Housing affordability CA

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davehica
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Housing affordability CA

Post by davehica »

Hi All -- My wife and I have been very patient re: real estate and are just now looking to buy our first house in the sf bay area. Im struggling with our max purchase price and am hoping for some insight from the board. Here are our details:

General family info: Wife and I both work for the same stable company, 1 child, may have another next year. I am 37 and she is 42.

Income: Combined $190K/year, not including performance based bonuses that typically are ~15-20% of our base.

Savings
--401Ks - $633K
--Roth IRAs - $109K
--Taxable investments - $41K
--ESOP - $570K
--Cash - $132K
--HSA - $4.5K

Debt
--None
--Recurring monthly payments - $500/month for wife's horse (dont get me started, and dont buy a horse), $1K for childcare which will end next year when he enters kindergarten

Our intent is to buy a 3/2 in a nice area with a good school district,in part to avoid the $25K/year we would pay for private school. I think the minimum needed to get us there is $750K, and Ive set a max of $1M. Assuming a $1M home, we would come up with the ~$220K down payment/closing using a mixture of cash, roth contributions, taxable investments, and a $30K simple interest loan from our employer.

Ive seen most of the ratios one can use to estimate housing affordability, but they result in a pretty wide range. We are pretty conservative overall, and I want to make sure I collect as much info/input as possible before we pull the trigger on what will likely be the most significant purchase of our lives.

As always, love the forums and appreciate any feedback.
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kenyan
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Re: Housing affordability CA

Post by kenyan »

I assume that you will have positive cash flow after purchasing? Your cash reserves will be nil if you go toward the upper end of your price range. Now, you have other resources to tap for true emergencies, but there are a lot of startup costs for first-time homeowners. The cost of these can range quite a bit, depending upon preference, but some aren't really optional - tools/gardening equipment, furniture, etc. $1M is pretty well above what most people would recommend purchasing on a $190/year salary (over 5x salary; not too many people recommend going above 4x). Might depend on how reliable your jobs are, as well as how reliable your bonuses are. Personally, I would be pretty uncomfortable at that purchase price and your income level, but everyone has their own tolerance. "What the banks will loan me" is not a good limit - probably should carefully budget everything out and see what it looks like. Those housing costs can be quite the anchor.
Retirement investing is a marathon.
HornedToad
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Re: Housing affordability CA

Post by HornedToad »

Is your ESOP vested and usable for your home purchase? It looks like a significant purchase of your net worth.

If so, you could certainly use that plus cash to put 30-40% down on a 1 million dollar house and be fine with your salary. I would also look at your income both with bonus and without. It can be overly conservative not to consider bonus if you get one every year, and if you have a year that you don't get one, it's just a tighter year but not a catastrophe assuming reasonable reserves.

Have you looked at homes? Depending on where you are living, I doubt 750k would get it done and you probably need much closer to $1million or more. It's back to the days of 5-15 offers for reasonably priced houses so be prepared for a long search.

Edit: Since you are talking about private school if you don't purchase, it might be better to do a cost-flow analysis than to use home buying rule of thumbs as it can certainly be cheaper to buy a home at 4-5-6x annual income than continue to rent + pay private school or buy a cheaper house and still need to pay for private school.

20k+/year for private school adds up fast and isn't tax deductable.
Last edited by HornedToad on Sun May 18, 2014 10:52 pm, edited 1 time in total.
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White Coat Investor
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Re: Housing affordability CA

Post by White Coat Investor »

Now way would I buy a house for 4-5 times my annual income, even in Northern Cali. You have to really value housing to do that. Even at 4%, you're looking at $40K a year in interest.

But it really comes down to what comparable rent is, since I'm assuming moving somewhere else isn't an option.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
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Dale_G
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Re: Housing affordability CA

Post by Dale_G »

I sympathize with the op. But wow, this has to be a cultural thing. Why the California start-ups don't move east is a mystery.

At the very least one of these start-ups should invent a cost effective matter transporter. There are probably tens of millions of 3/2 homes in the eastern/southern 80% of the country that can be had for $200,000 or less. Better yet, the start-ups could invent a technique to import the income tax structure from some other state (skipping NJ, NY and CT).

But to the OP: You make good bucks. The 3 X income guide really applies to folks with moderate incomes. Assuming your jobs are stable, you still have plenty of income available after your housing expense.

You can afford it if your spending is otherwise in control.

Dale
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DualIncomeNoDebt
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Re: Housing affordability CA

Post by DualIncomeNoDebt »

Why the California start-ups don't move east is a mystery.

At the very least one of these start-ups should invent a cost effective matter transporter. There are probably tens of millions of 3/2 homes in the eastern/southern 80% of the country that can be had for $200,000 or less.
There's quite a bit outside California for established tech. The executive suites may be in Palo Alto or Mountain View, but they have lots of significant buildout in low-tax, low-cost states, especially data centers, tech centers, and domestic assembly and manufacturing (e.g. Apple's new glass plant in Arizona, Tesla battery factory will not be in California, Google -- not a single data center in California, as I recall). You also have thriving tech in many places outside the Bay Area.
ahmadcpa
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Re: Housing affordability CA

Post by ahmadcpa »

I live in the bay area. I don't think it's the executives that causes Google/Apple to stay in the bay. Instead, it's the chicken and egg problem. Basically, all the talent is in the bay area and order for you to succeed as a business in IT, you need to be in the bay area. Many of these engineers would also love to move to a cheaper area but moving them in masses to a specific city is impossible.
ankzap
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Re: Housing affordability CA

Post by ankzap »

Nothing to add regarding the affordability question, but good luck trying to find a 3/2 in a nice area with good schools (>875 api) for under $1m. Houses are going anywhere between 10% to 50% over the listing price. And many are selling all-cash! Unless you are considering a townhome/condo (with a $400-$600 HOA per month), or are willing to commute 1+ hours each way, a 3/2 for $1m is not going to be easy. I am in a similar situation as you (higher combined income, higher cash, but much smaller 401k), and am struggling to get a 2/1 for under 1.1m.
Kaufmanrider
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Re: Housing affordability CA

Post by Kaufmanrider »

The Bay Area is a big place with many somewhat affordable areas along the fringes. Where is it you work as that can determine which outlying areas you can look to live, i.e., commute distance/time.

You can look in the Concord/Pittsburg/Antioch/Discovery Bay areas. Many newer homes and more affordable than San Fran/Oakland. However
you will have a commute, and traffic on Hwy 4 is thick during commute times.
FoolStreet
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Re: Housing affordability CA

Post by FoolStreet »

davehica wrote:


$1K for childcare which will end next year when he enters kindergarten.

Don't plan on it dropping. Not soon. K is only half day. Plus #2?

Also, regardless of the house, all of the ESOP in on place is pretty scary. Probably worth diversifying. 450 down will be a big help.

Consider a smaller house to get started. Look at edge areas, like the borders of East Palo Alto (other side). Start small and keep some powder dry. Enjoy!
buckstar
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Re: Housing affordability CA

Post by buckstar »

Having a mortgage that is 4x annual income is a stretch. Do you expect increases in the future, or has your income plateaued? If you're seeing yourself at ~200-240k/yr from here on out, you're stretching a bit. The other thing that is worrisome is that you and your wife and your ESOP are all tied up in one company. I know you say it's stable, but....that's a lot of eggs in one basket. Why can't you rent a house in a good school district?
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mmmodem
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Re: Housing affordability CA

Post by mmmodem »

I don't think you should use your Roth for your downpayment. I suggest you use the $173k in savings and taxable investments for a downpayment. Let the Roth be your emergency fund instead. I also think 3x your base income is the conservative max you should carry a mortgage. This means I think your max home price ought to be $750k not $1 million. There are plenty of places to buy a 3/2 in the Bay Area at that price with a good school. My neighborhood in Milpitas averages $550k with the school at 873 API.
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interplanetjanet
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Re: Housing affordability CA

Post by interplanetjanet »

Kaufmanrider wrote:The Bay Area is a big place with many somewhat affordable areas along the fringes. Where is it you work as that can determine which outlying areas you can look to live, i.e., commute distance/time.

You can look in the Concord/Pittsburg/Antioch/Discovery Bay areas. Many newer homes and more affordable than San Fran/Oakland. However
you will have a commute, and traffic on Hwy 4 is thick during commute times.
This is putting it mildly - I used to commute a couple days a week into the east bay from the delta, coming in on CA-4. If I tried to beat traffic in the morning, I really had to hit Antioch no later than 6AM or else wait until after 9, in between it was basically a very slow moving parking lot. I think that it's really some of the worst traffic in the SFBA.
fareastwarriors
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Re: Housing affordability CA

Post by fareastwarriors »

What are your target areas?

That would help determine the max price.
ralph124cf
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Re: Housing affordability CA

Post by ralph124cf »

FoolStreet wrote:
davehica wrote:


$1K for childcare which will end next year when he enters kindergarten.

Don't plan on it dropping. Not soon. K is only half day. Plus #2?

Also, regardless of the house, all of the ESOP in on place is pretty scary. Probably worth diversifying. 450 down will be a big help.

Consider a smaller house to get started. Look at edge areas, like the borders of East Palo Alto (other side). Start small and keep some powder dry. Enjoy!
An ESOP, even if fully vested, often cannot be touched for a number of years, and perhaps not until after leaving the company.

Ralph
muddlehead
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Re: Housing affordability CA

Post by muddlehead »

Santa Rosa here. Second cheapest of the 9 Bay Are counties - only Solano cheaper. And yes, I'm one of the few who admits we're here cause Marin was too expensive. Always a good time to buy house if you plan to stay in the house 10 yrs or so and have ample resources to pay mortgage and property tax. Some quick calcs - 30 yr mortgage 800k at 4% = $3819 p/m plus property tax annual ~ $12.5k = per month charges mortgage plus prop tax = $4860. I'm guessing your rent is in the $2500 p/m range. On that, it's basically a double to buy. You make about $17,000 per month. You're good. Get on it. Good luck in your new home.
Ron Ronnerson
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Re: Housing affordability CA

Post by Ron Ronnerson »

muddlehead wrote:Santa Rosa here. Second cheapest of the 9 Bay Are counties - only Solano cheaper. And yes, I'm one of the few who admits we're here cause Marin was too expensive. Always a good time to buy house if you plan to stay in the house 10 yrs or so and have ample resources to pay mortgage and property tax. Some quick calcs - 30 yr mortgage 800k at 4% = $3819 p/m plus property tax annual ~ $12.5k = per month charges mortgage plus prop tax = $4860. I'm guessing your rent is in the $2500 p/m range. On that, it's basically a double to buy. You make about $17,000 per month. You're good. Get on it. Good luck in your new home.
I agree with Muddlehead. I'm in the Bay Area as well. Real estate will make up a larger percentage of your expenses here than in most other parts of the country. However, other expenses will make up a small percentage. Rather than focusing only on how expensive a house is compared to your income, take a broader view and see how much your overall expenses are to your income. If you can pay for the house and all your other expenses and still have plenty to put into savings/retirement, you should be fine. Just to be on the safe side though, add a bit of a cushion.

If you have some flexibility as to where in the Bay Area you'd like to live, you may want to consider some parts of the East Bay. I live in a 4/3 townhome in San Ramon (schools here have API scores in the high 900s). My HOA is reasonable ($250) but property taxes are pretty high. After taking into account the tax deduction on mortgage interest, I'm basically paying what I would to rent a considerably smaller apartment. In addition, a part of the mortgage payment goes toward the principal each month. The market value of our home (2150 sq. ft) is $700k. So you have some less expensive options if you're willing to live outside of Silicon Valley or San Francisco.
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Watty
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Re: Housing affordability CA

Post by Watty »

davehica wrote:As always, love the forums and appreciate any feedback.
I lived in the Bay Area years ago.

Housing in the Bay Area is not only insanely expensive but you do not get much for your money since the houses are often so small. You need to be really careful about this when you you look at the house prices and think that an average house in the Bay Area might be four time the national average, it is really much more because the average house in different areas is so different.

For reference here is what you can can get for about a quarter of a million dollars in the outer suburbs here in Atlanta. Closer to downtown would of course be a lot more expensive but that is true in the Bay Area too.

http://www.realtor.com/realestateandhom ... A583278066

When I worked there a number of people I knew managed to transfer with their company to a less expensive area in the US but it often took them several years to find a job opening that they could get. Once they moved, even if they took a pay cut, their standard of living soared since they had often had saved up enough to pay cash for a house when they moved. Some people even worked overseas for a while which had a lot of pros and cons. It would be good to focus on making as many job contacts that might lead to jobs like this to keep this option open.

When I lived in the Bay Area and was looking at buying my first house I researched it and the best guess that I could come up with was that if if bought a house there it might have major earthquake damage once in 200 years. That does not sound to bad until you realize that if you own the house for 20 years there is a 10% chance it will have major earthquake damage. (Be sure to do your own research and come up with your own numbers) You are looking at buying a house that is in the ballpark of 100% of your net worth so it isn't like you are a multimillionaire that could afford a loss like that.

If you can't afford to pay for earthquake insurance or to take a big loss like that then you really can't afford a house in the Bay Area.

I ended up finding a job in Portland Oregon and moving there where I bought a house that I could never have afforded in the Bay Area.

The way to really win is to save up a bunch there then move to someplace that is more affordable. You could also easily get by on one income in a more affordable place if that is something you want to do along with having more kids.
chameleon
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Re: Housing affordability CA

Post by chameleon »

Watty wrote:.

When I lived in the Bay Area and was looking at buying my first house I researched it and the best guess that I could come up with was that if if bought a house there it might have major earthquake damage once in 200 years. That does not sound to bad until you realize that if you own the house for 20 years there is a 10% chance it will have major earthquake damage. (Be sure to do your own research and come up with your own numbers) You are looking at buying a house that is in the ballpark of 100% of your net worth so it isn't like you are a multimillionaire that could afford a loss like that.

If you can't afford to pay for earthquake insurance or to take a big loss like that then you really can't afford a house in the Bay Area.
Congrats on having the prescience of mind in considering this. Too many people who look at CA don't realize how damaging an earthquake can be. Even small tremors can cause serious stress cracks and or unseen foundation damage. Not to mention the risk of burning your house down completely due to electrical faults or gas leaks during an earthquake. This was a major deciding factor in why I sold my house even though I was in southern CA and not the bay area. It's been awhile since there's been a "big one" in CA, the last being Northridge but it's always just a matter of time.

Almost all earthquake insurance coverage is severely inadequate. State farm, etc.. paid a lot during the last disaster and is now ripping off people with revised coverage and most people don't realize how little it covers. The premiums are high as it is and unless you are holding lots of cash to rebuild when a major earthquake happens you will be homeless too. Good luck rebuilding if a big one hits too, contractors will have a field day and I imagine just rebuilding will cost double what it would pre-disaster.
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celia
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Re: Housing affordability CA

Post by celia »

You can afford a million dollar house with your income. You could increase the money you have available for the down payment, though. Why not sock away as much as you can for a year ($100,000??) and it will be easier. While saving, if a great opportunity comes up, go for it.

You could get a 40-year mortgage to lower your payments. Then during the first 5 years of so, make double payments to knock extra years off the mortgage.

I assume you have already researched which schools/districts have the education you want, as you have a child ready to start school. If not, that is where you should start as it will narrow the areas you want to look at.
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Topic Author
davehica
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Re: Housing affordability CA

Post by davehica »

Hi All -- Thought I would provide an update to my original question. My wife and I are now expecting our second child in July, and we closed today on our first (and probably last) home. We had to stretch significantly more than I would have liked, but we're in one of the best school districts and neighborhoods in the area. Purchase price was $1.35M and we put down 25% on a 30-year fixed at 3.875%. In order to make it happen, I had to withdraw contributions from our roth IRAs, which still have ~$60K in them. Luckily, we both received raises this year and our annual income has increased to $250K.

The bank's appraisal came back $140K higher than the purchase price, and we love the home enough to live there forever, so overall I'm pretty happy how things turned out. That said, I'm still a little nervous with our monthly payment jumping from $2K to 4.7K/month. We've definitely cut back our spending recently to ease the transition.

Just wanted to say thanks for all the advice on both sides (IE do it and don't do it). I certainly feel for anyone trying to buy out here right now; it's an absolute zoo.
dgdevil
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Re: Housing affordability CA

Post by dgdevil »

How's the horse?
Topic Author
davehica
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Re: Housing affordability CA

Post by davehica »

still alive..
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