Can we/Should we buy this house (SF Bay Area)

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pascal
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Can we/Should we buy this house (SF Bay Area)

Post by pascal » Sun Jun 19, 2016 5:23 pm

Hi,

A fellow Boglehead here about to make the biggest purchase in life.

Purchase is for a 60 odd year old SFH in the SF Bay Area. Our contingencies expire soon and we desire the Boglehead general opinion.

House price: $1M
Downpayment: $200k
Assets in taxable outside of downpayment: 290k
Assets in tax-deferred/Roth accounts: 240k
Combined family income: 290k without bonus. This is about $10k - post tax per month.
Other notables: 401(k) loan of 50k at 4.5% and upfront costs of about 10-15k before moving into the house.

Having lived in a 1BD apartment for over 10 years - to say that this is a lot of house is an understatement. The wife(age 29) and I( age 34) - both software engineers are planning to raise a family in this home. The school district is good, the house and locality are good too. We like the house but have never lived in a large SFH. We don't immediately need this house and can coast for 1-2 more years without a home. However, the fear of rate increases/not finding a home in future.

We are factoring $4000 for per month expenditure on housing. (Rate at 3.3% - $3620, Utilities: $250, Insurance: $130). Our grocery and entertainment budget is less than $1k a month. We factor the property taxes to be somewhat returned in the form of tax deductions at the end of the year(Itemized CA tax returns > standard deduction). We have no other debt at this time.

Please ask if any other information helps in making an assessment.
"Never underestimate the ability of a bad situation to get worse...rapidly." Ninegrams

moneywise3
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Re: Can we/Should we buy this house (SF Bay Area)

Post by moneywise3 » Sun Jun 19, 2016 5:59 pm

Are you sure your property taxes would null out of your tax savings? Bay area housing is stable, so go for it.

stan1
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Re: Can we/Should we buy this house (SF Bay Area)

Post by stan1 » Sun Jun 19, 2016 6:21 pm

People who don't live in HCOL areas will tell you to buy a less expensive house or move to a LCOL area. They'll ask what you will do if one of you loses your job or if wife wants to stay home with kids. None of that will be helpful because you've already thought about all of those options (possibly for years) and decided you want a good location/schools in the Bay Area.

Sounds like you have a good location and a good house. At this point make sure you understand the inspection report. Walk through the house with the inspector and ask questions about age of heater, AC, water heater, roof. Look for signs of water damage or damage to the foundation. Make sure the yard has good drainage away from the house. Pay the inspector extra to spend more time with you if needed. Try to meet the neighbors. If they are parking on the lawn, have a junkyard in the back yard, or have a tarp on the roof that's not going to stop when you move in.

Enjoy the new home!

pascal
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Re: Can we/Should we buy this house (SF Bay Area)

Post by pascal » Sun Jun 19, 2016 6:56 pm

Thanks for the opinions.
Yes, we will hit AMT for Fed taxes - turbotax indicated I might break even or pay an extra 1k in property taxes.

There was some damage to the foundation - we got a specialized inspection done which represents part of the upfront costs. The roof and HVAC are relatively new - will not need replacement in 10 years. (touchwood)

The current solution to "what if one loses a job" - the house is structured such that we can close an area and rent it. it sounds weird and drastic but so is losing one's job I suppose.
"Never underestimate the ability of a bad situation to get worse...rapidly." Ninegrams

Leemiller
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Re: Can we/Should we buy this house (SF Bay Area)

Post by Leemiller » Sun Jun 19, 2016 7:26 pm

Utilities may be low. Are you planning any renovations? Regardless you need to budget more for home maintaince future repairs as well as any housekeeping or landscaping you want to done for you. You may also wish to check into childcare costs. We paid a mortgage worth when we had a nanny and now are down to $1,500 a month. Are your incomes expected to increase in the future?

pascal
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Re: Can we/Should we buy this house (SF Bay Area)

Post by pascal » Sun Jun 19, 2016 7:35 pm

Leemiller wrote:Utilities may be low. Are you planning any renovations? Are your incomes expected to increase in the future?
I was told to budget that much for utilities as its a function of square foot. There is a garden to maintain yes, but I love gardening myself. No renovations are necessary in the foreseeable future. Incomes might or might not rise - I would not like to count on future income. We might consider offering room and board to a nanny to offset costs. This may or may not work out as planned. The sheer number of unknowns in homebuying should demotivate a potential buyer - yet here we are :|
"Never underestimate the ability of a bad situation to get worse...rapidly." Ninegrams

Traveler
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Re: Can we/Should we buy this house (SF Bay Area)

Post by Traveler » Sun Jun 19, 2016 7:41 pm

Your insurance estimate seems low, but probably wouldn't make much of a difference. I pay almost $800/year for a townhouse worth about $115K in Atlanta. $1560 for a $1M home seems like a nice rate.

Rodc
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Re: Can we/Should we buy this house (SF Bay Area)

Post by Rodc » Sun Jun 19, 2016 8:00 pm

People who don't live in HCOL areas...
Some of us in HCOL areas would be reluctant to buy this much house on that salary, but I do think we would be a minority, judging from my newer neighbors.

Does not automatically make us wrong. :)

But if you want a house and a modest commute you don't have a lot of choices. I would note however that things like early 1990s on the east cost, 2001 and 2008 across the entire economy do happen and when they do some non-trivial number of people get hung out to dry. This is not a theoretical concern.

Best of luck.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

ssalem
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Re: Can we/Should we buy this house (SF Bay Area)

Post by ssalem » Sun Jun 19, 2016 8:34 pm

We have lived in the SF Bay Area since '92. Bought our first house in '97, sold that and bought our second one in 2012. Both DH and I are/were engineers. We have weathered layoffs, stock market fluctuations, been a SAHM/SAHD, etc.

My $0.02? Only you and your partner know how much risk you are comfortable with. Run through the different scenarios with pessimistic numbers for expenses and worst case what if's. Ask yourself tough questions about how employable you and your partner are, etc.

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Watty
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Re: Can we/Should we buy this house (SF Bay Area)

Post by Watty » Sun Jun 19, 2016 8:50 pm

pascal wrote:The current solution to "what if one loses a job" - the house is structured such that we can close an area and rent it. it sounds weird and drastic but so is losing one's job I suppose.
You might physically be able to do that but it might not be allowed. I don't live in California but someone tried doing that in my subdivision and the normally passive HOA and the county shot that down real quick. In many areas a "single family home" really means "single family".

The rental income would also be taxable income and it might have consequences with things like homeowners property tax exclusions.
stan1 wrote:People who don't live in HCOL areas will tell you to buy a less expensive house or move to a LCOL area.
Yep.

Here in Atlanta you can get a decent house in a decent area for the low $200s, a McMansion for the $400s, and a million dollars will get you a real estate home.

It was a long time ago but I used to live in the Bay Area but I moved when I was ready to buy my first house and that was one of the best financial decisions I even made. I was able to buy my first house for maybe a quarter or a fifth of what it would have cost in the bay area and my after tax income did not drop dramatically since I moved to a lower tax area.

One thing to aggressively check on is if your current employers has positions in lower cost of living areas that you could transfer to. Several people I knew were able to transfer within their company to lower cost areas and they did very well.
pascal wrote:....are planning to raise a family in this home.
One thing that I saw when I was in the Bay Area was that some of my older co-workers had kids in their 20's but the kids had a real hard time trying to afford to live in the Bay Area even back then if they just had ordinary jobs. I remember one coworker that had a daughter that worked at a department store but even with a couple of roommates she could not afford an apartment even in a marginal area so she was still living at home. Some of the kids moved away, some kept living with their parents, and some moved in with questionable partners just to have a place to live away from their parents.

In contrast here in Atlanta my son is married and in his 20's and was able to easily afford a starter home that was in the low 100's.

Many kids will move away no matter what but consider what being in the Bay Area will mean for your future kids when they grow up.
pascal wrote:The wife(age 29) and I( age 34) - both software engineers....
I retired from IT last year just before I turned 59. The really odd thing was there even though there were about 100 people in my IT department I was the very first person to have ever retired out out the IT department and I had been with that company for about 26 years! I only managed to last that long since I wrote and knew some company specif software that should have been replaced about ten years before, but then other projects got higher priority.

I can't count the number of IT people that I have seen laid off in their 40s and 50s that ended up having to change careers if they could not afford to retire. You are making great money now and you might get lucky and have real long careers but as you get into your 40s you may find that finding new jobs gets a lot harder even if you are diligent about keeping your skills current. You might have better odds of having a long career if you can get into management but many technical people don't have real strong management type skills.

There is a lot to be said in IT for planning to be able to retire by the time your are 50. That does not mean that you need to actually retire by then but being financially independent by then might come in handy.

I would look at saving like crazy then moving to a lower cost area by the time your first kid is ready to start school. By then you should be able to buy a VERY nice home for cash in 80% of the country,
moneywise3 wrote:Bay area housing is stable
Be sure to also get earthquake insurance. :P

Sorry I could not resist, but you do need to consider the risk of earthquakes. When I lived there I did some research and the best I could come up with was that if I bought a house there then it might have serious earthquake damage about once in 200 years.(feel free to come up with your own numbers) That does not sound that bad but you need to remember that this would mean that if you own the house for 20 years then there is a 10% chance that it will have serious earthquake damage while you own it.

Even if you can decide that you can afford that financial risk a big problem is that after a disaster it is next to impossible to get a contractor to do the repairs so you need to take that into account. I know someone that has family where Hurricane Andrew hit and it took them about three years to get a new roof even though they had good insurance. During those years they had blue tarps on their roof which often leaked and caused other problems.

As to the price stability, thinking that it cannot go down and being worried about being priced out of the market can be a sign of a bubble.

danaht
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Re: Can we/Should we buy this house (SF Bay Area)

Post by danaht » Sun Jun 19, 2016 10:13 pm

Most places in CA are very expensive now. 1 million is a probably a good deal. Are your jobs secure - and do you both enjoy the work? I am also a software engineer in the Dallas area. I don't think my job is secure due to a lot of outsourcing + increase in H1B visas. That could be a lot of stress - because you might be worried about losing the job(s) and making the payments. If this won't be an issue - then enjoy life and buy the home. I would like to downsize my home in TX - just to be able to retire sooner. Good luck.

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Re: Can we/Should we buy this house (SF Bay Area)

Post by cme » Sun Jun 19, 2016 10:56 pm

In the base scenario, your family will do great in the new home.

Under lower probability scenarios (i.e., a currently unforecasted downturn in home values, or every xx years earthquake, dissolution of your marriage), purchasing may not be as favorable, but you have - or can devise - contingency plans, up to and including mailing the keys back to the bank.

anoop
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Re: Can we/Should we buy this house (SF Bay Area)

Post by anoop » Sun Jun 19, 2016 11:26 pm

It is definitely within your affordability range, especially since you cited your income without bonuses. With your savings you can easily cover the mortgage payments for many months even if both of you lose your jobs! So I don't see any red flags.

You have to think of it as an upgrade in your lifestyle and thus your savings moving forward will likely be lower. That said, you are both young so there is potential for fairly significant jump in income which could mitigate some of that.

Bfwolf
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Re: Can we/Should we buy this house (SF Bay Area)

Post by Bfwolf » Sun Jun 19, 2016 11:43 pm

Can you? Sure.

Should you? My opinion is maybe not. One of the first replies said that housing prices in the Bay Area are stable. I have seen no evidence of this. They've been going up like crazy. My concern is that there may be a bubble there or possibly a tech bubble that will cause a crash. It's also possible prices will keep going up. Who knows? What we do know is that life holds uncertainty. It sounds like you don't have any kids yet. What if you have difficulty conceiving a child? What if one of you gets an incredible job offer in Austin or Australia in 2 years? I think that locking in a place when your life still holds a lot of uncertainty because you're concerned prices are going to spiral even more and because interest rates are low may be unwise. Especially since your house will clearly be way more than you need for a number of years, which means excess costs for a number of years.

Why not continue to rent? If and when you successfully have a kid, you can move into a 2 BR apartment. As said kid approaches kindergarten age, you'll probably have a good sense of how many kids you're going to have total, will have updated information about your careers, and can make a choice at that point in time to buy the house in the good school district. If you still live in the Bay Area.

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stratton
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Re: Can we/Should we buy this house (SF Bay Area)

Post by stratton » Sun Jun 19, 2016 11:55 pm

moneywise3 wrote:Are you sure your property taxes would null out of your tax savings? Bay area housing is stable, so go for it.
NO.

California real estate prices look like a saw blade. A several year run up followed by a crash.

Look at the crashes in 1991, 2001, 2008 and get back to us.

Paul
...and then Buffy staked Edward. The end.

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celia
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Re: Can we/Should we buy this house (SF Bay Area)

Post by celia » Mon Jun 20, 2016 12:02 am

Ignore those who don't live in California as they can't fathom living here...

You can afford it but need to have a solid plan if one of you gets laid off. Hopefully you don't work for the same company else you will need a plan should both of you be laid off. (This is diversification. And if you own lots of company stock, cut it down to no more than 10% of your net worth. A major hit to the company will throw havoc into your personal finances.)

The homeowners insurance seems low and you should strongly consider earthquake and liability insurance. Do you plan on doing your own landscaping or hire someone?

Don't forget to take your commuting time into account if it will be different than what you have now.

One way to save money if this isn't your "dream house" is to buy something during the fall or winter. This is the prime time for real estate so prices are higher now. For example, if this house was for sale at the end of the year and it was 50k less, would that difference matter to you?

I think that whatever you decide will work out for you.
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Re: Can we/Should we buy this house (SF Bay Area)

Post by anoop » Mon Jun 20, 2016 12:04 am

Bfwolf wrote:What if one of you gets an incredible job offer in Austin or Australia in 2 years?
Do such things exist anymore? I have heard of people from other areas getting incredible offers in the Bay Area, never vice versa. Maybe I just don't know enough people. The only time I've heard of something even remotely close is when someone from the Bay Area was offered a short-term expat deal by their current employer.

The only time I have heard of people leaving the Bay Area is when they lose their job or decide they want to move to lower cost of living area with a less frenzied lifestyle.

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Re: Can we/Should we buy this house (SF Bay Area)

Post by Ron Ronnerson » Mon Jun 20, 2016 12:09 am

I'm in the Bay Area as well. I think you can afford it (assuming your expenses in non-housing categories don't go up a lot in the future). Personally, I would buy a home only if I were intending to stay in it for at least 10 years. Transaction costs on the purchase and sale of a million dollar house are not negligible. If you like the town and the school district, have a reasonable commute, and have found a house that you like and plan to stay in for a while, I would move forward. I don't believe in market timing and think prices could move wildly in the short-term (in either direction). That's an additional reason that I'd only buy if I were going to stay in the home for more than a few years.

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Re: Can we/Should we buy this house (SF Bay Area)

Post by boglesmind » Mon Jun 20, 2016 1:38 am

Traveler wrote:Your insurance estimate seems low, but probably wouldn't make much of a difference. I pay almost $800/year for a townhouse worth about $115K in Atlanta. $1560 for a $1M home seems like a nice rate.
The appraised value of a property in the bay area consists of mostly land (about 70%) and the rest for the structure. Insurance covers only the structure and $1560 for a $1M home sounds too high - I'd guesstimate the land value at 600K and building at 400K. I've seen insurance premium of around $900 for > $1M house -- the structure valued at around $400K. Doesn't include earth quake insurance of course :-)

OP, assuming you and your spouse keep up your SW Engg skills relevant, I wouldn't worry about buying a $1M house on $290K income without bonus, in a desirable area. Just make sure the location and neighborhood are really desirable. Also, shop around for better insurance. $1560 sounds too high. You may want to build a buffer of 12 months of emergency exp, including mortgage/insurance/property taxes etc

$250 for utilities sounds right -- depends on the city/county/MUD you live in. We pay around $200/month for water/sewage, electricity, gas, garbage etc. Water restrictions continue to be in effect due to not enough rains this winter to overcome 4/5 years of drought. You may consider xeriscaping your front-yard. We did that and halved our water bill.

We debated earthquake insurance and decided against it. $1500 for $400K coverage with upwards of $50K deductible and all kinds of exclusions didn't appeal to us.
Paul wrote:California real estate prices look like a saw blade. A several year run up followed by a crash.

Look at the crashes in 1991, 2001, 2008 and get back to us.
All real estate is hyper local. During 2008 downturn there were zero foreclosures in our neighborhood and house prices went down (about 10%) and came roaring back. My friends' houses (in Southern San Jose -- in a nice neighborhood) have hardly reached 2008 peak even today, June 2016. My other friends' houses in Cupertino area held their value during 2008-09 crash -- due to high demand (even then) for good schools and have appreciated tremendously since then. If you go farther out to Pleasanton, Tracy/Stockton, etc these areas suffered quite a lot during the downturn and some ares like Pleasanton have mostly recovered but not Tracy and Stockton. Central california cities like Merced, Madera etc haven't recovered at all -- land is plenty and there are no high paying tech jobs, just agro-business. So, I would not generalize all of California and draw conclusions from that.

All the best
boglesmind
Last edited by boglesmind on Mon Jun 20, 2016 1:58 am, edited 1 time in total.

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Re: Can we/Should we buy this house (SF Bay Area)

Post by boglesmind » Mon Jun 20, 2016 1:57 am

Ron Ronnerson wrote:I'm in the Bay Area as well. I think you can afford it (assuming your expenses in non-housing categories don't go up a lot in the future). Personally, I would buy a home only if I were intending to stay in it for at least 10 years. Transaction costs on the purchase and sale of a million dollar house are not negligible. If you like the town and the school district, have a reasonable commute, and have found a house that you like and plan to stay in for a while, I would move forward. I don't believe in market timing and think prices could move wildly in the short-term (in either direction). That's an additional reason that I'd only buy if I were going to stay in the home for more than a few years.
+1 :thumbsup
OP,
When we bought our house we felt it was at the top and were explicit in our expectations of staying for 10+ years in the same house. We weren't going to time the market whether it is stock market or real-estate. We couldn't stand living in an apartment anymore -- too much floating traffic -- and love our current neighborhood. Bought an older house (50+ years) in excellent condition so that we don't have to commute for more than 30 minutes (now it has become 45 due to increased traffic). Other than replacing the roof for about 8K and copper re-piping for about 6K, no major expenses. Bought some tools as needed and learnt to do the minor jobs (changing faucet valve, toilet flapper, adding insulation to attic, fixing sprinkler heads etc) myself. If you like gardening, maintaining the yard (mowing once in fortnight) shouldn't be hard and probably a welcome distraction from SW development (speaking from experience :-)

Al the best
boglesmind

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Re: Can we/Should we buy this house (SF Bay Area)

Post by TigerNest » Mon Jun 20, 2016 3:37 am

Please do seriously consider earthquake insurance, and double check the maps to make sure you're not buying in a high-risk zone (i.e. liquefaction).

There's a 70%+ chance the Bay Area will be hit with a 6.7+ earthquake in the next 30 years. The magnitude could be severe. The 1906 earthquake was a magnitude 7.9.

Your million dollar home may be damaged/destroyed, along with much of the infrastructure that surrounds it.

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Re: Can we/Should we buy this house (SF Bay Area)

Post by DoubleClick » Mon Jun 20, 2016 4:35 am

pascal wrote: Combined family income: 290k without bonus. This is about $10k - post tax per month.
Huh? Am I reading that right or is that a typo?

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Re: Can we/Should we buy this house (SF Bay Area)

Post by Nebster » Mon Jun 20, 2016 5:13 am

Looks pretty good to me. Sounds like either a steal or somewhere with a pretty good commute?

Re: earthquake insurance, it's a pretty bad deal. For the people suggesting it, remember that the exposure is not simply a "million dollar home," it's more like a 200k or 300k home sitting on a piece of dirt worth 800k. The claim, assuming the insurer remains solvent, is only going to be for the reconstruction, minus a huge deductible. And when the Big One happens, the dirt could easily shed half its value or more for quite some time. You're pretty much just taking the risk living in that area.

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Re: Can we/Should we buy this house (SF Bay Area)

Post by Non7WoodUser » Mon Jun 20, 2016 6:12 am

$1M purchase price = 10,000 sqft house? If this is true, consider proceeding with the purchase. Otherwise, consider moving to the Midwest or South for a much higher quality of life.

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Re: Can we/Should we buy this house (SF Bay Area)

Post by warner25 » Mon Jun 20, 2016 8:09 am

DoubleClick wrote:
pascal wrote: Combined family income: 290k without bonus. This is about $10k - post tax per month.
Huh? Am I reading that right or is that a typo?
I've been wondering the same. 58%+ effective tax rate? If true, a million dollar home sounds entirely unaffordable, and there is no reason to continue to be a hard working dual income family in this area.

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Watty
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Re: Can we/Should we buy this house (SF Bay Area)

Post by Watty » Mon Jun 20, 2016 9:13 am

boglesmind wrote:
Traveler wrote:If you go farther out to Pleasanton, Tracy/Stockton, etc these areas suffered quite a lot during the downturn and some ares like Pleasanton have mostly recovered but not Tracy and Stockton.
It would be a stretch to call Tracy and Stockton part of the Bay Area.

There is not doubt that living someplace like downtown San Francisco or on the Coast is worth paying a premium for but the vast majority of the Bay Area is urban/suburban sprawl that only has an advantage of being an hour or two drive to someplace nice. Few people would choose to move to that urban/suburban sprawl except to take a high paying job.

On the comments about only needing earthquake insurance for the value of the building and not the land there are some problems with that. Earthquake insurance may also cover temporary living costs which could be significant if you have to move out for a long time and there is a shortage of temporary housing. An earthquake can also damage the utility lines which can be expensive to replace. In addition to the financial impact it would be hard to value the risk of being injured in an earthquake.

Earthquake insurance would not cover it but even if your house is OK the building where you work could be damage or the infrastructure could be so damaged that your employer might have to lay people off or move to a different location.

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Re: Can we/Should we buy this house (SF Bay Area)

Post by technovelist » Mon Jun 20, 2016 9:37 am

I could not imagine taking on that much real estate risk while relying on income from software engineering jobs.

I say this as a software engineer who got laid off in 2001 after the tech crash and needed a year to find a job... 1000 miles away.

We survived that without terrible financial damage because our housing costs were so low that we could keep afloat for a long time without income, but with a $4k/month housing cost I wouldn't have been able to sleep at night.
In theory, theory and practice are identical. In practice, they often differ.

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Re: Can we/Should we buy this house (SF Bay Area)

Post by DoubleClick » Mon Jun 20, 2016 9:41 am

technovelist wrote:We survived that without terrible financial damage because our housing costs were so low that we could keep afloat for a long time without income, but with a $4k/month housing cost I wouldn't have been able to sleep at night.
Yes, but rentals in the area aren't any cheaper. A good 2 bedroom in the South Bay is $4k/month.

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Re: Can we/Should we buy this house (SF Bay Area)

Post by technovelist » Mon Jun 20, 2016 9:44 am

DoubleClick wrote:
technovelist wrote:We survived that without terrible financial damage because our housing costs were so low that we could keep afloat for a long time without income, but with a $4k/month housing cost I wouldn't have been able to sleep at night.
Yes, but rentals in the area aren't any cheaper. A good 2 bedroom in the South Bay is $4k/month.
Ok, but you aren't locked into a rental for 15-30 years.
In theory, theory and practice are identical. In practice, they often differ.

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Re: Can we/Should we buy this house (SF Bay Area)

Post by anoop » Mon Jun 20, 2016 10:08 am

warner25 wrote:
DoubleClick wrote:
pascal wrote: Combined family income: 290k without bonus. This is about $10k - post tax per month.
Huh? Am I reading that right or is that a typo?
I've been wondering the same. 58%+ effective tax rate? If true, a million dollar home sounds entirely unaffordable, and there is no reason to continue to be a hard working dual income family in this area.
My guess is that it probably includes pre- and post-tax contributions as well such as 401(k) , ESPP, health insurance, HSA/FSA contributions, etc.

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Re: Can we/Should we buy this house (SF Bay Area)

Post by boglesmind » Mon Jun 20, 2016 10:22 am

anoop wrote:
warner25 wrote:
DoubleClick wrote:
pascal wrote: Combined family income: 290k without bonus. This is about $10k - post tax per month.
Huh? Am I reading that right or is that a typo?
I've been wondering the same. 58%+ effective tax rate? If true, a million dollar home sounds entirely unaffordable, and there is no reason to continue to be a hard working dual income family in this area.
My guess is that it probably includes pre- and post-tax contributions as well such as 401(k) , ESPP, health insurance, HSA/FSA contributions, etc.
In addition, the OP probably contributes 10% of salary to ESPP -- most public tech companies in the valley offer ESPP for up to 10% of salary and allow employees to buy shares at some discount (usually 15%) every 6 months or so and allow same day sale on the date of purchase. This is an easy 15% return.

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Re: Can we/Should we buy this house (SF Bay Area)

Post by countofmc » Mon Jun 20, 2016 10:34 am

I personally would not because of your professions. I don't think there is a tech bubble, but let's just assume there is. If that bubble bursts, there is the potential for job loss for software developers, right at the same time as a potential local real estate crash.

I think you and your wife BOTH being developers is a tad risky. I'd feel different if one of you was a doctor or CPA. And obviously I'd feel different if you just cashed out 5 million dollars worth of company stock and can bid on and buy this house with cash, as some in the Bay Area do.

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Re: Can we/Should we buy this house (SF Bay Area)

Post by boglesmind » Mon Jun 20, 2016 10:50 am

Watty wrote: It would be a stretch to call Tracy and Stockton part of the Bay Area.
I wouldn't and didn't. These are bed room communities with 2hour commutes. Our V.P was renting out his Cupertino home and commuting from Tracy/Stockton. I was responding to Paul's comment
Paul wrote: California real estate prices look like a saw blade. A several year run up followed by a crash.
Look at the crashes in 1991, 2001, 2008 and get back to us.
to show that real estate market is hyper local and one cannot generalize. I quoted examples from the heart of silicon valley to suburbs, outskirts, and finally bedroom communities to show the disparate impact of 2008 housing collapse on Bay area housing. Even in the heart of silicon valley, good neighborhoods with good schools fared much better than marginal ones with marginal schools.

Santa Clara County job market booms, reaches all-time high
http://www.mercurynews.com/business/ci_ ... eaches-all
technovelist wrote: We survived that without terrible financial damage because our housing costs were so low that we could keep afloat for a long time without income, but with a $4k/month housing cost I wouldn't have been able to sleep at night.
100% of my ex-colleagues numbering in the hundreds were laid off during 2001 and have been employed continuously since then. It depends on the field and how up to date their skills are. This is why I said
OP, assuming you and your spouse keep up your SW Engg skills relevant, I wouldn't worry about buying a $1M house on $290K income without bonus, in a desirable area.
boglesmind

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Re: Can we/Should we buy this house (SF Bay Area)

Post by pascal » Mon Jun 20, 2016 12:17 pm

As anoop and boglesmind suggested: the 10k income is after 401k max contributions, LPFSA, HSA, ESPP and accounting for the 401k loan payoff.

Folks, neither of us have lucked out in an IPO and we dont have such prospects. Yes, if we had any such money life would be ideal. But as in the stock market and in life, there is a certain amount of risk in everything including purchasing a house. We know we are picking up the risks of earthquake, job market and maybe no child due to conceiving issues.

We are very much alive to the fact that we could get laid off and will not be working in the present go-getter capacity at say 55. But we are also reasonably confident that we could pay off a substantial portion of the loan in 20 years or sell and move on during that time. It might work and if it does not, we will rely on the single income and an emergency fund that I plan to build up over the next 1 year(during which I hope we dont get laid off :sharebeer )

If we both get laid off, we will come up with the contingency I suggested earlier - it will foot part of the bill. There will be a 3b/2b for us though it might feel like a townhome. ::|
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ray.james
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Re: Can we/Should we buy this house (SF Bay Area)

Post by ray.james » Mon Jun 20, 2016 1:05 pm

OP, If you are happy with schools and commute(and possible future commute), go ahead and buy. Life is always uncertain. You have enough reserves to come out of recession unscathed.

Other considerations:
Check if you need more umbrella coverage since you have a new asset.

Houses are old in Bay area. Take house repairs into account while deciding on emergency fund size.

Take a note on upcoming public transport developments and traffic changes in next 5-10 years. People who bought in recession in far east bay had their commute time doubled now.
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Re: Can we/Should we buy this house (SF Bay Area)

Post by wertdaman » Mon Jun 20, 2016 1:31 pm

You certainly can based on the finances you provided. I assume you'll give up some taxable savings, but shouldn't feel constrained - we just bought a similar SFH in San Mateo for last year with a lower income. Your insurance estimate is in line with ours, and utiilies (electric, gas, and water) is also in line for our family of 3. I would note that you didn't consider escrow in your mortgage payment amount - which will be ~$1,000/mo.

Should you buy, that's a completely personal opinion, but there have been a lot of good suggestions from others with respect to the quality of the neighborhood, commute, etc. Some things to consider if you're planning for kids, that we experienced searching last year are the walkability of the neighborhood (e.g., large hills or side walks) and proximity/quality of local parks. We looked at some nicer houses, but we ended up two blocks from two parks and in a completely flat neighborhood so we can do a lot with our toddler without getting in the car.

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Re: Can we/Should we buy this house (SF Bay Area)

Post by bengt » Mon Jun 20, 2016 1:48 pm

technovelist wrote:
DoubleClick wrote:
technovelist wrote:We survived that without terrible financial damage because our housing costs were so low that we could keep afloat for a long time without income, but with a $4k/month housing cost I wouldn't have been able to sleep at night.
Yes, but rentals in the area aren't any cheaper. A good 2 bedroom in the South Bay is $4k/month.
Ok, but you aren't locked into a rental for 15-30 years.
Keep in mind that if both are unemployed, they will not be able to get cheaper rental either (since employment verification fails) so they have to stay in the expensive rental (or move to low cost area elsewhere without jobs nearby)

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Re: Can we/Should we buy this house (SF Bay Area)

Post by systemBuilder » Mon Jun 20, 2016 11:17 pm

So from your letter I gather you are married and looking at an $800k mortgage with $290k of household income for a 60-year old house. Been there, done that, for the past 2 years - ALL FOUR FACTORS - in Palo Alto. The only difference? Our house is worth $2M, not $1M.

Some perspective, (a) I have a PhD engineering degree from a top-5 school so if I lose my job there is a presumption that I can get *something* to replace it, although our income could get cut in half which wouldn't pay the mortgage over the longer term. We have enough saved to live 3 years until my kids go to college. (b) You are doing extremely well to be able to leverage up on a $1M house at age ~31 average. At age 30 I had ... nothing. At age 35 I had ... nothing. At age 40 my wife got lucky at a startup and we paid off our 4-yr old house. (c) It is time to get a house if you are planning to start a family soon, (d) We took the leap when the rental we hated went from $4200/month to $4800/month (1200 sq-ft 1950 gloomy cottage.) I hope your house is everything you need it to be over the next 5 years, because you won't have a lot of extra money for remodeling - our house needs a 6-figure remodel (roof, kitchen, baths) which is causing us fits. It was too much of a stretch, we came here for the school districts, but we are having second thoughts because we find out that all the Palo Alto kids are over-coached and taking classes twice - once in the summer, and a 2nd time in the fall or spring semester, "to be competitive" !!! sheesh !!!

We live very frugally, we live on about 20% of our income save about 15%, and put about 30% into housing (the rest is swallowed wholly by income and payroll taxes). We put an extra $2k/month into our mortgage. Our mortgage and property tax and insurance is $8k/month - we got an astonishing Jumbo 7/1 ARM at 2.69%. We are the riff-raff in our neighborhood because our cars average 160k miles and were built in 1996 and 2000, respectively.

We waited 13 years to upgrade our house - in 2011 - which was when I predicted the housing market would bottom (16-20 quarters after the peak in july 2005), and I was EXACTLY right. However, a cross-country job change in 2013 caused us to sell our dream home and downsize. Nothing is certain. Today I live 5 blocks away from the Mountain View rental that I occupied from 1984-1986. That small 1100 sq-ft house has appreciated 7.9% tax free for the past 30 years. 7.9%. Tax Free. If you are going to live a decade or longer in the Bay Area, I wouldn't worry too much about today's housing prices. Yes, if you buy at the peak, then you will need to sell at the peak in some future year, big freaking deal. In my lifetime every time there has been a downturn there has been a new housing price-peak within 9 years.

http://www.jparsons.net/housingbubble/s ... cisco.html

When the semiconductor and software boom is over, that will be when it's time to worry.
Last edited by systemBuilder on Tue Jun 21, 2016 12:00 am, edited 13 times in total.

technovelist
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Re: Can we/Should we buy this house (SF Bay Area)

Post by technovelist » Mon Jun 20, 2016 11:30 pm

bengt wrote:
technovelist wrote:
DoubleClick wrote:
technovelist wrote:We survived that without terrible financial damage because our housing costs were so low that we could keep afloat for a long time without income, but with a $4k/month housing cost I wouldn't have been able to sleep at night.
Yes, but rentals in the area aren't any cheaper. A good 2 bedroom in the South Bay is $4k/month.
Ok, but you aren't locked into a rental for 15-30 years.
Keep in mind that if both are unemployed, they will not be able to get cheaper rental either (since employment verification fails) so they have to stay in the expensive rental (or move to low cost area elsewhere without jobs nearby)
Perhaps, but at least they won't have an enormous mortgage hanging over their heads in the meantime.
In theory, theory and practice are identical. In practice, they often differ.

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Re: Can we/Should we buy this house (SF Bay Area)

Post by Bfwolf » Tue Jun 21, 2016 12:19 am

pascal wrote:As anoop and boglesmind suggested: the 10k income is after 401k max contributions, LPFSA, HSA, ESPP and accounting for the 401k loan payoff.

Folks, neither of us have lucked out in an IPO and we dont have such prospects. Yes, if we had any such money life would be ideal. But as in the stock market and in life, there is a certain amount of risk in everything including purchasing a house. We know we are picking up the risks of earthquake, job market and maybe no child due to conceiving issues.

We are very much alive to the fact that we could get laid off and will not be working in the present go-getter capacity at say 55. But we are also reasonably confident that we could pay off a substantial portion of the loan in 20 years or sell and move on during that time. It might work and if it does not, we will rely on the single income and an emergency fund that I plan to build up over the next 1 year(during which I hope we dont get laid off :sharebeer )

If we both get laid off, we will come up with the contingency I suggested earlier - it will foot part of the bill. There will be a 3b/2b for us though it might feel like a townhome. ::|
I guess I just don't understand why you are buying the 3 BR house with the good schools when your wife isn't even pregnant with your first kid yet. It feels like your motivation is concern that prices will keep going up. Are you possibly being biased by the recent huge run up in prices? Past performance does not necessarily predict future returns.

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Re: Can we/Should we buy this house (SF Bay Area)

Post by peterinjapan » Tue Jun 21, 2016 12:38 am

My advice is, before pulling the trigger, try to stay for 1-3 nights nearby, perhaps in an Airbb or something, just to "kick the tires" on the neighborhood. There are always going to be things you don't notice until after you move in and the honeymoon period ends. I bought a condo in downtown San Diego which I love, but it faces a hospital so there are a lot of sirens going off. I don't care, but if I'd chosen more calmly I might have bought something else. (We ended up buying another unit in the building since we like downtown living so much, and made a tidy profit on the first condo, so it's all good.)

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Re: Can we/Should we buy this house (SF Bay Area)

Post by Derby » Tue Jun 21, 2016 1:29 am

Speaking as a SF homeowner, I don't think you can just hand wave away the property taxes. They will be about $1000/mo. Sure that's deductable, but it's still $600+ real. And for a 60 year old house, you should budget at least $500/ mo for maintenance/cap-ex, imho.
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Re: Can we/Should we buy this house (SF Bay Area)

Post by ray.james » Tue Jun 21, 2016 1:40 am

Derby wrote:Speaking as a SF homeowner, I don't think you can just hand wave away the property taxes. They will be about $1000/mo. Sure that's deductable, but it's still $600+ real. And for a 60 year old house, you should budget at least $500/ mo for maintenance/cap-ex, imho.
I believe Op's math is tax deduction on mortgage interest will equal property taxes on first 10 years. Since he is in AMT range, property taxes are not deductible but mortgage interest is, from what I understand.
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Re: Can we/Should we buy this house (SF Bay Area)

Post by Watty » Tue Jun 21, 2016 8:21 am

systemBuilder wrote:Today I live 5 blocks away from the Mountain View rental that I occupied from 1984-1986. That small 1100 sq-ft house has appreciated 7.9% tax free for the past 30 years. 7.9%. Tax Free. If you are going to live a decade or longer in the Bay Area, I wouldn't worry too much about today's housing prices. Yes, if you buy at the peak, then you will need to sell at the peak in some future year, big freaking deal. In my lifetime every time there has been a downturn there has been a new housing price-peak within 9 years.

http://www.jparsons.net/housingbubble/s ... cisco.html

When the semiconductor and software boom is over, that will be when it's time to worry.
In the early 1980s interest rates and inflation were both in double digits so a large factor in price increases was people being able to pay more for a house as interest rates dropped below 3%. When interest rates eventually increase again that will reduce the number of people that can afford expensive houses much less bid them up higher. Mortgage interest rates were above 6% as recently as 2008 but the OP is pretty young so he or she may not remember that.

You also need to be careful with the chart on that web page. It is based on the median house price not a specific house price. The problem is that a 1,000 square foot 1950s bungalow does not necessarily go up in value just because a bunch of new McMansions are built that raise the median price. In addition many older homes have been torn down over the last 30 years just for normal development so the median home price will increase as low end housing is removed from the market.
Last edited by Watty on Tue Jun 21, 2016 9:48 am, edited 1 time in total.

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Re: Can we/Should we buy this house (SF Bay Area)

Post by Rodc » Tue Jun 21, 2016 9:07 am

You also need to be careful with the chart on that web page. It is based on the median house price not a specific house price. The problem is that a 1,000 square foot 1950s bungalow does not necessarily go up in value just because a bunch of new McMansions are built that raise the median price. In addition many older homes have been torn down over the last 30 years just for normal development so the median home price will increase as low end housing is removed from the market.
That has been a big factor in my town and if anything is increasing.

20 years ago I had precisely the median home in town. A year or two I checked and it was about a 30th percentile house. It would be a little less than that now.

Makes it important to be careful with these sorts of data.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Re: Can we/Should we buy this house (SF Bay Area)

Post by technovelist » Tue Jun 21, 2016 9:20 am

Watty wrote:
systemBuilder wrote:Today I live 5 blocks away from the Mountain View rental that I occupied from 1984-1986. That small 1100 sq-ft house has appreciated 7.9% tax free for the past 30 years. 7.9%. Tax Free. If you are going to live a decade or longer in the Bay Area, I wouldn't worry too much about today's housing prices. Yes, if you buy at the peak, then you will need to sell at the peak in some future year, big freaking deal. In my lifetime every time there has been a downturn there has been a new housing price-peak within 9 years.

http://www.jparsons.net/housingbubble/s ... cisco.html

When the semiconductor and software boom is over, that will be when it's time to worry.
In the early 1980s interest rates were both in double digits so a large factor in price increases was people being able to pay more for a house as interest rates dropped below 3%. When interest rates eventually increase again that will reduce the number of people that can afford expensive houses much less bid them up higher. Mortgage interest rates were above 6% as recently as 2008 but the OP is pretty young so he or she may not remember that.
Right. That's why whenever I hear "buy real estate now before interest rates go up", I know instantly that whoever says that has absolutely no understanding of finance. :oops:
In theory, theory and practice are identical. In practice, they often differ.

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Re: Can we/Should we buy this house (SF Bay Area)

Post by EXH » Tue Jun 21, 2016 11:40 am

Coming from the Bay Area this sounds pretty reasonable to me - you have good savings and should be able to ride out any problems as well as a good contingency option (which most houses don't have around here). Sure you don't have kids yet, but if you are planning on having kids it's certainly nice to have the house set up first rather than looking madly while pregnant and not being able to find anything. We have a small 3BR which works great sans kids to have a guest bed and office - obviously this is not necessary but worth it to us for gardening space, nicer than an apartment kitchen, etc.

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Re: Can we/Should we buy this house (SF Bay Area)

Post by mervinj7 » Tue Jun 21, 2016 12:37 pm

Watty wrote: You also need to be careful with the chart on that web page. It is based on the median house price not a specific house price. The problem is that a 1,000 square foot 1950s bungalow does not necessarily go up in value just because a bunch of new McMansions are built that raise the median price. In addition many older homes have been torn down over the last 30 years just for normal development so the median home price will increase as low end housing is removed from the market.
I'm not sure how familiar you are with SF Bay Area housing but a 1,000 square foot 1950s bungalow has significantly gone up in price in the last 5 years. McMansions? Not many of those are popping up around here...

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Re: Can we/Should we buy this house (SF Bay Area)

Post by Rodc » Tue Jun 21, 2016 1:26 pm

mervinj7 wrote:
Watty wrote: You also need to be careful with the chart on that web page. It is based on the median house price not a specific house price. The problem is that a 1,000 square foot 1950s bungalow does not necessarily go up in value just because a bunch of new McMansions are built that raise the median price. In addition many older homes have been torn down over the last 30 years just for normal development so the median home price will increase as low end housing is removed from the market.
I'm not sure how familiar you are with SF Bay Area housing but a 1,000 square foot 1950s bungalow has significantly gone up in price in the last 5 years. McMansions? Not many of those are popping up around here...
Why is that?

Every location I happen to be familiar with where the land price has shot up has seen tear-downs and McMansions shoot up.

You can buy and live in a tiny old million dollar house where the land is worth $800K, or you can spend the million, scape off the tiny house, spend $500K to build a really nice house and either live it or sell it for $1.7M and make a tidy profit for six months of effort. Builders in other areas of the country are going nuts doing this.

Is it zoning controls or Bay area economic are different?
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Re: Can we/Should we buy this house (SF Bay Area)

Post by pascal » Tue Jun 21, 2016 1:48 pm

Thanks again for all the helpful suggestions and opinions.

I have been waiting for the past 3 years thinking housing is expensive and been paying about $2300 for a 1BD in the Bay Area. Our circumstances then are similar to now, except we had a single income then and the spouse was in grad school.

I understand that a better optimization of the process was to wait until we actually need the house and then make the purchase. Honestly, I've been fighting with that thought for sometime. Housing is still expensive but moderately approachable at present. There is an influx of a tech companies within a 6 mile radius around here predicted for within the next 1 year - I don't believe prices are going to get cheaper unless there is a prolonged tech layoff in Google/Apple/Cisco/Samsung/Ebay - Yes, it might happen and I accept that risk.
The rate change is one of the many parameters and not the only parameter in the decision. It makes a 1M house kind of within reach. We didn't start looking at houses in that range, but a house half the size is currently 80% of the cost. I don't expect any major renovations while we stay there, roof/heater replacements in the next 5-10 years, need for a private school.

Commute is workable - sub 30 minutes one way for wife and a bikeable distance for me.
Great parks and trails around.

I would like to think 15k of upfront costs to fix all inspection items will take care of maintenance for a few years. It will help if someone can direct me to other possible maintenance issues so I can plan for it.
"Never underestimate the ability of a bad situation to get worse...rapidly." Ninegrams

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