Affording a 1.3 million home?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
SpartanSJ
Posts: 14
Joined: Wed Aug 06, 2014 3:52 pm

Affording a 1.3 million home?

Post by SpartanSJ » Wed Aug 06, 2014 6:53 pm

Hi,
Recently came across these forums and wanted to get some feedback on purchase of a new home. We live in city where the Real estate market is very hot and prices have gone up substantially in the last 1 year. The homes that we are liking with all the features/location are now in 1.3-1.4million range :( Wanted to check if buying at this price with our current profile is a good idea in terms of savings/retirement :confused
Working couple, both ~35 yrs old

Salary: 275K combined (Bonus+ RSU: +100K/year)
401K: Max out to limit each year: Current: 500k combined
Effective tax rate 2013: 26% Federal, State: 9%
The property tax in our area is ~1.1%

Savings:
Cash: 200K
Stocks: 350K (vanguard ETFs Diversified stocks : 80% Bonds: 20%)
Company Stocks: 250K (vested)
Real Estate: 120K (equity in our current home)[/list]

Debts
Current Home mortgage: ~400K
NO other CC/Car/Education debt

plan to put 20% down on the new home (cash+ sell sell company stock)


thanks

denovo
Posts: 4379
Joined: Sun Oct 13, 2013 1:04 pm

Re: Affording a 1.3 million home?

Post by denovo » Wed Aug 06, 2014 7:22 pm

So, I am guessing Northern California.

Is the 100k bonus and RSU in excess of the 275k?

Are the savings you mentioned such as the cash and stocks separate from the 401k?

How stable are your jobs?

Do you have or are expecting children in the near future?

Based on current monthly expenses, do you have any cash remaining every month after 401k contributions?
"Don't trust everything you read on the Internet"- Abraham Lincoln

SpartanSJ
Posts: 14
Joined: Wed Aug 06, 2014 3:52 pm

Re: Affording a 1.3 million home?

Post by SpartanSJ » Wed Aug 06, 2014 7:32 pm

thanks for the reply..
Yes, Northern Ca

Is the 100k bonus and RSU in excess of the 275k?
--Yes, but we don't want to count on it for the mortgage calculations. So far it has been stable but who knows in the future...

Are the savings you mentioned such as the cash and stocks separate from the 401k?
-- Yes

How stable are your jobs?
-- Good question..They are stable right now but in tech..can you really say :)

Do you have or are expecting children in the near future?
--yes in the next 1-2years , one of the reasons for upgrading home

Based on current monthly expenses, do you have any cash reminding every month after 401k contributions?
-- We put 15% (in addition to 401K) directly into a savings account. After that and the monthly expenses, not much left

denovo
Posts: 4379
Joined: Sun Oct 13, 2013 1:04 pm

Re: Affording a 1.3 million home?

Post by denovo » Wed Aug 06, 2014 7:37 pm

So I guess the obvious elephant in the room is the kids. When you have children, do one of you plan on not working, I assume you both are now? Or will you be paying for babysitting, provided by an employer, or are relatives going to handle that?
Once you answer that, I can answer you!
"Don't trust everything you read on the Internet"- Abraham Lincoln

SpartanSJ
Posts: 14
Joined: Wed Aug 06, 2014 3:52 pm

Re: Affording a 1.3 million home?

Post by SpartanSJ » Wed Aug 06, 2014 7:42 pm

Yep both working and plan to after kids. We will have to pay for babysitting

denovo
Posts: 4379
Joined: Sun Oct 13, 2013 1:04 pm

Re: Affording a 1.3 million home?

Post by denovo » Wed Aug 06, 2014 7:48 pm

So, here's what I see, you want to bring about 450k to the table, 200k cash plus 250k from the vested stocks, so with a home worth 1.3 million, your down is closer to 33 percent. You didn't mention what you wanted to do with the other property, but I would consider selling it since you are both busy with 2 full-time jobs and don't need that extra headache. That gives you another 120k in cash. If you put 500k down, your mortgage would be about 800k, plugging that in with a rate that you expect, plus the formula for property taxes, about 1.1 percent, and insurance can you swing it? My gut says you can. Some of those rules of thumb like 3x your income or 30 percent of your gross income for home payments don't apply when you're at the higher income.

I take it you have a budget. Add child and child care expenses, add the increased property taxes, mortgage payment, and likely higher insurance payments. Are you breaking even, or better having a cushion of like 5 percent of your income after maxing your retirement accounts? If that's the case go for it.
"Don't trust everything you read on the Internet"- Abraham Lincoln

Elbowman
Posts: 494
Joined: Tue Apr 03, 2012 2:25 pm

Re: Affording a 1.3 million home?

Post by Elbowman » Wed Aug 06, 2014 7:54 pm

This is OT, but every personal finance book I've read implores you not to hold your employer's stock any longer than you have to.
Last edited by Elbowman on Wed Aug 06, 2014 8:05 pm, edited 1 time in total.

denovo
Posts: 4379
Joined: Sun Oct 13, 2013 1:04 pm

Re: Affording a 1.3 million home?

Post by denovo » Wed Aug 06, 2014 7:55 pm

Elbowman wrote:This is OT, but every personal finance book I've read implores you not to hold your employers stock any longer than you have to.

This too!
"Don't trust everything you read on the Internet"- Abraham Lincoln

epitomist
Posts: 240
Joined: Mon Jul 21, 2014 2:00 pm

Re: Affording a 1.3 million home?

Post by epitomist » Wed Aug 06, 2014 8:11 pm

I have an almost identical salary, almost identical assets.

I live in a $600k house. I would never consider buying a $1.3MM house.

sunnyday
Posts: 1679
Joined: Sat Jul 16, 2011 8:48 am

Re: Affording a 1.3 million home?

Post by sunnyday » Wed Aug 06, 2014 8:21 pm

How long do you plan to stay in the home and what do similar homes rent for? I'm not saying you should rent, but SF is #2 on the list below. A couple of links that you may find helpful:

http://info.trulia.com/index.php?s=32055&item=125286
http://www.nytimes.com/interactive/2014 ... .html?_r=0

cheesepep
Posts: 785
Joined: Wed Feb 17, 2010 10:58 pm

Re: Affording a 1.3 million home?

Post by cheesepep » Wed Aug 06, 2014 8:54 pm

Back of the napkin calculations says that you can afford it provided that your jobs are stable and you will stay there long-term.

User avatar
The529guy
Posts: 610
Joined: Fri May 23, 2014 1:08 am

Re: Affording a 1.3 million home?

Post by The529guy » Wed Aug 06, 2014 8:58 pm

SpartanSJ wrote:thanks for the reply..
Yes, Northern Ca
epitomist wrote:I have an almost identical salary, almost identical assets.

I live in a $600k house. I would never consider buying a $1.3MM house.
There seems to be a recurring disconnect here when it comes to Northern California real estate. Let me share one data point with you.

Right now, I have Redfin open in another window. I'm viewing a house in a Peninsula city that's located between SF and San Jose:

- 2 bedrooms and 1.5 baths
- 920 sqft on a 6,500 sqft lot
- built in the 1930s
- listed for $849,000 in April
- "pending" only 10 days later
- sale price: $1,050,000, $201,000 over asking

You might be thinking, "Wow, it must have excellent schools!"

It's elementary school, middle school, and high school are rated 2, 4, and 7 on a scale of 10, respectively.

Presumably, the new owner will spend more money to build this house out.

This is why people consider buying a $1.3MM home in the Bay Area. We're not talking about mansions with acres here.

User avatar
William4u
Posts: 1320
Joined: Fri Jun 01, 2012 3:02 pm

Re: Affording a 1.3 million home?

Post by William4u » Wed Aug 06, 2014 9:08 pm

Here is a person who lives in the Bay area who has good advice: RENT!

https://www.khanacademy.org/economics-f ... ing-a-home

The founder of Khan Academy, Salman Khan, is very smart (MIT/Harvard grad), and lays out a strong long-term economic argument for why he rents and does not buy in the Bay area.

In the long term, he thinks you are better off renting.

Calm Man
Posts: 2917
Joined: Wed Sep 19, 2012 9:35 am

Re: Affording a 1.3 million home?

Post by Calm Man » Wed Aug 06, 2014 9:14 pm

These threads get me concerned, screaming the word bubble. Ask yourself, and OP ask yourself, on that type of income would you ever have considered purchasing a 1.4 - 1.5 MM dollar house? No way. But per OP,the market has been hot. Now do not misinterpret the word fool, as you (OP) and the participants at this board are not fools. But you are now involved in the greater fool theory and just must hope that you are not the last fool. This amount of money for a house is beyond absurd, but it is continuing. People forget 2006-2007 so quickly.

sunnyday
Posts: 1679
Joined: Sat Jul 16, 2011 8:48 am

Re: Affording a 1.3 million home?

Post by sunnyday » Wed Aug 06, 2014 9:18 pm

William4u wrote:Here is a person who lives in the Bay area who has good advice: RENT!

https://www.khanacademy.org/economics-f ... ing-a-home

The founder of Khan Academy, Salman Khan, is very smart (MIT/Harvard grad), and lays out a strong long-term economic argument for why he rents and does not buy in the Bay area.

In the long term, he thinks you are better off renting.
His numbers are skewed -- $3k /mo is not a realistic rental price for a $1M home. He could also skew the numbers the other way to prove that buying is better.

dgdevil
Posts: 938
Joined: Sun Feb 20, 2011 1:42 pm

Re: Affording a 1.3 million home?

Post by dgdevil » Wed Aug 06, 2014 9:19 pm

epitomist wrote:I have an almost identical salary, almost identical assets.

I live in a $600k house. I would never consider buying a $1.3MM house.
I assume you are not in the Bay Area, though?

Trelin946
Posts: 48
Joined: Sat Dec 28, 2013 4:20 am

Re: Affording a 1.3 million home?

Post by Trelin946 » Wed Aug 06, 2014 9:59 pm

I live on the Peninsula, mid San Mateo county where starter homes cost $1.3m. We bought the house 15 years ago when the average homes are in the $500k range. From a lifestyle standpoint, 25 percent of our household income is what I would allocate as maximum mortgage. At $1.3m, I would imagine that the house you are considering will need some remodeling and repairs. You have a high income and decent assets, however, I do think that you will be stretching yourself too thinly with property tax, repairs, and the cost of raising children. What will happen to your saving goals? Why don't you look at the East Bay (San Ramon in particular), where you can get better value for your money. Schools are great in San Ramon, and a $1M house will actually be decent and not outdated and cramped.

User avatar
market timer
Posts: 5954
Joined: Tue Aug 21, 2007 1:42 am

Re: Affording a 1.3 million home?

Post by market timer » Wed Aug 06, 2014 10:10 pm

How certain are you that you will continue to live in the Bay Area? An alternative life path that I think you should consider is living where you are for another few years (maybe sell your current home and rent a bigger place as needed), continue working and saving a good deal of money. Then, once your firstborn is near elementary school age, relocate to a different part of the country with good public schools, where land prices are cheap, and you can afford a nice house for $200-300K. Your net worth is currently $1.4mn. Assuming you save $125K/year, and your assets grow by 3%, you'll be worth over $2mn in just four years. That's easily enough to retire comfortably outside of the Bay Area.

This is basically what I have done recently. I'm about your age, and as a single person had income + assets similar to what you have per capita (divide by two). After my son was born, my motivation to continue working for the man was gone.

Ron Ronnerson
Posts: 983
Joined: Sat Oct 26, 2013 6:53 pm
Location: Bay Area

Re: Affording a 1.3 million home?

Post by Ron Ronnerson » Wed Aug 06, 2014 10:34 pm

Trelin946 wrote:I live on the Peninsula, mid San Mateo county where starter homes cost $1.3m. We bought the house 15 years ago when the average homes are in the $500k range. From a lifestyle standpoint, 25 percent of our household income is what I would allocate as maximum mortgage. At $1.3m, I would imagine that the house you are considering will need some remodeling and repairs. You have a high income and decent assets, however, I do think that you will be stretching yourself too thinly with property tax, repairs, and the cost of raising children. What will happen to your saving goals? Why don't you look at the East Bay (San Ramon in particular), where you can get better value for your money. Schools are great in San Ramon, and a $1M house will actually be decent and not outdated and cramped.
We live in San Ramon and both my wife and I commute down 680. My stop is in Fremont and wife goes all the way to Cupertino. When we bought our home in 2010, the commute was sort of bad. Now it is much worse. We love our home and neighborhood and the schools out here are terrific. The home prices in San Ramon are much more reasonable than much of the Bay Area for sure. You'll be able to get a great home for around $1M or so. However, if you have to go into Silicon Valley or San Francisco, the days can be long.

By the way, in my opinion, you can afford to buy a home in the price range you have in mind.

Go Spartans!

User avatar
vitaflo
Posts: 1000
Joined: Sat Sep 03, 2011 3:02 pm

Re: Affording a 1.3 million home?

Post by vitaflo » Wed Aug 06, 2014 10:57 pm

epitomist wrote:I have an almost identical salary, almost identical assets.

I live in a $600k house. I would never consider buying a $1.3MM house.
Same boat here, similar age, income and assets, only we're in a $400k house. The houses in the development kitty-corner from us are in the $1.3m range. I never once thought I could sniff those homes with my income.

Then again, the option for a nice, large, new, $400k home in the best school district exists where I live. Guess not everyone is so lucky. I don't know how people in CA do it.

Johno
Posts: 1883
Joined: Sat May 24, 2014 4:14 pm

Re: Affording a 1.3 million home?

Post by Johno » Wed Aug 06, 2014 11:13 pm

dgdevil wrote:
epitomist wrote:I have an almost identical salary, almost identical assets.

I live in a $600k house. I would never consider buying a $1.3MM house.
I assume you are not in the Bay Area, though?
Or in a desirable part of NY or its inner suburbs. Our house *would* be maybe $700k if it had appreciated the same as Case Shiller national index since we bought it in the early 90's, but it's worth well over $1.3m. That doesn't do us any real good for the time being anyway, since we like where we live and don't intend to move; it's a negative year to year because our type of place has appreciated even faster than other types and so the property tax reval has increased out taxes more. But goes to show even always expensive areas like NY are more ridiculous than they used to be. Visualizing a $400k or 600k house is impossible unless you state the area. I don't know what we'd do facing today's relative pricing back when we bought our house. The location is great for working in the City though the house isn't big at all, and old, though a beautiful example of its kind, a piece of history, it's now priceless to us. But location was the driver at the time: a negative effect on not only lifestyle but certain careers to live too far from work. I don't know the answer for younger people with good jobs but facing reediculous NY (or SF) area home prices. Of course there's all the cheaper parts of the country, but not as many of those high paying jobs...there might be a connection. :D (though in NY particularly it's also foreign money making Manhattan prices beyond ridiculous, and pushing demand outward).

GeneParmesan
Posts: 10
Joined: Tue Mar 26, 2013 7:14 pm

Re: Affording a 1.3 million home?

Post by GeneParmesan » Wed Aug 06, 2014 11:38 pm

sunnyday wrote:
William4u wrote:Here is a person who lives in the Bay area who has good advice: RENT!

https://www.khanacademy.org/economics-f ... ing-a-home

The founder of Khan Academy, Salman Khan, is very smart (MIT/Harvard grad), and lays out a strong long-term economic argument for why he rents and does not buy in the Bay area.

In the long term, he thinks you are better off renting.
His numbers are skewed -- $3k /mo is not a realistic rental price for a $1M home. He could also skew the numbers the other way to prove that buying is better.
Not skewed at all. The example rent/buy ratio is 0.3%. Taking the first family-oriented listing from Craigslist, a 1500sqft Palo Alto 3br/2ba, asking rent is $4475/month, Zillow estimate of the property is 1.78M. Giving a 30% Zillow fudge factor, that's a 0.2%-0.35% ratio. The point of the video is that it's not *always* better to buy, and it is amply demonstrated in some markets in the US.

I would spend a lot of time with the NYTimes Rent vs. Buy calculator, working from the bottom up. In the uncertain future projection areas, such as market performance and housing price increases, I'd write down the low and high amounts that seem reasonable to you, and then try the calculator at all combinations of extremes.

I bought in 2011, and would just barely buy my house at it's current valuation. But honestly I kind of wish I could rebalance out of housing a bit... if only houses and mortgages worked that way!

SpartanSJ
Posts: 14
Joined: Wed Aug 06, 2014 3:52 pm

Re: Affording a 1.3 million home?

Post by SpartanSJ » Wed Aug 06, 2014 11:48 pm

thanks.
yep, we plan to sell the current home.
So for higher income groups, what is prudent %age that should go towards home payments? Also should we be putting more than 20% down and investing the rest in non RE allocation?




denovo wrote:So, here's what I see, you want to bring about 450k to the table, 200k cash plus 250k from the vested stocks, so with a home worth 1.3 million, your down is closer to 33 percent. You didn't mention what you wanted to do with the other property, but I would consider selling it since you are both busy with 2 full-time jobs and don't need that extra headache. That gives you another 120k in cash. If you put 500k down, your mortgage would be about 800k, plugging that in with a rate that you expect, plus the formula for property taxes, about 1.1 percent, and insurance can you swing it? My gut says you can. Some of those rules of thumb like 3x your income or 30 percent of your gross income for home payments don't apply when you're at the higher income.

I take it you have a budget. Add child and child care expenses, add the increased property taxes, mortgage payment, and likely higher insurance payments. Are you breaking even, or better having a cushion of like 5 percent of your income after maxing your retirement accounts? If that's the case go for it.

User avatar
vitaflo
Posts: 1000
Joined: Sat Sep 03, 2011 3:02 pm

Re: Affording a 1.3 million home?

Post by vitaflo » Thu Aug 07, 2014 12:12 am

SpartanSJ wrote:thanks.
yep, we plan to sell the current home.
So for higher income groups, what is prudent %age that should go towards home payments? Also should we be putting more than 20% down and investing the rest in non RE allocation?
Here's how I look at it. With interest rates so low, I'd do only 20% down to get rid of PMI, invest the remainder. In a high tax bracket, with low interest, mortgage deduction and inflation, it's basically a 0% loan at that point.

This of course makes a bit more sense if you can purchase a home that's not at your max because it gives you a bit a leeway if there is a job loss, etc. Personally the way I see it is that I'd rather retire sooner than live in a nicer place now. This also has the added benefit of keeping you a bit frugal which just helps you accumulate faster and thus retire sooner.

All this said, in our case 8% of our income goes to the mortgage. That's fairly low. Given where you live it would be tough to do that. But the more you can reduce the cost, the better off you'll be. Anywhere near the top of what a lender is willing to give you is way too much imho.

Valuethinker
Posts: 36342
Joined: Fri May 11, 2007 11:07 am

Re: Affording a 1.3 million home?

Post by Valuethinker » Thu Aug 07, 2014 2:49 am

SpartanSJ wrote:Hi,
Recently came across these forums and wanted to get some feedback on purchase of a new home. We live in city where the Real estate market is very hot and prices have gone up substantially in the last 1 year. The homes that we are liking with all the features/location are now in 1.3-1.4million range :( Wanted to check if buying at this price with our current profile is a good idea in terms of savings/retirement :confused
Working couple, both ~35 yrs old

Salary: 275K combined (Bonus+ RSU: +100K/year)
401K: Max out to limit each year: Current: 500k combined
Effective tax rate 2013: 26% Federal, State: 9%
The property tax in our area is ~1.1%

Savings:
Cash: 200K
Stocks: 350K (vanguard ETFs Diversified stocks : 80% Bonds: 20%)
Company Stocks: 250K (vested)
Real Estate: 120K (equity in our current home)[/list]

Debts
Current Home mortgage: ~400K
NO other CC/Car/Education debt

plan to put 20% down on the new home (cash+ sell sell company stock)


thanks

IF it is the house you want, long term, then I would say go for it. In London the house I now own, after 4 years, I could not afford-- prices have risen c. 30%.

To get the right house in the right area in a 'hot' market is just a nightmare. And I've been waiting for London's housing market to cool since 2000 (it has more or less doubled since then, tripled in some areas).

Recognize that a good house in a good area is a 'lifestyle' decision that will pay off in the enjoyment you get from living there. Whether it's a good investment decision is much harder to say.

Plan for a situation where, post kids, only one of you is working (ditto circumstances if one of you is redundant).

Plan for a situation where only one of you is working, and the value of your house drops by 30%. That's consistent with previous tech crashes, I believe.

BTW you should be selling company stock anyways. It should never be more than 10% of your total net worth (if it is liquid and saleable). Made that mistake once and have lived to regret it.

User avatar
fredflinstone
Posts: 2110
Joined: Mon Mar 29, 2010 7:35 am
Location: Bedrock

Re: Affording a 1.3 million home?

Post by fredflinstone » Thu Aug 07, 2014 5:52 am

According to the NY Times rent-vs-buy calculator it is better to rent than buy a $1.3 million home if you can rent for less than $4,541 per month. This assumes you plan to stay in the home for 9 years.

There are many homes available for less than $4,000 per month in the San Francisco Bay Area. A few examples:
http://sfbay.craigslist.org/pen/apa/4575268450.html
http://sfbay.craigslist.org/pen/apa/4606185215.html
http://sfbay.craigslist.org/sby/apa/4606973838.html

OP, you can play around with the NY Times calculator here, plugging in different assumptions about how long you plan to stay in the home and so on:
http://www.nytimes.com/interactive/2014 ... .html?_r=0

I rented a home for five years (2006-2011) and am glad I did so. I purchased a home in 2011 but it has been a poor investment because (a) I overpaid, (b) the home has declined in value, and (c) upkeep has been expensive. If I had continued to rent I would be significantly better off financially. I'd also be more mobile, which is another factor you ought to consider.

awval999
Posts: 1075
Joined: Fri Apr 08, 2011 10:17 pm

Re: Affording a 1.3 million home?

Post by awval999 » Thu Aug 07, 2014 6:44 am

When I read these threads I am truly thankful I do not live in northern California. Truly I think it's hard for the majority of Bogleheads to respond to threads like this. It's like saying, milk is $14/gallon but my child needs it, can I afford it? I am at a loss, because whether it makes financial sense or not, home ownership is a part of the American dream. And I do truly feel bad for the posters who come here with their AMAZING incomes, for which I'm sure they have sacrificed a lot to get where they are. But yet, something that is so easy for the rest of the country to obtain, is nearly un-obtainable where they are.

User avatar
kramer
Posts: 1632
Joined: Wed Feb 21, 2007 2:28 am
Location: Philippines

Re: Affording a 1.3 million home?

Post by kramer » Thu Aug 07, 2014 6:57 am

market timer wrote:How certain are you that you will continue to live in the Bay Area? An alternative life path that I think you should consider is living where you are for another few years (maybe sell your current home and rent a bigger place as needed), continue working and saving a good deal of money. Then, once your firstborn is near elementary school age, relocate to a different part of the country with good public schools, where land prices are cheap, and you can afford a nice house for $200-300K. Your net worth is currently $1.4mn. Assuming you save $125K/year, and your assets grow by 3%, you'll be worth over $2mn in just four years. That's easily enough to retire comfortably outside of the Bay Area.

This is basically what I have done recently. I'm about your age, and as a single person had income + assets similar to what you have per capita (divide by two). After my son was born, my motivation to continue working for the man was gone.
This is really a great post and it is basically what I did, as well. And when I left the Bay Area I had enough to retire and to live wherever I wanted, within reason. We all have different values, obviously. However, it was often difficult for me to understand why more of my co-workers didn't consider this idea. Sometimes, when you are working so hard, it is hard to see beyond where you are right now. Also, I suspect that most spent up to their salaries, unlike the OP.

But living a comfortable lifestyle in another area of the country, maybe one stay at home parent or both parents working part-time, having a nice home and school district, being almost financially independent and well past that in a few years, all at 40 years old, sounds like a great plan to me.

sunnyday
Posts: 1679
Joined: Sat Jul 16, 2011 8:48 am

Re: Affording a 1.3 million home?

Post by sunnyday » Thu Aug 07, 2014 7:57 am

GeneParmesan wrote:
sunnyday wrote:
William4u wrote:Here is a person who lives in the Bay area who has good advice: RENT!

https://www.khanacademy.org/economics-f ... ing-a-home

The founder of Khan Academy, Salman Khan, is very smart (MIT/Harvard grad), and lays out a strong long-term economic argument for why he rents and does not buy in the Bay area.

In the long term, he thinks you are better off renting.
His numbers are skewed -- $3k /mo is not a realistic rental price for a $1M home. He could also skew the numbers the other way to prove that buying is better.
Not skewed at all. The example rent/buy ratio is 0.3%. Taking the first family-oriented listing from Craigslist, a 1500sqft Palo Alto 3br/2ba, asking rent is $4475/month, Zillow estimate of the property is 1.78M. Giving a 30% Zillow fudge factor, that's a 0.2%-0.35% ratio. The point of the video is that it's not *always* better to buy, and it is amply demonstrated in some markets in the US.

I would spend a lot of time with the NYTimes Rent vs. Buy calculator, working from the bottom up. In the uncertain future projection areas, such as market performance and housing price increases, I'd write down the low and high amounts that seem reasonable to you, and then try the calculator at all combinations of extremes.

I bought in 2011, and would just barely buy my house at it's current valuation. But honestly I kind of wish I could rebalance out of housing a bit... if only houses and mortgages worked that way!
I'm not sure what listing you're referring to but zillow (as you mentioned) is often completely inaccurate. Instead one should compare overall price to rent ratios to get a feel for if it's better to rent or buy. The Bay Area has the second highest in the country at 15.5 so it's a good place to rent. However, If we plug that into the numbers from the video we get $1m / 15.5 / 12 = $5.4k / month for renting the average million dollar home in the Bay Area. That is 80% higher than what is used in the video.

Also, I just watched the full video and a couple other things to note are:
- he mentions investing in a 4% CD, I believe they were close to 2% when he created the video
- he doesn't factor in taxes from the income generated by the CD
- the mortgage rate used is 6% and is interest only
- he doesn't factor in that property taxes can be deducted

I agree about the nytimes rent vs buy calculator and linked to that in my post above.
Last edited by sunnyday on Thu Aug 07, 2014 9:25 am, edited 2 times in total.

User avatar
Watty
Posts: 14365
Joined: Wed Oct 10, 2007 3:55 pm

Re: Affording a 1.3 million home?

Post by Watty » Thu Aug 07, 2014 8:54 am

Calm Man wrote:These threads get me concerned, screaming the word bubble. Ask yourself, and OP ask yourself, on that type of income would you ever have considered purchasing a 1.4 - 1.5 MM dollar house? No way. But per OP,the market has been hot. Now do not misinterpret the word fool, as you (OP) and the participants at this board are not fools. But you are now involved in the greater fool theory and just must hope that you are not the last fool. This amount of money for a house is beyond absurd, but it is continuing. People forget 2006-2007 so quickly.

+1

Mortgage interest rates were 6 to 7 % just a few years ago. That at the stock market is near a high which makes the stock options worth a lot.

It those change who will be able to afford a house that expensive?

KyleAAA
Posts: 6761
Joined: Wed Jul 01, 2009 5:35 pm
Contact:

Re: Affording a 1.3 million home?

Post by KyleAAA » Thu Aug 07, 2014 9:19 am

You're borderline. You could probably afford it if you didn't feel the need to take nice vacations or drive fancy cars or anything like that. Your house is going to soak up all your disposable income for a good 10 years or so. But you COULD afford it, probably.

kingomri
Posts: 36
Joined: Tue Feb 25, 2014 11:19 am

Re: Affording a 1.3 million home?

Post by kingomri » Thu Aug 07, 2014 9:43 am

Now I don't live in the Bay Area - I live in LCOL Ohio, so I know what I'm saying is colored by my experiences.

I would be very uncomfortable buying the home in your situation. Here's why:
How stable are your jobs?
-- Good question..They are stable right now but in tech..can you really say :)
If your jobs end up becoming destabilized, it's likely that will be the case for tech jobs in general. If that's the case, I imagine SF real estate prices will start dropping. Even assuming that's an unlikely event, that's the kind of risk that I would want to avoid.

I'm with a previous poster on this one - unless the lifestyle factors of living in the Bay Area are incredibly important to you, you could retire soon in a LCOL area and spend lots of time with your family when you do start one.

User avatar
Imperabo
Posts: 1109
Joined: Fri Aug 29, 2008 1:00 am

Re: Affording a 1.3 million home?

Post by Imperabo » Thu Aug 07, 2014 9:47 am

awval999 wrote:When I read these threads I am truly thankful I do not live in northern California.
If I lived in Silicon Valley I would probably be making double what I am now. My house would cost triple, but I think it would still be a net positive financially because everything other than housing would only be a little more expensive.

Johno
Posts: 1883
Joined: Sat May 24, 2014 4:14 pm

Re: Affording a 1.3 million home?

Post by Johno » Thu Aug 07, 2014 9:55 am

Calm Man wrote:These threads get me concerned, screaming the word bubble. Ask yourself, and OP ask yourself, on that type of income would you ever have considered purchasing a 1.4 - 1.5 MM dollar house? No way. But per OP,the market has been hot. Now do not misinterpret the word fool, as you (OP) and the participants at this board are not fools. But you are now involved in the greater fool theory and just must hope that you are not the last fool. This amount of money for a house is beyond absurd, but it is continuing. People forget 2006-2007 so quickly.
I agree that's a serious issue. I'd be very worried about it if buying into the neighborhood where I live now. But the other side of the coin is the risk of applying a sort of ad hoc 'efficient market' thesis of residential real estate to conclude in effect that one should be able to afford such and such house, in substance not price, and that if the price is way beyond that it's a 'bubble' and will soon enough become much more affordable. I don't know SF area real estate, but I know the NY area RE fairly well, and I know a lot of people (albeit often from outside the area who never intend to live here) have that attitude toward prices here. But it's not necessarily a practically savvy attitude. Money is coming into real estate in NY from rich people the world over. Could that trend reverse, or even slow down enough to cause a major correction in real estate prices? Absolutely, but it's hard from individual POV to accurately gauge how 'foolish' the prices actually are compared to global forces and trends driving them, which may not reverse for a long time. Upper end NY city/close by real estate is back to ~06-07 peak (though Case Shiller overall NY-metro area graph doesn't show it), but similar London real estate is substantially past previous peak.

Prices in our neighborhood went down substantially in the aftermath of the crash but less proportionally than most places. And the market for houses like ours pretty much shut down: there weren't many people who had to sell, mortgage delinquency rate wasn't high. Most sellers kept offering only slightly discounted prices, buyers wanted real bargains: canyon wide bid-offers and few sales. So that's another caveat to price graphs (even assuming we could predict the next big dip in the graph) as a potential buyer. They don't take into account sales volume.

But I totally agree with your call for caution in this way: if making money on appreciation, assuming more than CPI, is part of the motive of a home purchase at high price to income ratio in an already very expensive market, then it's a bad idea, IMO.

User avatar
abuss368
Posts: 12971
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!

Re: Affording a 1.3 million home?

Post by abuss368 » Thu Aug 07, 2014 10:47 am

Big gamble here in my opinion. What happens with children, RSU's and bonuses that may dry up! A loss of job or income? Too many folks forget way too soon the 2007 - 2009 bust.

Regardless of income and assets, I would be hesitant to have that much home and debt.

Best.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

Ron Ronnerson
Posts: 983
Joined: Sat Oct 26, 2013 6:53 pm
Location: Bay Area

Re: Affording a 1.3 million home?

Post by Ron Ronnerson » Thu Aug 07, 2014 11:20 am

Imperabo wrote:
awval999 wrote:When I read these threads I am truly thankful I do not live in northern California.
If I lived in Silicon Valley I would probably be making double what I am now. My house would cost triple, but I think it would still be a net positive financially because everything other than housing would only be a little more expensive.
Home prices in Silicon Valley may actually be more than triple but this is a good point. When I moved from Arizona to the Bay Area many years ago, I was shocked by the house prices. But once you've lived somewhere for a while, that place begins to shape your perspective. Now it's hard to believe how people in other parts of the country can spend such a significant percentage of their income on things like food, cable TV, vacations, and gasoline. Everything in the Bay Area is a bit warped and the typical rules of thumb don't apply exactly the same way. Yes, home prices will take up a lot of a person's income here but other things will appear to be on sale because the cost is only slightly higher than other places while incomes are considerably so.

HornedToad
Posts: 890
Joined: Wed May 21, 2008 12:36 am

Re: Affording a 1.3 million home?

Post by HornedToad » Thu Aug 07, 2014 11:47 am

If bonus/RSU are stable, I think you're fine with current lifestyle. It will have a life impact though on savings, vacations, early retirement, etc so it depends on what's worth to you. If you are really concerned you could put 800k down and have a 500k mortgage and then you'd have lots of disposable cash again but minimal external assets. Note: I'm not recommending that but you could consider a larger down payment if that helps with cash flow. Maybe take out 800k or 900k mortgage instead of 1mil.

Also question to ask is how much career growth you have and how many kids for daycare? Daycare is ~$2k a month and so if two kids in at the same time then you'd be a lot more stretched.
Last edited by HornedToad on Thu Aug 07, 2014 11:56 am, edited 1 time in total.

dgdevil
Posts: 938
Joined: Sun Feb 20, 2011 1:42 pm

Re: Affording a 1.3 million home?

Post by dgdevil » Thu Aug 07, 2014 11:54 am

vitaflo wrote:
Here's how I look at it. With interest rates so low, I'd do only 20% down to get rid of PMI, invest the remainder. In a high tax bracket, with low interest, mortgage deduction and inflation, it's basically a 0% loan at that point.
+1. Minimum downpayment also obviates need for earthquake insurance.

User avatar
HomerJ
Posts: 11841
Joined: Fri Jun 06, 2008 12:50 pm

Re: Affording a 1.3 million home?

Post by HomerJ » Thu Aug 07, 2014 12:36 pm

Imperabo wrote:
awval999 wrote:When I read these threads I am truly thankful I do not live in northern California.
If I lived in Silicon Valley I would probably be making double what I am now. My house would cost triple, but I think it would still be a net positive financially because everything other than housing would only be a little more expensive.
My house would cost 5x as much, or I'd have to add a 2 hours commute to my life. Neither are worth it for double the salary.

mw1739
Posts: 511
Joined: Mon Mar 21, 2011 5:44 pm

Re: Affording a 1.3 million home?

Post by mw1739 » Thu Aug 07, 2014 12:48 pm

You say part of the reason you want to move is because you're thinking of having kids. A few things to consider:

1. Have you priced out childcare? That can put a huge dent in your budget.
2. What are the schools like where you live now vs. where you want to live? It may make sense to move to a good school district vs. somewhere where you'd send your kids to private schools.

People often go out and buy a minivan or bigger house as soon as they find out they're having kids. I think its better to wait until after the baby comes and gets a little older to move. Bigger house=more for them to get into. More expensive house = costs more to fix the stuff they ruin

SpartanSJ
Posts: 14
Joined: Wed Aug 06, 2014 3:52 pm

Re: Affording a 1.3 million home?

Post by SpartanSJ » Thu Aug 07, 2014 1:06 pm

thanks for all the inputs folks..

With my profile, would would be the max you guys recommend we spend on a home?? (



In terms of moving from bay area, we can easily get jobs in SoCAl (SD) but what i am hearing from my friends is that the housing market there has also picked up a lot. We would probably get a much better home for the same price but in good school district with less commute, the home prices are still north of 900K/1million

technovelist
Posts: 2917
Joined: Wed Dec 30, 2009 9:02 pm
Contact:

Re: Affording a 1.3 million home?

Post by technovelist » Thu Aug 07, 2014 1:09 pm

I would rent.
In theory, theory and practice are identical. In practice, they often differ.

Buddtholomew
Posts: 974
Joined: Thu Mar 01, 2007 3:29 pm

Re: Affording a 1.3 million home?

Post by Buddtholomew » Thu Aug 07, 2014 1:19 pm

I would not recommend buying the most expensive house you can afford, but rather purchasing a home where you can live and raise children comfortably. Ignore this advice if you consider your primary residence an investment.
"The first principle is that you must not fool yourself and you are the easiest person to fool" --Feynman.

ks289
Posts: 626
Joined: Sun Mar 11, 2012 12:42 pm

Re: Affording a 1.3 million home?

Post by ks289 » Thu Aug 07, 2014 1:41 pm

Max for your salary I would feel comfortable with is right around the $1.3M mark, since you will have some cushion to allow for future changes (kids, working slightly less). Job loss or substantial decline in salary could require selling, but that might be the case for most people even with a more conservatively priced home.
Home affordability calculators might give you a number in the $1.8M range.

MP1233
Posts: 128
Joined: Tue May 27, 2014 10:29 am

Re: Affording a 1.3 million home?

Post by MP1233 » Thu Aug 07, 2014 1:53 pm

I would rent and become financially independent as soon as possible. Too much downside to buying such an expensive house. My concern would be I might not be able to keep my high salary and/or bonus when I am no longer young and strong and have one or two kids to raise. In five years, could you be replaced by a highly talented 25 year old? For most tech jobs, the answer is yes. Unless you have a company ownership opportunity or a significant management opportunity ahead of you, you are nearly at the top of your game right now.

emilyinsf
Posts: 41
Joined: Sat Jan 04, 2014 3:38 pm

Re: Affording a 1.3 million home?

Post by emilyinsf » Thu Aug 07, 2014 3:23 pm

My concern would be your current savings rate of 15% of your take home. Will the increase in mortgage payment plus childcare expenses mean that you're spending all the money you take home every month? Are you ok with that?

Childcare expenses have also gone up with the real estate market. Research your area, but in SF, you'd be looking at around $1500-$2500/month for each child. Once they are preschool age, costs go down a little.

I'd keep the current place until your kids are elementary school age and then look at moving again.

Good luck. It's tough out there.

fareastwarriors
Posts: 915
Joined: Tue Feb 14, 2012 12:31 pm

Re: Affording a 1.3 million home?

Post by fareastwarriors » Thu Aug 07, 2014 3:35 pm

What cities are you looking at?

User avatar
TimeRunner
Posts: 1418
Joined: Sat Dec 29, 2012 9:23 pm

Re: Affording a 1.3 million home?

Post by TimeRunner » Thu Aug 07, 2014 4:27 pm

I'd try to get a job somewhere along the coast in San Luis Obispo or Santa Barbara counties, and leave the Bay Area behind. I speak from experience. 8-)
"What'd ya expect in an opera, a happy ending?" -Bugs Bunny. "You gotta fight for your right to party!" -Beastie Boys

Lafder
Posts: 3831
Joined: Sat Aug 03, 2013 7:56 pm
Location: East of the Rio Grande

Re: Affording a 1.3 million home?

Post by Lafder » Thu Aug 07, 2014 6:40 pm

I would check with a mortgage broker and find out what they would lend you and at what interest rate/costs.

I would be unlikely to want to borrow the max they would give, but it will give you an idea of what you can get and what it will cost as far as payments. You can also be sure to get the rates and costs for lower amounts borrowed. This will also give you an idea of whether you can buy first then sell the old.

They can help you calculate actual monthly costs for different loan amounts (but don't forget all of the moving costs and expenses of a new house and unexpected things going wrong or needing fixing)

Rather than focus on the total I could borrow, I would look at the cost the monthly payments including taxes etc, and see how much of a monthly payment I felt comfortable affording.

You already have a house. Is there anything you can do to make it more livable for less than the cost of moving? ((I may have missed if it is in your desired area))

If you are pretty sure you want to grow old there, I think buying is a great idea. If you are wanting to get out sooner than old age, the numbers of renting should be considered. But, I like the idea of owning so I would likely try to buy even if the numbers made renting look favorable.

My "made up" ratio was to buy a house less than 3x our annual income. So after our deposit, our mortgage is about twice our annual income. I am not sure where I came up with that, it just felt comfortable and I did not want a jumbo loan. Luckily where we live, that bought a nice house. Where I live what would be Palo Alto 990,000 (2bed/1ba) can be found for under 150,000$, and in better condition.

lafder

thomasbayarea
Posts: 358
Joined: Wed Feb 29, 2012 4:40 pm

Re: Affording a 1.3 million home?

Post by thomasbayarea » Thu Aug 07, 2014 7:00 pm

What am I missing?

You have $920k in savings before taxes. You want to buy a $1.3M house. You earn $275k/year.

Should be a walk in the park ... Good luck :sharebeer

Post Reply