013 wrote: Thu May 06, 2021 10:29 pm]
If you lose your job and you can’t find another one that pays enough to cover the mortgage, you can just sell the house and downgrade. Why is that not a sufficient contingency?

And what kind of apocalyptic scenario would leave a $600k dual earner family permanently unable to cover a $70k housing cost?
Because it doesn’t work that way. OP works in tech. Tech is cyclical. People forget that, because it’s been on an upswing for awhile now.

If OP gets laid off and can’t find another job right away, it will be in a situation where most of OP’s neighbors are also laid off and not able to find a new job right away. They might not be able to sell the house at all, much less for enough to get their down payment money back. Their other investments will probably be in the dumper at the same time.

The other thing is it’s not all about the layoff. I would guess that OP’s compensation includes a lot of RSU’s and bonus money. Those things go away in a downturn, and if they’re out on a limb with debt, it could leave them in a squeeze, at the same time that their neighbors are in a similar squeeze. When I was in a similar situation, my base pay was only $160k.
If you can’t afford your house, it will be taken from you whether you want to downsize or not. And then you go find a new house, probably as a renter. Yes you’ll lose your down payment, just like how the renter will lose -50% in their stock portfolio that included the money that would have gone into a down payment. And the renter is still renting, just like the former homeowner.

There is no downside to buying big, because if the economy turns, you’ll be no worse off than the renter who never bought in the first place. Oh, and you’ll have gotten the utility out of owning a house for all those years.
investingfan
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Re: California Homebuying Insanity

Post by investingfan »

Somethingwitty92912 wrote: Thu May 06, 2021 4:21 pm
investingfan wrote: Thu May 06, 2021 3:10 pm
Somethingwitty92912 wrote: Thu May 06, 2021 2:26 pm
poppy42 wrote: Thu May 06, 2021 1:15 pm Hello everyone,

I'm trying to buy a house in a VHCOL area of Southern California, and I'm trying to figure out how I can do this while still respecting Boglehead principles. Everything in this market feels like a ripoff.

The market here is INSANE right now. We're looking at homes in the $1M - $1.6M range, and these homes are routinely going for $100-600K over asking. We were in escrow on a home previously, but pulled out during inspection due to unforeseen major issues (the house ended up getting torn down). Since then, we have been outbid on several homes, mostly by all-cash bidders. There's also very little inventory. Looking in other areas that are cheaper and farther away are not an option with our jobs - we are already considering a wide swath of our metro area of up to a 1-hour commute.

Under usual circumstances, I would wait to buy. However, we have a young child who will be starting kindergarten next year, so getting settled soon is a priority. We rent a place that is inexpensive by CA standards, but it's super small with no yard, we've really grown out of it, and we are eager to move. We also don't want to switch schools (and we can't afford to buy in the area where we currently rent - decent houses run about $2M here).

We have $400K in savings dedicated towards down payment, closing, and making up an appraisal shortfall (you pretty much have to waive appraisal contingency to compete in this market). We make $600K a year combined.

It seems freaking ridiculous that a couple making $600K cannot buy a house, but that's been the situation so far. I also fear we will be majorly overpaying for whatever we buy, which will just be disappointing. Is there a way of looking at this that I haven't considered? I'm so frustrated and sad.
Hello! After reading your post an majority of the responses, here is what I am thinking. Consider shopping around your resume out of state.

I know this is brutal to even consider for a lot of people, but in my own personal journey of wealth acquisition, I can’t tel you how much better my life got when I choose to bow out of this sort of location based thinking.

The reality is 9/10 times you can find the same amenities, weather, living conditions, an more often than not better ones— with little effort when you become willing to move.

Better schools, smaller communities, more fresh air, less food deserts…the living becomes more sustainable. Seriously the list goes on an on.

Disconnect yourself from the location an watch the opportunity open up for yourself. Your family seems gainfully employed, a slightly lower pay, in a medium COL area goes ALOT farther, I bet once you get over the shock of moving you’ll be happier too.
Why the advice always out of state? There are many nice towns in California where home aren't $1,000,000 or even $700,000 and schools are 10/10.
Why not? It’s as applicable as staying within the state, but has many bonuses. Avoiding Cali taxes, pollution, traffic, I mean the list goes on. I am sure there are nice places outside of the city, but they will be as hard to find as ones closer to work centers, essentially for all the same reasons. Then we need to talk about the commute to and from work.

Where’s they could shop around out of state get all the bonuses an have a 10-20 minute drive in low traffic, an you know not get car jacked on the way to boot!

OP didn’t ask if he/she should move out of state, but this is a financial forum yada yada. There are pros and cons living in every state. The pros widely outweigh the cons for the 40 million or so Californians. Ever think of that?
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Re: California Homebuying Insanity

Post by Firemenot »

investingfan wrote: Fri May 07, 2021 9:12 am
Somethingwitty92912 wrote: Thu May 06, 2021 4:21 pm
investingfan wrote: Thu May 06, 2021 3:10 pm
Somethingwitty92912 wrote: Thu May 06, 2021 2:26 pm
poppy42 wrote: Thu May 06, 2021 1:15 pm Hello everyone,

I'm trying to buy a house in a VHCOL area of Southern California, and I'm trying to figure out how I can do this while still respecting Boglehead principles. Everything in this market feels like a ripoff.

The market here is INSANE right now. We're looking at homes in the $1M - $1.6M range, and these homes are routinely going for $100-600K over asking. We were in escrow on a home previously, but pulled out during inspection due to unforeseen major issues (the house ended up getting torn down). Since then, we have been outbid on several homes, mostly by all-cash bidders. There's also very little inventory. Looking in other areas that are cheaper and farther away are not an option with our jobs - we are already considering a wide swath of our metro area of up to a 1-hour commute.

Under usual circumstances, I would wait to buy. However, we have a young child who will be starting kindergarten next year, so getting settled soon is a priority. We rent a place that is inexpensive by CA standards, but it's super small with no yard, we've really grown out of it, and we are eager to move. We also don't want to switch schools (and we can't afford to buy in the area where we currently rent - decent houses run about $2M here).

We have $400K in savings dedicated towards down payment, closing, and making up an appraisal shortfall (you pretty much have to waive appraisal contingency to compete in this market). We make $600K a year combined.

It seems freaking ridiculous that a couple making $600K cannot buy a house, but that's been the situation so far. I also fear we will be majorly overpaying for whatever we buy, which will just be disappointing. Is there a way of looking at this that I haven't considered? I'm so frustrated and sad.
Hello! After reading your post an majority of the responses, here is what I am thinking. Consider shopping around your resume out of state.

I know this is brutal to even consider for a lot of people, but in my own personal journey of wealth acquisition, I can’t tel you how much better my life got when I choose to bow out of this sort of location based thinking.

The reality is 9/10 times you can find the same amenities, weather, living conditions, an more often than not better ones— with little effort when you become willing to move.

Better schools, smaller communities, more fresh air, less food deserts…the living becomes more sustainable. Seriously the list goes on an on.

Disconnect yourself from the location an watch the opportunity open up for yourself. Your family seems gainfully employed, a slightly lower pay, in a medium COL area goes ALOT farther, I bet once you get over the shock of moving you’ll be happier too.
Why the advice always out of state? There are many nice towns in California where home aren't $1,000,000 or even $700,000 and schools are 10/10.
Why not? It’s as applicable as staying within the state, but has many bonuses. Avoiding Cali taxes, pollution, traffic, I mean the list goes on. I am sure there are nice places outside of the city, but they will be as hard to find as ones closer to work centers, essentially for all the same reasons. Then we need to talk about the commute to and from work.

Where’s they could shop around out of state get all the bonuses an have a 10-20 minute drive in low traffic, an you know not get car jacked on the way to boot!

OP didn’t ask if he/she should move out of state, but this is a financial forum yada yada. There are pros and cons living in every state. The pros widely outweigh the cons for the 40 million or so Californians. Ever think of that?
Every thread on real estate choices in California has a major percentage of people saying just move out of state. Kind of a broken record and not helpful.
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Re: California Homebuying Insanity

Post by willthrill81 »

lindsayinsf wrote: Fri May 07, 2021 3:48 am
59Gibson wrote: Thu May 06, 2021 5:53 pm
willthrill81 wrote: Thu May 06, 2021 5:41 pm
In that scenario, one can almost certainly substantially reduce one's tax burden. The combined federal, state, and local taxes on those making seemingly high incomes in VHCOL areas can be obscenely high, well over 50%.
No doubt. The tax differences can be like an extra p/t income in the household
Which VHCOL locations have an effective tax rate well over 50%? By my calculations the combined federal & California state effective tax rate on $600k is 40.8%, and on $1M is 44.2% (unless my math is incorrect). What am I missing?
Property tax, sales tax, tax on HSA contributions, and probably something else I'm not even aware of.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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willthrill81
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Re: California Homebuying Insanity

Post by willthrill81 »

marcopolo wrote: Fri May 07, 2021 1:24 am
willthrill81 wrote: Thu May 06, 2021 5:25 pm
Marseille07 wrote: Thu May 06, 2021 5:18 pm
willthrill81 wrote: Thu May 06, 2021 5:11 pm
Tingting1013 wrote: Thu May 06, 2021 2:53 pm

If you make $600k you can afford a $2M house
That reminds me of the Spandex rule: just because you can doesn't mean that you should.
I don't disagree, but if they can spend more and don't, and keep getting outbid by others...what exactly are they complaining?
True. If you want to live in a VHCOL area, then you should expect to pay VHCOL prices. If you simply cannot or will not pay those prices or adjust what you consume, then you may have little option other than moving elsewhere, which is what a great many are doing.

When we moved to our current area, we initially wanted a few acres of land on which to build our 'dream home'. However, county regulations don't permit SFHs to be built on under 10 acres of land outside the city limits, and there was no way we could afford to buy a few acres in the city limits or to buy 10 acres outside the city and then build our home. So we had a very lovely but very modestly sized home built in a well run HOA and haven't regretted anything. Incidentally, the value of our home has nearly doubled in the 6.5 years since we closed on it.
It is odd to see the various comments about how crazy CA is and so many people moving away in the same thread discussing the rapidly rising home prices. It is almost like a forum full of people that follow markets and the economy don't understand how supply and demand work to set prices. :oops:
TMK, CA real estate is not appreciating at the same pace everywhere. Only certain and fairly small geographic areas are seeing substantial growth in prices. Further, the demographics of immigration and emigration in the state do not seem to be homogeneous; those with high incomes are generally the ones moving in (in order to earn the high incomes) while many middle income folks are generally the ones moving out.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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Re: California Homebuying Insanity

Post by bluebolt »

Firemenot wrote: Fri May 07, 2021 8:47 am I assumed he was talking tax rates on the margin. The tax rates on the margin are brutal. I’m a CA resident and I pack as much away into deferred comp plans and am hesitant to exercise any options. Someday I’ll take the hit though but it’s just so unappealing.
Yes, paying a large tax bill on even larger gains is totally unappealing. Please gift me your options and I'll be happy to take that burden away from you. :D
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celia
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Re: California Homebuying Insanity

Post by celia »

poppy42 wrote: Thu May 06, 2021 1:15 pm I'm trying to buy a house in a VHCOL area of Southern California, and I'm trying to figure out how I can do this while still respecting Boglehead principles. Everything in this market feels like a ripoff.
The "problem" here is that you are trying to follow Boglehead principles!

We had a thread recently about what percent your house value was compared to your net worth. Those in California said around 40% while it was more like 20% elsewhere. Even a 6 year-old poll here showed similar results: viewtopic.php?f=2&t=160117&p=2403210

If we hadn't bought our house before prop 13 (1977), we wouldn't be able to afford where we live now. Now, we can't sell because the gains over $500K would be huge.
Last edited by celia on Fri May 07, 2021 10:47 am, edited 1 time in total.
Firemenot
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Re: California Homebuying Insanity

Post by Firemenot »

celia wrote: Fri May 07, 2021 10:44 am
poppy42 wrote: Thu May 06, 2021 1:15 pm I'm trying to buy a house in a VHCOL area of Southern California, and I'm trying to figure out how I can do this while still respecting Boglehead principles. Everything in this market feels like a ripoff.
The "problem" here is that you are trying to follow Boglehead principles!

We had a thread recently about what percent your house value was to your net worth. Those in California said around 40% while it was more like 20% elsewhere. Even a 6 year-old poll here showed similar results: viewtopic.php?f=2&t=160117&p=2403210

If we hadn't bought our house before prop 13 (1977), we wouldn't be able to afford where we live now.
The only way you can follow Boglehead principles with purchasing a home in VHCOL is if your income is mega large and you buy a very modest home (feature wise — not price wise) on your income. Otherwise, you just have to take the gamble and hope it turns out. Or rent.
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Re: California Homebuying Insanity

Post by WhiteMaxima »

generaly housing will cost 3x of family income. So 600k x 3 = 1.8 mil is normal price. In many other place where family is 5-60k, a SFH will cost 60x3=180k.
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Re: California Homebuying Insanity

Post by lindsayinsf »

bluebolt wrote: Fri May 07, 2021 10:14 am
Firemenot wrote: Fri May 07, 2021 8:47 am I assumed he was talking tax rates on the margin. The tax rates on the margin are brutal. I’m a CA resident and I pack as much away into deferred comp plans and am hesitant to exercise any options. Someday I’ll take the hit though but it’s just so unappealing.
Yes, paying a large tax bill on even larger gains is totally unappealing. Please gift me your options and I'll be happy to take that burden away from you. :D
+1
Sign me up! :D
Firemenot
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Re: California Homebuying Insanity

Post by Firemenot »

lindsayinsf wrote: Fri May 07, 2021 11:05 am
bluebolt wrote: Fri May 07, 2021 10:14 am
Firemenot wrote: Fri May 07, 2021 8:47 am I assumed he was talking tax rates on the margin. The tax rates on the margin are brutal. I’m a CA resident and I pack as much away into deferred comp plans and am hesitant to exercise any options. Someday I’ll take the hit though but it’s just so unappealing.
Yes, paying a large tax bill on even larger gains is totally unappealing. Please gift me your options and I'll be happy to take that burden away from you. :D
+1
Sign me up! :D
Don’t want to hijack thread but I do think about moving to a no income tax state while I exercise my options. Go live in Wyoming or Nevada ski county for awhile and learn to ski on a daily basis. Saved state income taxes would pay for the adventure.
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vitaflo
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Re: California Homebuying Insanity

Post by vitaflo »

poppy42 wrote: Thu May 06, 2021 10:26 pm The average working person should be able to afford to buy a home, and as a country I don’t know if we will ever get back to a place where that’s possible.
There are plenty of places in america where the average working person can afford a home. That's not true where you live, but it is true in a lot of places. They're probably just not places you're willing to live.
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Re: California Homebuying Insanity

Post by willthrill81 »

vitaflo wrote: Fri May 07, 2021 11:17 am
poppy42 wrote: Thu May 06, 2021 10:26 pm The average working person should be able to afford to buy a home, and as a country I don’t know if we will ever get back to a place where that’s possible.
There are plenty of places in america where the average working person can afford a home. That's not true where you live, but it is true in a lot of places. They're probably just not places you're willing to live.
Sad but true.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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lindsayinsf
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Re: California Homebuying Insanity

Post by lindsayinsf »

willthrill81 wrote: Fri May 07, 2021 10:05 am
lindsayinsf wrote: Fri May 07, 2021 3:48 am
59Gibson wrote: Thu May 06, 2021 5:53 pm
willthrill81 wrote: Thu May 06, 2021 5:41 pm
In that scenario, one can almost certainly substantially reduce one's tax burden. The combined federal, state, and local taxes on those making seemingly high incomes in VHCOL areas can be obscenely high, well over 50%.
No doubt. The tax differences can be like an extra p/t income in the household
Which VHCOL locations have an effective tax rate well over 50%? By my calculations the combined federal & California state effective tax rate on $600k is 40.8%, and on $1M is 44.2% (unless my math is incorrect). What am I missing?
Property tax, sales tax, tax on HSA contributions, and probably something else I'm not even aware of.
One can opt out of property taxes by not owning property.

Lower incomes pay a higher % proportionally towards sales taxes than higher incomes. The higher income has more left over after paying sales taxes than the lower income.

HSA taxes? I thought one of the benefits of an HSA was to avoid paying taxes? I'm not familiar with HSA taxes...it seems that any payroll taxes on HSA contributions would apply to all income levels, and would be a higher % proportionally on lower incomes, similar to sales tax.

I can't address the tax you're unaware of, because I don't know what that could be.

Even after all of these taxes, someone with a $600k income still has more income left over after paying taxes than someone with much less income does. They can more easily afford to purchase a more expensive home if they choose to.
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Re: California Homebuying Insanity

Post by willthrill81 »

lindsayinsf wrote: Fri May 07, 2021 11:26 am
willthrill81 wrote: Fri May 07, 2021 10:05 am
lindsayinsf wrote: Fri May 07, 2021 3:48 am
59Gibson wrote: Thu May 06, 2021 5:53 pm
willthrill81 wrote: Thu May 06, 2021 5:41 pm
In that scenario, one can almost certainly substantially reduce one's tax burden. The combined federal, state, and local taxes on those making seemingly high incomes in VHCOL areas can be obscenely high, well over 50%.
No doubt. The tax differences can be like an extra p/t income in the household
Which VHCOL locations have an effective tax rate well over 50%? By my calculations the combined federal & California state effective tax rate on $600k is 40.8%, and on $1M is 44.2% (unless my math is incorrect). What am I missing?
Property tax, sales tax, tax on HSA contributions, and probably something else I'm not even aware of.
One can opt out of property taxes by not owning property.
Only if your landlord is willing to 'eat' the cost. Most are not and have their tenants pay for property taxes via rent. It's just not a separate line item.
lindsayinsf wrote: Fri May 07, 2021 11:26 am HSA taxes? I thought one of the benefits of an HSA was to avoid paying taxes? I'm not familiar with HSA taxes...it seems that any payroll taxes on HSA contributions would apply to all income levels, and would be a higher % proportionally on lower incomes, similar to sales tax.
CA taxes contributions on HSAs. New Jersey is the only other state that does that.

CA also has much higher fuel tax than most other states.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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Re: California Homebuying Insanity

Post by lindsayinsf »

willthrill81 wrote: Fri May 07, 2021 11:32 am
lindsayinsf wrote: Fri May 07, 2021 11:26 am
willthrill81 wrote: Fri May 07, 2021 10:05 am
lindsayinsf wrote: Fri May 07, 2021 3:48 am
59Gibson wrote: Thu May 06, 2021 5:53 pm

No doubt. The tax differences can be like an extra p/t income in the household
Which VHCOL locations have an effective tax rate well over 50%? By my calculations the combined federal & California state effective tax rate on $600k is 40.8%, and on $1M is 44.2% (unless my math is incorrect). What am I missing?
Property tax, sales tax, tax on HSA contributions, and probably something else I'm not even aware of.
One can opt out of property taxes by not owning property.
Only if your landlord is willing to 'eat' the cost. Most are not and have their tenants pay for property taxes via rent. It's just not a separate line item.
If we're looking at it that way...then isn't everyone paying property taxes, regardless of income level? The cost of housing, or the year against which the property is being assessed at, is more determining of how much property taxes will be than one's income level.
willthrill81 wrote: Fri May 07, 2021 11:32 am
lindsayinsf wrote: Fri May 07, 2021 11:26 am HSA taxes? I thought one of the benefits of an HSA was to avoid paying taxes? I'm not familiar with HSA taxes...it seems that any payroll taxes on HSA contributions would apply to all income levels, and would be a higher % proportionally on lower incomes, similar to sales tax.
CA taxes contributions on HSAs. New Jersey is the only other state that does that.
I wasn't aware of this, thank you. I haven't been eligible for an HSA in a long time. I need more coverage than what a HDHP provides. We're talking about tax on $3,600/individual or $7,600/family. This doesn't seem like an obscenely high amount of taxes for someone with a $600k or $1M income.
willthrill81 wrote: Fri May 07, 2021 11:32 am CA also has much higher fuel tax than most other states.
Sounds like another a tax that applies to everyone, and affects people with lower incomes proportionally more than people with higher incomes.
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Re: California Homebuying Insanity

Post by owls »

We can see why you didn't retype your comparison: you compared a $400k down payment in CA ($1.6m mtge on a $2m home) with a $100K down payment elsewhere ($0.4 mtge on $0.5m home). With a $400k down payment elsewhere, mtge would be only $100k, and housing expenses are much less.

And your $2m CA house has $1k insurance expense, but the $500k house elsewhere needs $5k???

How many jobs in LCOL pay $200k each? With remote work, LOTS!

Tingting1013 wrote: Fri May 07, 2021 8:46 am
PowderDay9 wrote: Fri May 07, 2021 12:43 am
Tingting1013 wrote: Thu May 06, 2021 9:49 pm
PowderDay9 wrote: Thu May 06, 2021 6:48 pm
investingfan wrote: Thu May 06, 2021 3:10 pm Why the advice always out of state? There are many nice towns in California where home aren't $1,000,000 or even $700,000 and schools are 10/10.
Because the OP is paying over $3k a month in CA income taxes. You could buy the $2M house for $500k in a tax-free state and the $3k would cover the mortgage.

Even if the OP had to take new jobs at half their income they'd still come out ahead unless the CA housing market goes to the moon. I wouldn't bet on that but many people do. Regardless, OP still pays half a million in CA taxes over the next decade.
This is just bad math.

$600k income in CA
-$130k Federal income taxes (assuming 2 maxed out 401ks and standard deduction)
-$40k CA income taxes
-$30k payroll taxes
-$100k housing
-$100k other expenses
= $200k for savings

$300k income in LCOL TX or FL
-$50k Federal income taxes (assuming 2 maxed out 401ks and standard deduction)
-$20k payroll taxes
-$40k housing ($500k house with $400k mortgage, 2% property tax)
-$75k other expenses (let’s assume non-housing costs in CA are 1/3 more expensive than LCOL, which I think is being generous to LCOL, since everything bought online costs the same no matter where you live)
= $115k for savings

The savings in each scenario are invested in the same stock market. So every year you stay in CA the compounding on your extra savings is that much more impactful.
My comment was a general statement, not a math equation. But since you nicely laid out the math, can you explain how a $500k house has an annual cost of $40k while a $2M house is only $100k?

I also said the $3k would cover the mortgage, not equal the mortgage. In FL you can spend about $2.3k per month for PITI on a $400k mortgage. You'll get 4 bedrooms and about 2500-3000 sq feet.
“General statements” are what mislead people, rules of thumb are often dead wrong.

$500k house with $400k mortgage:
Principal & Interest: $20k
Taxes: $10k
Insurance: $5k
Maintenance: $5k

I did the math for the $2M house above, I don’t care to retype it. The bottom line is that home insurance & property taxes are much higher as a % of home value in LCOL than in CA.

Bottom Line: in order to save the amount as a $600k CAer, the LCOLer would need to earn much more than $300k. Probably closer to $450k. How many jobs in LCOL pay $200k each?

People are at a loss how folks have the money they have to be bidding up all these houses. And then they poo poo the compensation that can only be made here??
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Re: California Homebuying Insanity

Post by brianH »

quantAndHold wrote: Fri May 07, 2021 9:04 am Because it doesn’t work that way. OP works in tech. Tech is cyclical. People forget that, because it’s been on an upswing for awhile now.
This is what would concern me about locking in 30-year assumptions based on a handful of well-paid tech roles. I'm old enough to remember 2000/2001, where plenty of very-well-paid (overpaid) tech workers in hot tech markets got the boot when it all went bad. Many would never find work at that salary level again and/or left the industry entirely.

There are a dozen or so companies, in primarily a half-dozen or so areas, that pay these outsized salaries. The vast majority of tech employees in the rest of the country make much closer to $150K than $300K. With work-from-home becoming common, and satellite offices springing up everywhere, I expect tech salaries to normalize, even absent a major crash.
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Re: California Homebuying Insanity

Post by willthrill81 »

lindsayinsf wrote: Fri May 07, 2021 11:44 am
willthrill81 wrote: Fri May 07, 2021 11:32 am
lindsayinsf wrote: Fri May 07, 2021 11:26 am
willthrill81 wrote: Fri May 07, 2021 10:05 am
lindsayinsf wrote: Fri May 07, 2021 3:48 am

Which VHCOL locations have an effective tax rate well over 50%? By my calculations the combined federal & California state effective tax rate on $600k is 40.8%, and on $1M is 44.2% (unless my math is incorrect). What am I missing?
Property tax, sales tax, tax on HSA contributions, and probably something else I'm not even aware of.
One can opt out of property taxes by not owning property.
Only if your landlord is willing to 'eat' the cost. Most are not and have their tenants pay for property taxes via rent. It's just not a separate line item.
If we're looking at it that way...then isn't everyone paying property taxes, regardless of income level? The cost of housing, or the year against which the property is being assessed at, is more determining of how much property taxes will be than one's income level.
willthrill81 wrote: Fri May 07, 2021 11:32 am
lindsayinsf wrote: Fri May 07, 2021 11:26 am HSA taxes? I thought one of the benefits of an HSA was to avoid paying taxes? I'm not familiar with HSA taxes...it seems that any payroll taxes on HSA contributions would apply to all income levels, and would be a higher % proportionally on lower incomes, similar to sales tax.
CA taxes contributions on HSAs. New Jersey is the only other state that does that.
I wasn't aware of this, thank you. I haven't been eligible for an HSA in a long time. I need more coverage than what a HDHP provides. We're talking about tax on $3,600/individual or $7,600/family. This doesn't seem like an obscenely high amount of taxes for someone with a $600k or $1M income.
willthrill81 wrote: Fri May 07, 2021 11:32 am CA also has much higher fuel tax than most other states.
Sounds like another a tax that applies to everyone, and affects people with lower incomes proportionally more than people with higher incomes.
Yes, virtually everyone is paying property taxes in one form or another.

I didn't say that any one tax was obscenely high; rather, the combination of all of the taxes for some individuals can. If you disagree, that's fine.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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lindsayinsf
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Re: California Homebuying Insanity

Post by lindsayinsf »

willthrill81 wrote: Fri May 07, 2021 2:40 pm
lindsayinsf wrote: Fri May 07, 2021 11:44 am
willthrill81 wrote: Fri May 07, 2021 11:32 am
lindsayinsf wrote: Fri May 07, 2021 11:26 am
willthrill81 wrote: Fri May 07, 2021 10:05 am

Property tax, sales tax, tax on HSA contributions, and probably something else I'm not even aware of.
One can opt out of property taxes by not owning property.
Only if your landlord is willing to 'eat' the cost. Most are not and have their tenants pay for property taxes via rent. It's just not a separate line item.
If we're looking at it that way...then isn't everyone paying property taxes, regardless of income level? The cost of housing, or the year against which the property is being assessed at, is more determining of how much property taxes will be than one's income level.
willthrill81 wrote: Fri May 07, 2021 11:32 am
lindsayinsf wrote: Fri May 07, 2021 11:26 am HSA taxes? I thought one of the benefits of an HSA was to avoid paying taxes? I'm not familiar with HSA taxes...it seems that any payroll taxes on HSA contributions would apply to all income levels, and would be a higher % proportionally on lower incomes, similar to sales tax.
CA taxes contributions on HSAs. New Jersey is the only other state that does that.
I wasn't aware of this, thank you. I haven't been eligible for an HSA in a long time. I need more coverage than what a HDHP provides. We're talking about tax on $3,600/individual or $7,600/family. This doesn't seem like an obscenely high amount of taxes for someone with a $600k or $1M income.
willthrill81 wrote: Fri May 07, 2021 11:32 am CA also has much higher fuel tax than most other states.
Sounds like another a tax that applies to everyone, and affects people with lower incomes proportionally more than people with higher incomes.
Yes, virtually everyone is paying property taxes in one form or another.

I didn't say that any one tax was obscenely high; rather, the combination of all of the taxes for some individuals can. If you disagree, that's fine.
Adding property taxes of 2% to 3% on a $2M home puts someone making $600k at around a 48% to 51% combined total effective tax rate. Sales tax, HSA taxes, fuel tax…those seem likely to be under 2% combined I think. So approx 53% combined total effective tax rate before any deductions or exemptions are applied. Leaving them with $282k.

P&I for one year on a $1.6M mortgage with a 3.00% rate is $81k. Leaving $201k for everything else. The OP can afford a $2M home.
tj
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Re: California Homebuying Insanity

Post by tj »

lindsayinsf wrote: Fri May 07, 2021 5:57 pm
willthrill81 wrote: Fri May 07, 2021 2:40 pm
lindsayinsf wrote: Fri May 07, 2021 11:44 am
willthrill81 wrote: Fri May 07, 2021 11:32 am
lindsayinsf wrote: Fri May 07, 2021 11:26 am

One can opt out of property taxes by not owning property.
Only if your landlord is willing to 'eat' the cost. Most are not and have their tenants pay for property taxes via rent. It's just not a separate line item.
If we're looking at it that way...then isn't everyone paying property taxes, regardless of income level? The cost of housing, or the year against which the property is being assessed at, is more determining of how much property taxes will be than one's income level.
willthrill81 wrote: Fri May 07, 2021 11:32 am
lindsayinsf wrote: Fri May 07, 2021 11:26 am HSA taxes? I thought one of the benefits of an HSA was to avoid paying taxes? I'm not familiar with HSA taxes...it seems that any payroll taxes on HSA contributions would apply to all income levels, and would be a higher % proportionally on lower incomes, similar to sales tax.
CA taxes contributions on HSAs. New Jersey is the only other state that does that.
I wasn't aware of this, thank you. I haven't been eligible for an HSA in a long time. I need more coverage than what a HDHP provides. We're talking about tax on $3,600/individual or $7,600/family. This doesn't seem like an obscenely high amount of taxes for someone with a $600k or $1M income.
willthrill81 wrote: Fri May 07, 2021 11:32 am CA also has much higher fuel tax than most other states.
Sounds like another a tax that applies to everyone, and affects people with lower incomes proportionally more than people with higher incomes.
Yes, virtually everyone is paying property taxes in one form or another.

I didn't say that any one tax was obscenely high; rather, the combination of all of the taxes for some individuals can. If you disagree, that's fine.
Adding property taxes of 2% to 3% on a $2M home puts someone making $600k at around a 48% to 51% combined total effective tax rate. Sales tax, HSA taxes, fuel tax…those seem likely to be under 2% combined I think. So approx 53% combined total effective tax rate before any deductions or exemptions are applied. Leaving them with $282k.

P&I for one year on a $1.6M mortgage with a 3.00% rate is $81k. Leaving $201k for everything else. The OP can afford a $2M home.
California doesn't have a 2%-3% property tax rate.
Somethingwitty92912
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Re: California Homebuying Insanity

Post by Somethingwitty92912 »

investingfan wrote: Fri May 07, 2021 9:12 am
Somethingwitty92912 wrote: Thu May 06, 2021 4:21 pm
investingfan wrote: Thu May 06, 2021 3:10 pm
Somethingwitty92912 wrote: Thu May 06, 2021 2:26 pm
poppy42 wrote: Thu May 06, 2021 1:15 pm Hello everyone,

I'm trying to buy a house in a VHCOL area of Southern California, and I'm trying to figure out how I can do this while still respecting Boglehead principles. Everything in this market feels like a ripoff.

The market here is INSANE right now. We're looking at homes in the $1M - $1.6M range, and these homes are routinely going for $100-600K over asking. We were in escrow on a home previously, but pulled out during inspection due to unforeseen major issues (the house ended up getting torn down). Since then, we have been outbid on several homes, mostly by all-cash bidders. There's also very little inventory. Looking in other areas that are cheaper and farther away are not an option with our jobs - we are already considering a wide swath of our metro area of up to a 1-hour commute.

Under usual circumstances, I would wait to buy. However, we have a young child who will be starting kindergarten next year, so getting settled soon is a priority. We rent a place that is inexpensive by CA standards, but it's super small with no yard, we've really grown out of it, and we are eager to move. We also don't want to switch schools (and we can't afford to buy in the area where we currently rent - decent houses run about $2M here).

We have $400K in savings dedicated towards down payment, closing, and making up an appraisal shortfall (you pretty much have to waive appraisal contingency to compete in this market). We make $600K a year combined.

It seems freaking ridiculous that a couple making $600K cannot buy a house, but that's been the situation so far. I also fear we will be majorly overpaying for whatever we buy, which will just be disappointing. Is there a way of looking at this that I haven't considered? I'm so frustrated and sad.
Hello! After reading your post an majority of the responses, here is what I am thinking. Consider shopping around your resume out of state.

I know this is brutal to even consider for a lot of people, but in my own personal journey of wealth acquisition, I can’t tel you how much better my life got when I choose to bow out of this sort of location based thinking.

The reality is 9/10 times you can find the same amenities, weather, living conditions, an more often than not better ones— with little effort when you become willing to move.

Better schools, smaller communities, more fresh air, less food deserts…the living becomes more sustainable. Seriously the list goes on an on.

Disconnect yourself from the location an watch the opportunity open up for yourself. Your family seems gainfully employed, a slightly lower pay, in a medium COL area goes ALOT farther, I bet once you get over the shock of moving you’ll be happier too.
Why the advice always out of state? There are many nice towns in California where home aren't $1,000,000 or even $700,000 and schools are 10/10.
Why not? It’s as applicable as staying within the state, but has many bonuses. Avoiding Cali taxes, pollution, traffic, I mean the list goes on. I am sure there are nice places outside of the city, but they will be as hard to find as ones closer to work centers, essentially for all the same reasons. Then we need to talk about the commute to and from work.

Where’s they could shop around out of state get all the bonuses an have a 10-20 minute drive in low traffic, an you know not get car jacked on the way to boot!

OP didn’t ask if he/she should move out of state, but this is a financial forum yada yada. There are pros and cons living in every state. The pros widely outweigh the cons for the 40 million or so Californians. Ever think of that?
I mean, yes, that’s kinda my point. 40 MILLION Americans live in that one state. OP asked for solutions, I provided him/her one that I personally went through, and had successfully achieved serious goals by committing to a major life change. The question isn’t if something is possible, it’s how much do you want it?

Your dogmatic view of living in that state is more representative of a reason to not stay there than my polite suggestion to consider somewhere else.

Seriously! I am a live an let live guy, as long as it’s not on the west coast. J/k =p
Tingting1013
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Re: California Homebuying Insanity

Post by Tingting1013 »

owls wrote: Fri May 07, 2021 11:58 am We can see why you didn't retype your comparison: you compared a $400k down payment in CA ($1.6m mtge on a $2m home) with a $100K down payment elsewhere ($0.4 mtge on $0.5m home). With a $400k down payment elsewhere, mtge would be only $100k, and housing expenses are much less.

And your $2m CA house has $1k insurance expense, but the $500k house elsewhere needs $5k???

How many jobs in LCOL pay $200k each? With remote work, LOTS!
Get rid of the mortgage entirely in LCOL and you only reduce expense by $20k or so. You still pay 2-3% property taxes and insurance and maintenance.

I pay $1k insurance on my $2M property in Silicon Valley. That’s an actual number right there. It has a lot to do with the fact that the house is only worth $600k, and that the policy doesn’t cover earthquake damage.

The average home insurance cost in FL and TX is $2k, and the average home cost is $200-250k. (https://insurify.com/insights/states-ex ... ance-2020/) So I just doubled that for a $500k house. Hurricanes and floods are no joke.

Remote work doesn’t mean you get to keep your salary. Every tech company of any meaningful size localizes your compensation. At my company $200k compensation in LCOL means $300k in the Bay Area. I think the math is pretty clear that $200k in LCOL means you are saving less absolute dollars at the end of the day, and absolute dollars is what counts when compounding in the market.
Last edited by Tingting1013 on Fri May 07, 2021 8:51 pm, edited 1 time in total.
stan1
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Re: California Homebuying Insanity

Post by stan1 »

Somethingwitty92912 wrote: Fri May 07, 2021 8:23 pm Your dogmatic view of living in that state is more representative of a reason to not stay there than my polite suggestion to consider somewhere else.
Haha, I've been to the other places, they aren't as nice but a few do come close. Boulder and Incline sure aren't cheap. This whole "I like the four seasons" and "the bugs aren't that bad" thing? Ridiculous when it is sunny and 75 at the beach with no flying or stinging insects anywhere in sight. It's called a sunshine tax for a reason.
Bungo
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Re: California Homebuying Insanity

Post by Bungo »

poppy42 wrote: Thu May 06, 2021 10:27 pm
Yesterdaysnews wrote: Thu May 06, 2021 10:23 pm Who are these people showing up with $3M cash to buy a house on the spot? Where is this money coming from, the tech industry? I don’t see that kind of liquid folks around where I live.
It’s tech, but it’s also people who bought a while ago and are trading up. They have seen their home values increase by a ton in the last decade. Homes in my current neighborhood were selling for about 400k 10 years ago. Those same houses will now go for 2M. Not an exaggeration.
What neighborhood is this? I bought 9 years ago in San Jose at around 650k, and my house is currently worth roughly 1.6M, which is a 2.5x multiple. Where in the Bay Area is there a 5x multiple vs. 10 years ago? I'm not saying it's false, but if it's true it's not on my radar!
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JonnyDVM
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Re: California Homebuying Insanity

Post by JonnyDVM »

Tingting1013 wrote: Fri May 07, 2021 8:48 am
marcopolo wrote: Fri May 07, 2021 1:24 am
willthrill81 wrote: Thu May 06, 2021 5:25 pm
Marseille07 wrote: Thu May 06, 2021 5:18 pm
willthrill81 wrote: Thu May 06, 2021 5:11 pm

That reminds me of the Spandex rule: just because you can doesn't mean that you should.
I don't disagree, but if they can spend more and don't, and keep getting outbid by others...what exactly are they complaining?
True. If you want to live in a VHCOL area, then you should expect to pay VHCOL prices. If you simply cannot or will not pay those prices or adjust what you consume, then you may have little option other than moving elsewhere, which is what a great many are doing.

When we moved to our current area, we initially wanted a few acres of land on which to build our 'dream home'. However, county regulations don't permit SFHs to be built on under 10 acres of land outside the city limits, and there was no way we could afford to buy a few acres in the city limits or to buy 10 acres outside the city and then build our home. So we had a very lovely but very modestly sized home built in a well run HOA and haven't regretted anything. Incidentally, the value of our home has nearly doubled in the 6.5 years since we closed on it.
It is odd to see the various comments about how crazy CA is and so many people moving away in the same thread discussing the rapidly rising home prices. It is almost like a forum full of people that follow markets and the economy don't understand how supply and demand work to set prices. :oops:
Not surprising to me at all. A forum full of buy-and-holders has no need to understand anything about economic principles.
There’s a certain crowd here that loves to poop on California whenever the opportunity presents itself. [OT comment removed by admin LadyGeek]

There’s also a contingent who’s answer to any real estate thread is always rent, never buy. OP, your story is quite common these days. You’re going to have to play the SoCal game and overbid for what you want, or continue to rent. That’s all there is too it. I would advise you to wait, but that advice has been bad pertaining to SoCal real estate for a decade. I’m not sure today is any different.
I’d trade it all for a little more | -C Montgomery Burns
Tingting1013
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Re: California Homebuying Insanity

Post by Tingting1013 »

Bungo wrote: Fri May 07, 2021 8:56 pm
poppy42 wrote: Thu May 06, 2021 10:27 pm
Yesterdaysnews wrote: Thu May 06, 2021 10:23 pm Who are these people showing up with $3M cash to buy a house on the spot? Where is this money coming from, the tech industry? I don’t see that kind of liquid folks around where I live.
It’s tech, but it’s also people who bought a while ago and are trading up. They have seen their home values increase by a ton in the last decade. Homes in my current neighborhood were selling for about 400k 10 years ago. Those same houses will now go for 2M. Not an exaggeration.
What neighborhood is this? I bought 9 years ago in San Jose at around 650k, and my house is currently worth roughly 1.6M, which is a 2.5x multiple. Where in the Bay Area is there a 5x multiple vs. 10 years ago? I'm not saying it's false, but if it's true it's not on my radar!
OP is in SoCal
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ram
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Re: California Homebuying Insanity

Post by ram »

poppy42 wrote: Thu May 06, 2021 1:15 pm Hello everyone,
Under usual circumstances, I would wait to buy. However, we have a young child who will be starting kindergarten next year, so getting settled soon is a priority. We rent a place that is inexpensive by CA standards, but it's super small with no yard, we've really grown out of it, and we are eager to move. We also don't want to switch schools (and we can't afford to buy in the area where we currently rent - decent houses run about $2M here).
Most kids handle school change quite well. Our daughter was the state AP scholar and son had a perfect score of 36 on ACT. We moved 4 times and they attended 5 schools in 3 different countries by the time they reached high school.
Ram
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