Can I afford this house?

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Topic Author
Timon0201
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Joined: Thu Oct 23, 2014 3:20 am

Can I afford this house?

Post by Timon0201 » Fri Feb 02, 2018 3:53 am

I’m having anxiety and need some advise.

I live in the Bay Area where housing is crazy, as everyone knows. Every year we think the market can’t go any higher and my neighborhood went up 20% in 2017. Sigh

My family (me (35), husband (35), daughter (1), and probably baby #2 in the near future) lives in a 2 bedroom condo that is very cheap because we bought before the housing craze. So our housing expense is only about $2500 a month with mortgage, prop tax, and hoa.

We are outgrowing the space and just got into a situation where we can get a 4 bed, 3.5 bath townhome that’s $2M in a cute neighborhood (keep in mind that I live in the peninsula where homes that are in dangerous neighborhoods with bars on windows cost $1m). The monthly cost on this townhouse will be about $8500 and that’s after giving up about $750k to put as a down payment. Once we sell our condo, we will have about $500k in liquid assets (not including retirement Accounts that are at about $700k)

My family is used to living well below our means, but this townhome definitely increases our cost of living and I’m having so much anxiety about it, I can’t sleep. I know we can afford the house because my husband and I currenntly make a little over $400k a year combined and can definitely afford it month to month, but I’m just a dooms day person wondering what if my husband (the bread winner) loses his job and then what!

The only other option is renting which would cost like $5500 a month.

Please Provide some insight!

Thank you in advance!

I hate Bay Area housing!!

Adding a better financial picture...
Our current balance sheet is:
Cash - $500k
Retirement - $750k
Taxable investment - $380k
Equity in condo after sales costs - $450k
529 plan - $20k
Mortgage - $280k

If we buy the townhouse, we will use the cash and all our taxable investments except $100k. So loan would be 1.25m. We would then sell our condo and take that equity and put it in our vanguard account and invest again. So after we buy, our balance sheet would be about...

Cash - 15k
Retirement $750k
Taxable investments - 550k
Equity in townhouse - 750k
529 plan - 20k
Mortgage - 1.25M
Last edited by Timon0201 on Fri Feb 02, 2018 4:09 am, edited 1 time in total.

onourway
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Re: Can I afford this house?

Post by onourway » Fri Feb 02, 2018 3:57 am

We can't really give you a good answer without a more complete financial picture. Those would include an accurate accounting of your expenses and a list of your assets. $400k income and a $2M house seems a big stretch to me, but it depends on the total picture.

Topic Author
Timon0201
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Re: Can I afford this house?

Post by Timon0201 » Fri Feb 02, 2018 4:12 am

I just edited my original post to provide some more detail. Thanks!

Lonestarz
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Re: Can I afford this house?

Post by Lonestarz » Fri Feb 02, 2018 4:16 am

No wonder so many Californians are moving to Texas where you could earn similar without state tax and $2 mill will buy you a 7-10 bedroom home.

I don’t know if I would pull the trigger myself as that’s a big chunk of your $21k/month? take home. But if you look at job market/stability, future income, and if you are dead set on living not just in CA but the same city without commute..


Also I’m not sure what tax laws are on home profit exclusion if you buy the new home before you sell the old. 6% transaction cost on (avg 1.5mil) is a lot of money.

Topic Author
Timon0201
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Re: Can I afford this house?

Post by Timon0201 » Fri Feb 02, 2018 4:22 am

I hear you about cost of living, but I’m a born and raised native of the bay with all my family and support system here, I’m not moving anywhere.

My husband is a software engineer, so I’d hope his job is secure in the tech industry. My job is very secure.

I’m a cpa so I’ve run the numbers with tax in mind. As long as we make $320k a year, we can afford this home (assuming we max out our 401ks). We currently make $100k over that.

Lonestarz
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Re: Can I afford this house?

Post by Lonestarz » Fri Feb 02, 2018 4:30 am

Sounds like you have your answer. If you’re set on staying there and you need more space... is it worth the trade offs of neighborhood or school (are public schools good?) for maybe $500k difference? I’m sure, excluding the San Andreas fault separating you into the ocean, the property appreciation will mitigate the price difference.

I would be more focused on moving where I want to live long term vs incremental upgrades. Do a thourough inspection.

slalom
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Re: Can I afford this house?

Post by slalom » Fri Feb 02, 2018 4:51 am

You did the numbers yourself, yes you can technically afford it.

However you're already in a really good position. You own a home in the peninsula at a low carrying cost, which is a position many people would literally kill to be in. You already have a second bedroom and the kids can bunk. A lot of people e.g. in the city start out in a 1 bedroom condo and are really in trouble when the kids come into the picture!

This is Bogleheads after all so you're bound to get this viewpoint: At your current incomes and expenses, you could be saving and investing an incredible amount of money and retire young with plenty of money for college for the kiddos, vacations anywhere you want, etc. You could also take off work for several years which a lot of people consider doing once the realities of 2 little kids start wearing you down (unless you wanted a nanny, I guess!).

The market is sky high right now and you're experiencing a little of the mania that accompanies real estate bubble where outrageous prices seem normal because of your surroundings. Something like 16% of residents in San Mateo County can afford the median priced home. The chances of it continuing indefinitely like that are nil, so imagine the possibility of testing the water again and buying near the top, whereas you already made out and bought near the bottom (i assume).

If it were me, I would stay put and rest easy on my piles of money and feel very fortunate. It'll be a long time before your children complain about the space and it'll be many years before schools are even an issue (unless you're one of the kinds of moms that think kindergartens can be ranked!) - hell, you can afford private schools too at this point.

This is outside the realm of finances but: you should really sit down and honestly consider why you want to get the $2M house. Make sure it's not about the circumstances of your friends or social circle. In the end, remember that regardless of where you live, you're the same people in the same few rooms with the same issues to work through. What's changing is your financial flexibility and potential future gains letting your money work for you. Not sure that's worth it to live in a cute neighborhood.

Of course, the reality is - probably most people in this country would take the opportunity to get the expensive house in the nice neighborhood. But remember that people on this forum tend to think more in terms of the long-term picture and many (most?) live well below their means and stash away money in the market.

It sounds like you have already done all the math and are just wanting someone to push you in the direction you want to go. In the end there are pros and cons only you can truly weigh...
Last edited by slalom on Fri Feb 02, 2018 4:52 am, edited 1 time in total.

denovo
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Re: Can I afford this house?

Post by denovo » Fri Feb 02, 2018 4:52 am

Timon0201 wrote:
Fri Feb 02, 2018 4:22 am


My husband is a software engineer, so I’d hope his job is secure in the tech industry. My job is very secure.

When I think of secure jobs, my mind immediately goes to state and federal employment with civil service protection that only rarely has layoffs or pay cuts, and also professors with tenure at a university level.

When you're worried about paying the mortgage, it's not enough that the world is still going to need software engineers for the foreseeable future, it's about whether or not the industry can also sustain the salaries they are providing. Whether or not one considers the tech industry a bubble or not is something that is a matter of opinion that no one here can definitely answer...

But there is a certainly a plausible argument to be made that if a lot of venture-capital funded start ups go bust, interest rates go up, there will be more engineers chasing fewer jobs which will put downward pressure on salaries for software engineers including your husband.
"Don't trust everything you read on the Internet"- Abraham Lincoln

Topic Author
Timon0201
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Re: Can I afford this house?

Post by Timon0201 » Fri Feb 02, 2018 5:09 am

Good food for thought.

To respond a little,

we are definitely not buying to keep up with the jones’. My husband and I both work from home a lot and we basically live like college students, miraculously fitting 2 desks and a bed in our room. Feels like a maze. Our daughter has her room but it’s half storage/half crib. We try to live as minimalist as possible, but with thinking about baby #2, it’s because we are keeping all my daughters baby stuff in case we need it again. We really need extra space. Especially if baby 2 comes because we can’t fit another crib anywhere unless we want to use our living room as a 3rd bedroom, which we just don’t want to do.

When I say “nice” neighborhood, we aren’t talking Palo Alto here haha. Just what appears to be a nice quiet residential neighborhood. Sadly, the k-8 public school in the townhome is not good, so we’d have to pay for public school.

I think the only mania I’m running with is the fact that we keep trying to wait out this market and keep thinking homes are too expensive and don’t get anything, then 6 months later we are looking at the property we said no to saying “man can you believe we could have gotten that home for that price! Now it’s 20% higher!”

Should we rent instead then? At like $5500 a month?

gotester2000
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Re: Can I afford this house?

Post by gotester2000 » Fri Feb 02, 2018 6:08 am

Your numbers say you can afford the house - you are already sold on the house!!!
If I were you I would not tie myself to such a huge mortgage and everything in one asset. Go for a cheaper house.

student
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Re: Can I afford this house?

Post by student » Fri Feb 02, 2018 6:54 am

Personally I would not do it. Objectively, I think you can afford it.

slalom
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Re: Can I afford this house?

Post by slalom » Fri Feb 02, 2018 7:03 am

You could also think about storage units and cheap co-working office space to declutter and work elsewhere. It’s certainly cheaper and less of a commitment than a huge mortgage.

If the condo is actually very very small, then it might be true that you will need more space. You could get a 3 BR townhouse in that case though, it doesn’t have to be a 4 br $2M house.

But I don’t need to convince you..

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Watty
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Re: Can I afford this house?

Post by Watty » Fri Feb 02, 2018 7:17 am

Timon0201 wrote:
Fri Feb 02, 2018 3:53 am
I hate Bay Area housing!!
I have been accused of sounding like a broken record when I say this but it would be good to consider moving to a less expensive area.

It was a long time ago but I lived in the Bay Area in Sunnyvale, which has always been expensive, when I wanted to buy my first house. I was single and the only type of house I could have afforded would have been a dump that I would not have wanted to live in. I ended up moving to a less expensive area where I could easily afford a nice house that cost maybe a fifth(probably less) of what it would have cost in the Bay Area. That was one of the best decisions that I ever made not only for me but for the kid I eventually had.

Even back then one of the things that saw was that some of my older coworkers had grown up kids that were well into their 20's and still living at home because they could not afford an apartment even with roommates. You might what to consider what it will be like for your kids if they are still living there when they are in their 20's.

I have moved since then and I am in Atlanta now where housing is still affordable. I am retired now and my son is in his late 20's and married and has a kid of his own now. He went through college and is doing well but he and all of his college friends were able to easily afford nice houses and he lives about ten minutes away from us now which is really nice. We also have some friends that have a son that is pretty dyslexic and barely graduated from high school. At one point he was working at a chain muffler shop which is a good honest job but it did not pay a lot. Even with his income he was able to afford to buy a small modest home that is not in a terrible area.

I assume that you work in some sort of tech job. I was a software developer and when I have moved around the regional salary differences were not as much as you might think and certainly not enough to cover the high cost of living in your area. This is especially true after taxes. My son also got a Computer Science degree and he is a Software Engineer now here in Atlanta and doing very well. Any large city will have lots of tech jobs.

Atlanta is not nirvana but here is an example of the type of house you could buy for your $450K in home equity in a suburb of Atlanta with good schools that is near where a lot of the tech companies are at.

https://www.realtor.com/realestateandho ... 978#photo0

(I can't picture myself living in a house like that, there are smaller houses here too. :D )

Instead of buying a bigger house I would take a hard look at saving like crazy then moving before your oldest kid starts school.

When I worked in the Bay Area I knew several people that were able to transfer with their same employer to a less expensive area and they did VERY well so if that is a possibility then you might aggressively seek out a transfer.
Timon0201 wrote:
Fri Feb 02, 2018 3:53 am
me (35), husband (35)
With a 30 year mortgage you will be 65 by the time it is paid off. It might vary with the field that you work in but some fields, especially high tech, it can be hard to find a high paying job when you are in your 50's or even 40's. Unless you are in some field like medicine then I would be cautious about assuming that the high income will last that long.

I would also be cautious about depending on two incomes to be able to afford the house. In addition to other possible problems if you have a second kid with even minor and temporary health issues then using daycare might not be possible or desirable.
Last edited by Watty on Fri Feb 02, 2018 7:43 am, edited 3 times in total.

Olemiss540
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Re: Can I afford this house?

Post by Olemiss540 » Fri Feb 02, 2018 7:26 am

You state that another alternative is to rent for 5500 a mo in an upgraded condo? I would do that!

You can definitely afford to buy the townhouse, but have you priced private tuition for 2? How much is that going to cost you? Personally, I would consider increasing my Emergency Fund and/or down payment (roll current equity into townhouse and re-amoritize) so that you were comfortable on one income for a long time in case of emergency.

Congrats on putting your family into such a strong position. You worked hard to get here so try not to stress and enjoy the fruits of your labor a bit!
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.

runner540
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Re: Can I afford this house?

Post by runner540 » Fri Feb 02, 2018 7:32 am

Timon0201 wrote:
Fri Feb 02, 2018 3:53 am
Adding a better financial picture...
Our current balance sheet is:
Cash - $500k
Retirement - $750k
Taxable investment - $380k
Equity in condo after sales costs - $450k
529 plan - $20k
Mortgage - $280k

If we buy the townhouse, we will use the cash and all our taxable investments except $100k. So loan would be 1.25m. We would then sell our condo and take that equity and put it in our vanguard account and invest again. So after we buy, our balance sheet would be about...

Cash - 15k
Retirement $750k
Taxable investments - 550k
Equity in townhouse - 750k
529 plan - 20k
Mortgage - 1.25M
How would you feel having your home value (not equity) be 100% of your net worth? That would make me anxious too.

Lots of people buy one house and then sell the second. It works out in a rising market, but the folks who are trying that in Toronto and Vancouver (also VHCOL areas, albeit in Canada with different mortgage market), lost a lot of money as prices dropped this year.
Last edited by runner540 on Fri Feb 02, 2018 7:37 am, edited 1 time in total.

Jack FFR1846
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Re: Can I afford this house?

Post by Jack FFR1846 » Fri Feb 02, 2018 7:34 am

Timon0201 wrote:
Fri Feb 02, 2018 3:53 am

My family (me (35), husband (35), daughter (1), and probably baby #2 in the near future) lives in a 2 bedroom condo that is very cheap because we bought before the housing craze. So our housing expense is only about $2500 a month with mortgage, prop tax, and hoa.
I doubt you bought before the housing craze. In 1989, my engineering group needed an experienced guy in Palo Alto and I was about to graduate with my MSEE, under a company program. I did my due diligence and found that houses at that time were 3 times what they were in suburban Boston. I stayed in New England. So perhaps there have been ebbs and flows, but I think you've seen only the latest housing craze. I don't know when it began but I'd guess before the mid 60's.
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Pajamas
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Re: Can I afford this house?

Post by Pajamas » Fri Feb 02, 2018 7:38 am

Sounds like it is a bit of a stretch since you would be cleaning out your retirement accounts to buy the townhouse. You are right to worry that you could lose everything, not just your home if you put everything in one basket, if you are living almost month-to-month and either of you lost your job or other problems arose that interrupted your income. People tend to forget about the last economic storm when the sky has been mostly sunny for so many years.

It sounds like you may have already decided to do this and are just looking for confirmation and reassurance. If you are going to do it, at least consider putting less down than you are currently thinking about to provide some flexibility. If you have to put basically everything into a down payment and then are on a tight budget, you really can't afford it even though it may look like it barely works on paper. Estimates are imperfect and unexpected things happen. You may be underestimating your future expenses, especially if you eventually have to pay for private school for two children.

It is NOT certain that "property appreciation will mitigate the price difference" as someone suggested above. Even if it is likely, no one can be "sure" of it.

If you like the neighborhood you live in now and the schools are good, think about alternatives.

For instance, it might be possible at some point to buy the condo next to yours to increase the size of your apartment without having to move and give up your location and favorable property taxes.

Where I live, some people buy a studio apartment in their building to use as an office even if it is not adjacent to the apartment they live in.

It may be possible to rent an office or shared working space for a reasonable cost or for one of you to go work in your employer's office. Yes, it is nice to work at home but if you are really too cramped and can't really afford a bigger place, maybe you have to chose not to work at home for a few years.
Last edited by Pajamas on Fri Feb 02, 2018 7:58 am, edited 1 time in total.

Grt2bOutdoors
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Re: Can I afford this house?

Post by Grt2bOutdoors » Fri Feb 02, 2018 7:39 am

Timon0201 wrote:
Fri Feb 02, 2018 4:22 am
I hear you about cost of living, but I’m a born and raised native of the bay with all my family and support system here, I’m not moving anywhere.

My husband is a software engineer, so I’d hope his job is secure in the tech industry. My job is very secure.

I’m a cpa so I’ve run the numbers with tax in mind. As long as we make $320k a year, we can afford this home (assuming we max out our 401ks). We currently make $100k over that.
I hear the “doomsday” part, but think of it in another manner - if your balance sheet is as you say, is it feasible to eliminate the mortgage over the next 15 years “if you wanted to”? I think the answer is yes. Why do I say 15 years - you are mid 30’s, age discrimination could pop up in ones 50’s, having an almost paid for house goes a long way in reducing the monthly “nut”. If your breadwinner husband lost his job - how long would your balance sheet potentially keep you afloat? Two, three years? That is more than most and gives you breathing space. I know what most Bogleheads would say, but in a VHCOL area especially where there are plentiful high paying jobs at the foreseeable future - rational thinking goes right out the window and sometimes it never returns. You are fortunate to have built up such a balance sheet at an early age, so FIRE isn’t in the cards if you do buy the place, but what is the reason for money if you can’t use it to better the family?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

cherijoh
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Re: Can I afford this house?

Post by cherijoh » Fri Feb 02, 2018 7:42 am

Timon0201 wrote:
Fri Feb 02, 2018 5:09 am
Good food for thought.

To respond a little,

we are definitely not buying to keep up with the jones’. My husband and I both work from home a lot and we basically live like college students, miraculously fitting 2 desks and a bed in our room. Feels like a maze. Our daughter has her room but it’s half storage/half crib. We try to live as minimalist as possible, but with thinking about baby #2, it’s because we are keeping all my daughters baby stuff in case we need it again. We really need extra space. Especially if baby 2 comes because we can’t fit another crib anywhere unless we want to use our living room as a 3rd bedroom, which we just don’t want to do.

When I say “nice” neighborhood, we aren’t talking Palo Alto here haha. Just what appears to be a nice quiet residential neighborhood. Sadly, the k-8 public school in the townhome is not good, so we’d have to pay for public school.

I think the only mania I’m running with is the fact that we keep trying to wait out this market and keep thinking homes are too expensive and don’t get anything, then 6 months later we are looking at the property we said no to saying “man can you believe we could have gotten that home for that price! Now it’s 20% higher!”

Should we rent instead then? At like $5500 a month?
I have no experience with the insane housing prices in the Bay Area, but I suggest you consider what happened during the run up to housing bust in the last decade. (I assume you purchased your current townhouse after the last housing bust). Does it sound familiar? People desperate to buy before houses increase further? Thinking they are priced out forever? Bemoaning that they could have gotten in for so much less 6 months ago?

One issue is that in order to buy any new house you have to sell your existing house for maximum profit. Have you considered selling now and renting with the plan to purchase later? (This requires that you take the contrarian viewpoint that housing prices will come down in the future). You would be back in the ideal spot of being able to make an offer without having to worry about selling your house first to come up with the down payment. Since you mentioned working from home a lot, could you look a little further out for a more affordable rental? You wouldn't be committed forever to a longer commute.

Also have you looked at the implications of the new tax law? Mortgage interest is capped at mortgages for $750K or less. SALT (state and local income and property taxes) is capped $10K. I think that is going to have to put some downward pressure on real estate in VHCOL areas because of the loss in tax subsidy. Maybe the reduction in marginal tax brackets and modifications to AMT will compensate for that, but I think the changes are going to have to impact the rent vs. own calculations.

Finally, have you considered the impact of Amazon's HQ2 project? I heard that Google is following suit and also looking for a second headquarters in a lower cost of living area. This could be the start of a wave of high-tech relocations in the future. So while you and your husband are committed to staying in the Bay Area are you confident that his job will still be there? And if it is, will it still be paying the same salary?

Ron Ronnerson
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Re: Can I afford this house?

Post by Ron Ronnerson » Fri Feb 02, 2018 10:15 am

I would not move (edit: out of the Bay Area). You have a lot of assets, a high income, and family in the Bay Area. Family, at least to my wife and me, is priceless. We own a townhouse like the one you're considering purchasing. It's in an area with excellent public schools and within a few minutes of both my and my wife's parents. We have a three year old and day care expenses have been low due to grandparent support. Our daughter can play with her three cousins each day because my sister and her family are our next door neighbors. It's hard to put a price tag on this stuff. I'd rather have family around than a large house far away from them.

I wouldn't worry about trying to time the market. Prices may go up or down. If you find a nice place you like, plan to stay in for many years, and can afford, I'd buy it. It sounds to me like you can afford it, btw.

It's good to be prudent but I wouldn't be too fearful. Have an adequate emergency fund, don't stretch yourself too much, and hopefully you'll be in an okay place to survive a job loss should one occur at some point.

You said you and your husband work from home a lot so perhaps the East Bay is worth considering. If your family, friends, and jobs are on the peninsula and you want to stay there, prices will be more. We're in a great neighborhood in the East Bay (Pleasanton/Dublin/San Ramon area) and the type of home you mention in your post is like the one we live in. It's a 2150 sq. ft townhouse, 4 bedrooms and 3.5 baths, great neighborhood, and fantastic schools. The current value is $800k. My wife and I both work in Silicon Valley. I'm a teacher and have a schedule that makes commuting not so bad and my wife works from home most days. A long daily commute would not be fun and not something I'd recommend. If you don't think you'd get to see the people in your life as much, I'd also consider that.

It's definitely shocking how expensive real estate is in the Bay Area. Unfortunately, no one can accurately predict in which direction and to what degree prices are about to move.

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BolderBoy
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Re: Can I afford this house?

Post by BolderBoy » Fri Feb 02, 2018 11:03 am

Timon0201 wrote:
Fri Feb 02, 2018 4:22 am
I hear you about cost of living, but I’m a born and raised native of the bay with all my family and support system here, I’m not moving anywhere.

My husband is a software engineer, so I’d hope his job is secure in the tech industry. My job is very secure.

I’m a cpa so I’ve run the numbers with tax in mind. As long as we make $320k a year, we can afford this home (assuming we max out our 401ks). We currently make $100k over that.
Are each of you well insured? Like $2 mill of term life coverage, each? If so, then you can probably do it.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect

mervinj7
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Re: Can I afford this house?

Post by mervinj7 » Fri Feb 02, 2018 4:14 pm

Lonestarz wrote:
Fri Feb 02, 2018 4:16 am
No wonder so many Californians are moving to Texas where you could earn similar without state tax and $2 mill will buy you a 7-10 bedroom home.
https://www.ocregister.com/2017/01/18/n ... alifornia/

But hey, maybe if more folks actually did move to Texas as you implied, the housing prices would come down...

Edit: More recent article
https://medium.com/ca-rising/the-great- ... a59595dfa2
Californians aren’t actually leaving the state at anything like a significant rate. According the U.S. Census, between 2014 and 2015, California had thesecond lowest out-migration rate after Texas: slightly less than 21 out of every 1,000 California residents left. In the three years before that, California even edged out Texas.

Hillview
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Re: Can I afford this house?

Post by Hillview » Fri Feb 02, 2018 8:04 pm

I am going to be a downer here. I don't think so. Where will your kids go to school (preschool? elementary?) my sister lives in same area and schools are super $$ unless you decide to go with public. 2m is super expensive relative to your income and your need for savings and child related expenses. I'd try to stay put for now and keep looking for an alternative.

4Health
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Re: Can I afford this house?

Post by 4Health » Sat Feb 03, 2018 12:14 am

Downer here as well. My wife and I missed the gravy train when we moved to SF in 2013 by not buying. We make more and are in a secure profession (medicine), and we are currently looking at housing with prices at a max of $1.6-1.7. This is making us incredibly nervous which is why we we haven't bit the bullet even though we've found houses we've loved. Consider looking at cheaper properties. We've grown to enjoy renting, when you're paying $5000/month in rent rather than $9000/month in mortgage (plus 1% maintenance) you can save a ton of money (we've been able to $150k+ a year). We'll eventually buy, but make sure you understand the school system well. Private kindergarten is going to cost us $43,000 next year for our first kid, and the younger kid will be joining her in 3 years. If the house is in an area with bad public schools, I would strongly consider bringing down the amount you spend on a house if you have any thought of wanting to send your kiddo to private school.

msk
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Re: Can I afford this house?

Post by msk » Sat Feb 03, 2018 12:33 am

I am 73, retired at 55. Looking back since my pauper days youth 5 decades back, I followed a few rules-of-thumb that worked well for me while living in HCOL and LCOL locations worldwide and I preach endlessly to my kids (unfortunately I don't think they listen):

1. Save and invest 30% of after tax income. Include repayment of principal on your primary home under saving-and-investing, but not interest.
That is the major rule, and frankly you can blow the rest on any toy.

2. Never pay more than 3x income (2.5x combined income) on your home
3. Never acquire car(s) by purchase or lease worth more than 6 months income.

2. and 3. are for sober appraisal of prospective purchases, but different people prefer different toys. DW may class an over-priced home, compared to 2. above, as part of her toy box, while the hubby may prefer a yacht. Doesn't really matter much, as long as you never clash with Rule 1. Watch Rule 1. religiously. I spent several years in London UK, so I know what HCOL means to housing prices. And I made a bundle out of that :mrgreen: No need to be overly reticent; as long as you satisfy Rule 1.

A-Commoner
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Re: Can I afford this house?

Post by A-Commoner » Sat Feb 03, 2018 12:56 pm

I’d buy a $2m house only if I knew I could pay it off in cash today. Sounds crazy, but that was my thinking process when I bought a house 4 months ago, albeit at a different price point. We bought a $1 million house in a nice suburb of Los Angeles. We didn’t pay cash since we got a 3.6% 30 yr fixed mortgage. But if the bank would for whatever reason demand full payment today, I could write them a check for the full amount today and tell them to shove it. The peace of mind that gives me is priceless.

IMHO you should have enough in liquid assets to pay for the house in cash AND have enough left for retirement and college funds for the kiddos. Don’t put all your assets into the house.

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TheAccountant
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Re: Can I afford this house?

Post by TheAccountant » Sat Feb 03, 2018 3:57 pm

If you can survive on one income then I'd go for it.

Don't play around with re-investing proceeds and this and that, use those funds to keep your mortgage as low as possible.

I also don't believe that you need to spend 2M to get into a nice neighborhood.
Making cents out of every dollar.

John Laurens
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Re: Can I afford this house?

Post by John Laurens » Sat Feb 03, 2018 4:07 pm

I would stay where you are at least until you and your next baby are healthy. Not unusual for a mother to have health problems in pregnancy or post partum that would require you not working for an extended period of time. Your unborn baby could be born with a health problem that would necessitate one of you staying home.

Regards,
John

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Re: Can I afford this house?

Post by TropikThunder » Sat Feb 03, 2018 8:24 pm

A-Commoner wrote:
Sat Feb 03, 2018 12:56 pm
IMHO you should have enough in liquid assets to pay for the house in cash AND have enough left for retirement and college funds for the kiddos. Don’t put all your assets into the house.
Yeah that's a realistic standard ..... :|

nura
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Re: Can I afford this house?

Post by nura » Sun Feb 04, 2018 11:13 am

Timon0201 wrote:
Fri Feb 02, 2018 3:53 am
I know we can afford the house because my husband and I currenntly make a little over $400k a year combined and can definitely afford it month to month, but I’m just a dooms day person wondering what if my husband (the bread winner) loses his job and then what!
What % of the $400k income is variable pay including RSUs? Also, some careers suffers from age discrimination. A nurse and physician making $400k can feel confident stable income well into 60s. OTOH, if you are into software development or new tech, you should not expect maintain and/or increase you incomes beyond 40s. You should go with 15 year mortgage, if you can't make ends meet paying a 15 year mortgage while contributing full into tax-deferred retirement saving, you can't afford it.

Simple Simon
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Re: Can I afford this house?

Post by Simple Simon » Sun Feb 04, 2018 1:39 pm

Any asset that goes up 20% in a year can easily go down 20% or 30% in the next year. Visualize how you might feel next year when you are lying in bed at night in your $2M house - except sorry, now it is $1.4M house. With your $1.25M mortgage, knowing that if circumstances forced you to sell you will be more or less wiped out.

I have been in that position (smaller numbers) in 2008. It was a very unpleasant place to be & I would urge you to map out a worst case scenario- and if this would not allow you to sleep well at night, then go back to the drawing board. Your anxiety is there for a reason.

panchilly
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Re: Can I afford this house?

Post by panchilly » Sun Feb 04, 2018 1:57 pm

run this example through my rule of thumb calculation

viewtopic.php?f=2&t=240504

I think you guys probably can afford, i'm curious what your numbers look like inputted into that rule of thumb.

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Re: Can I afford this house?

Post by gunn_show » Sun Feb 04, 2018 2:18 pm

Lonestarz wrote:
Fri Feb 02, 2018 4:16 am
No wonder so many Californians are moving to Texas where you could earn similar without state tax and $2 mill will buy you a 7-10 bedroom home.
I love these garbage blanket statements. I've lived in CA my whole life, work for major tech megacorp in bay area, don't know a single person that has moved to Texas. Keep preaching those internet articles, though.
Watty wrote:
Fri Feb 02, 2018 7:17 am
I have been accused of sounding like a broken record when I say this but it would be good to consider moving to a less expensive area.
Watty I respect your comments often, but good lord man, you broke the record 100 posts ago, PLEASE stop with your "move to Atlanta" shtick. Please. Some of us are born in CA, live and work in CA, love CA, have family and friends in CA, and have literally less than zero desire to move to Atlanta or TX or some other place. Hard to imagine, I know.

Plus, she clearly stated this:
Timon0201 wrote:
Fri Feb 02, 2018 4:22 am
I hear you about cost of living, but I’m a born and raised native of the bay with all my family and support system here, I’m not moving anywhere.
respect it. move on to other recommendations.
gotester2000 wrote:
Fri Feb 02, 2018 6:08 am
Your numbers say you can afford the house - you are already sold on the house!!!
If I were you I would not tie myself to such a huge mortgage and everything in one asset. Go for a cheaper house.
This would be my final thought. Numbers say you can afford it, but very tenuous. Also wondering why you aren't 1031 swapping your existing home/equity into a new one? Can't sell existing condo fast enough to make it work? This would be much smoother than shuffling around so many money buckets.

I am less worried about his job, as a tech company guy myself, if he is a good SW engineer, he is pretty set for a while, and if he really wanted to and busted his rear, could probably go make more money. The "50+ age worry problem" that many posted about, and constantly bombard these threads with, sure it is something to think about, but I work for a core SV tech firm, and I can say every other person I work with in my company is 50+ and many much older. One recent hire, very intelligent technical specialist that is customer-facing, has a son my age (late 30s), and is new to the company 11 months ago. Meaning he is 60+ and recently hired. I think this topic is way overblown unless you are a mediocre worker, then you should worry about every round of layoffs. Plus by that age you should really be amassing a lot of savings and cash.

But I do think you could find a cheaper place, and at the very least, wait. You have not yet had the 2nd child, and as a family that just had our first newborn after 2 MC's and struggles, no future desired additional child is ever guaranteed. I need more than 1 hand to count how many friends cannot get pregnant no matter what free or expensive method they try.

I think you are a bit premature to go from a 2BR condo to a $2mil 4 bed 3 bath, with no current changes to your family dynamic. I get it, the current place is small, I too work from home so I agree you need more space, but it appears you are making perhaps too large a leap and at a tremendous cost. You could do it, but I doubt those worrying feelings you have now, will go away for the next 30 years of that mortgage anytime soon.
"The best life hack of all is to just put the work in and never give up." Bas Rutten

MNS CA
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Re: Can I afford this house?

Post by MNS CA » Sun Feb 04, 2018 2:33 pm

Don't buy it. What happens if either you or your husband lose your job?

Without savings, you'll either have to break your retirement account to pay the mortgage (perhaps with penalties and taxes), or sell in a hurry and take a bath.

Get some bunk beds for the kids.

panchilly
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Re: Can I afford this house?

Post by panchilly » Sun Feb 04, 2018 2:36 pm

MNS CA wrote:
Sun Feb 04, 2018 2:33 pm
Don't buy it. What happens if either you or your husband lose your job?

Without savings, you'll either have to break your retirement account to pay the mortgage (perhaps with penalties and taxes), or sell in a hurry and take a bath.

Get some bunk beds for the kids.
They could get another job... If they buy the house they will start saving again. IF they lose a job in a year or 2 chances are they'd have savings to cover the duration of the unemployment.

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Re: Can I afford this house?

Post by Katietsu » Sun Feb 04, 2018 2:59 pm

My concern is the private school costs on top of the $2 million house. I would be renting at $5500 or buying for $2 million in a place where I was comfortable with public schools.

MNS CA
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Re: Can I afford this house?

Post by MNS CA » Sun Feb 04, 2018 3:01 pm

panchilly wrote:
Sun Feb 04, 2018 2:36 pm
MNS CA wrote:
Sun Feb 04, 2018 2:33 pm
Don't buy it. What happens if either you or your husband lose your job?

Without savings, you'll either have to break your retirement account to pay the mortgage (perhaps with penalties and taxes), or sell in a hurry and take a bath.

Get some bunk beds for the kids.
They could get another job... If they buy the house they will start saving again. IF they lose a job in a year or 2 chances are they'd have savings to cover the duration of the unemployment.
They could get another job, but it might not pay as much, and it could take a long time to find the new job. Or it could be outside the bay area, which doesn't help much with affording the house.

Stretching oneself financially to buy into a hot market, probably near the top, with interest rates heading up, does not seem prudent.

hightower
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Re: Can I afford this house?

Post by hightower » Sun Feb 04, 2018 3:16 pm

Timon0201 wrote:
Fri Feb 02, 2018 3:53 am
I’m having anxiety and need some advise.

I live in the Bay Area where housing is crazy, as everyone knows. Every year we think the market can’t go any higher and my neighborhood went up 20% in 2017. Sigh

My family (me (35), husband (35), daughter (1), and probably baby #2 in the near future) lives in a 2 bedroom condo that is very cheap because we bought before the housing craze. So our housing expense is only about $2500 a month with mortgage, prop tax, and hoa.

We are outgrowing the space and just got into a situation where we can get a 4 bed, 3.5 bath townhome that’s $2M in a cute neighborhood (keep in mind that I live in the peninsula where homes that are in dangerous neighborhoods with bars on windows cost $1m). The monthly cost on this townhouse will be about $8500 and that’s after giving up about $750k to put as a down payment. Once we sell our condo, we will have about $500k in liquid assets (not including retirement Accounts that are at about $700k)

My family is used to living well below our means, but this townhome definitely increases our cost of living and I’m having so much anxiety about it, I can’t sleep. I know we can afford the house because my husband and I currenntly make a little over $400k a year combined and can definitely afford it month to month, but I’m just a dooms day person wondering what if my husband (the bread winner) loses his job and then what!

The only other option is renting which would cost like $5500 a month.

Please Provide some insight!

Thank you in advance!

I hate Bay Area housing!!

Adding a better financial picture...
Our current balance sheet is:
Cash - $500k
Retirement - $750k
Taxable investment - $380k
Equity in condo after sales costs - $450k
529 plan - $20k
Mortgage - $280k

If we buy the townhouse, we will use the cash and all our taxable investments except $100k. So loan would be 1.25m. We would then sell our condo and take that equity and put it in our vanguard account and invest again. So after we buy, our balance sheet would be about...

Cash - 15k
Retirement $750k
Taxable investments - 550k
Equity in townhouse - 750k
529 plan - 20k
Mortgage - 1.25M
So you're considering spending 800k of your hard earned after tax dollars and adding about 5 times more debt than you currently have to your plate, just so you can have a couple more bedrooms and bathrooms? Your net worth will go from approx 1.8 million now, to around 800k after. And 750k of it will be equity in your house. That assumes we don't have a major stock market correction which would obviously drive your retirement and taxable account balances down significantly as well. You could end up with a net worth below 500k (assuming the housing market doesn't crash at the same time). Does that bother you? It would bother me quite a bit. Also, have you calculated what kind of effect the new tax law is going to have on your taxes this year? Factor the new mortgage into that and make sure it feels okay first.

This is just my opinion so take it with a grain of salt...
Spending that much on housing even making 400k/yr is kind of nuts to me. My wife and I make around 350k/yr and I would never consider having a mortgage even close to that big. The housing bubble in California is going to burst at some point and you don't want to be one of the suckers left with a million+ dollars in housing debt when it does. All of that equity in your house could disappear overnight. It happened in 2008 and it could happen again. Are you cool with potentially losing that kind of money? I'm not.

Just because you can make the minimum monthly payments each month does not mean you should be paying that much on housing. Remember that the 8500/month is the minimum it will cost you to live there. It doesn't include all the other costs that will inevitably arise. Nor does it account for any possible changes in your employment status in the future. Even though you say your jobs are secure, that's never a guarantee and stretching yourselves leaves you at risk.

There's good reason why you're losing sleep over this. Your brain is telling you not to do it. You're in such a good financial position right now at your age. You're truly wealthy. And if you continue to save and earn like you do now, you'll end up super-duper wealthy in the near future. You live in the bay area and only spend 2500/month on housing! That's incredible! Hold on to it. Wait for the inevitable housing market correction and upgrade your housing then. Your kids don't need separate bedrooms at that age. You've got at least 6-7 years? before they're going to demand that, lol.
Last edited by hightower on Sun Feb 04, 2018 3:20 pm, edited 1 time in total.

momvesting
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Re: Can I afford this house?

Post by momvesting » Sun Feb 04, 2018 3:18 pm

How is your current neighborhood? If you like the neighborhood, then for the kind of money you are talking about, you could move out of your current place, rent a place for 6 months, and have your place completely remodeled so that the entire place is redesigned to your specific needs and remodeled beautifully. For example, you mentioned the crammed in desks. You could have built in desks designed to meet your needs. You could have a beautifully redesigned kitchen. You could have all new appliances, you could have redesigned smaller, yet more efficient bathrooms, etc. I would first speak to good architect and see what they could do with your existing space because at $2500/month in the Bay area, I'd hang on to that forever!

MNS CA
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Re: Can I afford this house?

Post by MNS CA » Sun Feb 04, 2018 3:19 pm

Timon0201 wrote:
Fri Feb 02, 2018 3:53 am
I’m having anxiety and need some advise.. . . The monthly cost on this townhouse will be about $8500 and that’s after giving up about $750k to put as a down payment. Once we sell our condo, we will have about $500k in liquid assets (not including retirement Accounts that are at about $700k)

My family is used to living well below our means, but this townhome definitely increases our cost of living and I’m having so much anxiety about it, I can’t sleep. . . .

The only other option is renting which would cost like $5500 a month.
If you feel anxiety now just thinking about buying this house, you'll probably feel a lot more anxiety if you actually own it. Do you really want to spend more money so you can be more anxious and less happy?

The mortgage interest deduction is now capped at a $750K mortgage, and property taxes are effectively non-deductible. You might be giving up a large standard deduction to itemize. The tax advantages of ownership relative to renting might be a lot lower than you'd think if you have not been following tax reform.

You'll be putting all your eggs in one basket--(which could get destroyed in an earthquake). Have you factored in the costs of earthquake insurance?

You'll be locking yourself into a highly illiquid investment that could easily cost 7-10% to sell.

And that investment is highly correlated with your and your husband's salaries--if there's a tech slump your jobs will become less secure *and* your house will go down in value at the same time.

The stock market is more liquid and provides more diversification than local real estate.

You're basically asking if you should should borrow 70% of your networth to bet on the local economy continuing to go up faster than the rest of the country.

Would you borrow 70% of your networth to invest in a NASDAQ index fund? If not, why would you borrow 70% of your networth to invest in Bay Area housing?

You are right to feel anxious. What you're thinking about doing is extremely risky.

Unemployment and interest rates probably cannot get much lower than they are today. That means that in real terms, housing costs are probably close to a peak.

hightower
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Re: Can I afford this house?

Post by hightower » Sun Feb 04, 2018 3:22 pm

MNS CA wrote:
Sun Feb 04, 2018 3:19 pm
Timon0201 wrote:
Fri Feb 02, 2018 3:53 am
I’m having anxiety and need some advise.. . . The monthly cost on this townhouse will be about $8500 and that’s after giving up about $750k to put as a down payment. Once we sell our condo, we will have about $500k in liquid assets (not including retirement Accounts that are at about $700k)

My family is used to living well below our means, but this townhome definitely increases our cost of living and I’m having so much anxiety about it, I can’t sleep. . . .

The only other option is renting which would cost like $5500 a month.
If you feel anxiety now just thinking about buying this house, you'll probably feel a lot more anxiety if you actually own it. Do you really want to spend more money so you can be more anxious and less happy?

The mortgage interest deduction is now capped at a $750K mortgage, and property taxes are effectively non-deductible. You might be giving up a large standard deduction to itemize. The tax advantages of ownership relative to renting might be a lot lower than you'd think if you have not been following tax reform.

You'll be putting all your eggs in one basket--(which could get destroyed in an earthquake). Have you factored in the costs of earthquake insurance?

You'll be locking yourself into a highly illiquid investment that could easily cost 7-10% to sell.

And that investment is highly correlated with your and your husband's salaries--if there's a tech slump your jobs will become less secure *and* your house will go down in value at the same time.

The stock market is more liquid and provides more diversification than local real estate.

You're basically asking if you should should borrow 100% of your networth to bet on the local economy continuing to go up faster than the rest of the country.

Would you borrow 100% of your networth to invest in a NASDAQ index fund? If not, why would you borrow 100% of your networth to invest in bay area housing?

You are right to feel anxious. What you're thinking about doing is extremely risky.

Unemployment and interest rates probably cannot get much lower than they are today. That means that in real terms, housing costs are probably close to a peak.
Well said...100% agree

panchilly
Posts: 212
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Re: Can I afford this house?

Post by panchilly » Sun Feb 04, 2018 3:27 pm

MNS CA wrote:
Sun Feb 04, 2018 3:19 pm
Timon0201 wrote:
Fri Feb 02, 2018 3:53 am
I’m having anxiety and need some advise.. . . The monthly cost on this townhouse will be about $8500 and that’s after giving up about $750k to put as a down payment. Once we sell our condo, we will have about $500k in liquid assets (not including retirement Accounts that are at about $700k)

My family is used to living well below our means, but this townhome definitely increases our cost of living and I’m having so much anxiety about it, I can’t sleep. . . .

The only other option is renting which would cost like $5500 a month.
If you feel anxiety now just thinking about buying this house, you'll probably feel a lot more anxiety if you actually own it. Do you really want to spend more money so you can be more anxious and less happy?

The mortgage interest deduction is now capped at a $750K mortgage, and property taxes are effectively non-deductible. You might be giving up a large standard deduction to itemize. The tax advantages of ownership relative to renting might be a lot lower than you'd think if you have not been following tax reform.

You'll be putting all your eggs in one basket--(which could get destroyed in an earthquake). Have you factored in the costs of earthquake insurance?

You'll be locking yourself into a highly illiquid investment that could easily cost 7-10% to sell.

And that investment is highly correlated with your and your husband's salaries--if there's a tech slump your jobs will become less secure *and* your house will go down in value at the same time.

The stock market is more liquid and provides more diversification than local real estate.

You're basically asking if you should should borrow 70% of your networth to bet on the local economy continuing to go up faster than the rest of the country.

Would you borrow 70% of your networth to invest in a NASDAQ index fund? If not, why would you borrow 70% of your networth to invest in Bay Area housing?

You are right to feel anxious. What you're thinking about doing is extremely risky.

Unemployment and interest rates probably cannot get much lower than they are today. That means that in real terms, housing costs are probably close to a peak.

sounds like you are market timing here. What makes you think you know more about bay area real estate than everyone else?

How are you so sure that we are at a top right now?

Look at what happened to California home prices from 1970->1981 which was a period of increasing rates, increasing mortgage rates, increasing unemployment and a declining economy?

Guess what, prices went up!!

hightower
Posts: 627
Joined: Mon Dec 12, 2016 2:28 am

Re: Can I afford this house?

Post by hightower » Sun Feb 04, 2018 3:32 pm

panchilly wrote:
Sun Feb 04, 2018 3:27 pm
MNS CA wrote:
Sun Feb 04, 2018 3:19 pm
Timon0201 wrote:
Fri Feb 02, 2018 3:53 am
I’m having anxiety and need some advise.. . . The monthly cost on this townhouse will be about $8500 and that’s after giving up about $750k to put as a down payment. Once we sell our condo, we will have about $500k in liquid assets (not including retirement Accounts that are at about $700k)

My family is used to living well below our means, but this townhome definitely increases our cost of living and I’m having so much anxiety about it, I can’t sleep. . . .

The only other option is renting which would cost like $5500 a month.
If you feel anxiety now just thinking about buying this house, you'll probably feel a lot more anxiety if you actually own it. Do you really want to spend more money so you can be more anxious and less happy?

The mortgage interest deduction is now capped at a $750K mortgage, and property taxes are effectively non-deductible. You might be giving up a large standard deduction to itemize. The tax advantages of ownership relative to renting might be a lot lower than you'd think if you have not been following tax reform.

You'll be putting all your eggs in one basket--(which could get destroyed in an earthquake). Have you factored in the costs of earthquake insurance?

You'll be locking yourself into a highly illiquid investment that could easily cost 7-10% to sell.

And that investment is highly correlated with your and your husband's salaries--if there's a tech slump your jobs will become less secure *and* your house will go down in value at the same time.

The stock market is more liquid and provides more diversification than local real estate.

You're basically asking if you should should borrow 70% of your networth to bet on the local economy continuing to go up faster than the rest of the country.

Would you borrow 70% of your networth to invest in a NASDAQ index fund? If not, why would you borrow 70% of your networth to invest in Bay Area housing?

You are right to feel anxious. What you're thinking about doing is extremely risky.

Unemployment and interest rates probably cannot get much lower than they are today. That means that in real terms, housing costs are probably close to a peak.

sounds like you are market timing here. What makes you think you know more about bay area real estate than everyone else?
Yeah, but so are you. And the fact that a couple making 400k/yr is feeling anxious about housing prices shows that prices are a getting a little ridiculous. It is foolish to believe prices will always go up and never go down. There's nothing to "know about bay area real estate." Prices can not go up forever, that's all you need to know.

panchilly
Posts: 212
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Re: Can I afford this house?

Post by panchilly » Sun Feb 04, 2018 3:34 pm

hightower wrote:
Sun Feb 04, 2018 3:32 pm
panchilly wrote:
Sun Feb 04, 2018 3:27 pm
MNS CA wrote:
Sun Feb 04, 2018 3:19 pm
Timon0201 wrote:
Fri Feb 02, 2018 3:53 am
I’m having anxiety and need some advise.. . . The monthly cost on this townhouse will be about $8500 and that’s after giving up about $750k to put as a down payment. Once we sell our condo, we will have about $500k in liquid assets (not including retirement Accounts that are at about $700k)

My family is used to living well below our means, but this townhome definitely increases our cost of living and I’m having so much anxiety about it, I can’t sleep. . . .

The only other option is renting which would cost like $5500 a month.
If you feel anxiety now just thinking about buying this house, you'll probably feel a lot more anxiety if you actually own it. Do you really want to spend more money so you can be more anxious and less happy?

The mortgage interest deduction is now capped at a $750K mortgage, and property taxes are effectively non-deductible. You might be giving up a large standard deduction to itemize. The tax advantages of ownership relative to renting might be a lot lower than you'd think if you have not been following tax reform.

You'll be putting all your eggs in one basket--(which could get destroyed in an earthquake). Have you factored in the costs of earthquake insurance?

You'll be locking yourself into a highly illiquid investment that could easily cost 7-10% to sell.

And that investment is highly correlated with your and your husband's salaries--if there's a tech slump your jobs will become less secure *and* your house will go down in value at the same time.

The stock market is more liquid and provides more diversification than local real estate.

You're basically asking if you should should borrow 70% of your networth to bet on the local economy continuing to go up faster than the rest of the country.

Would you borrow 70% of your networth to invest in a NASDAQ index fund? If not, why would you borrow 70% of your networth to invest in Bay Area housing?

You are right to feel anxious. What you're thinking about doing is extremely risky.

Unemployment and interest rates probably cannot get much lower than they are today. That means that in real terms, housing costs are probably close to a peak.

sounds like you are market timing here. What makes you think you know more about bay area real estate than everyone else?
Yeah, but so are you. And the fact that a couple making 400k/yr is feeling anxious about housing prices shows that prices are a getting a little ridiculous. It is foolish to believe prices will always go up and never go down. There's nothing to "know about bay area real estate." Prices can not go up forever, that's all you need to know.
Look at what happened to California home prices from 1970->1981 which was a period of increasing rates, increasing mortgage rates, increasing unemployment and a declining economy? Prices went up during this period significantly!!

Its very hard to time markets my friend...

MNS CA
Posts: 103
Joined: Tue Dec 26, 2017 11:29 pm

Re: Can I afford this house?

Post by MNS CA » Sun Feb 04, 2018 3:38 pm

hightower wrote:
Sun Feb 04, 2018 3:32 pm
panchilly wrote:
Sun Feb 04, 2018 3:27 pm
MNS CA wrote:
Sun Feb 04, 2018 3:19 pm
Timon0201 wrote:
Fri Feb 02, 2018 3:53 am
I’m having anxiety and need some advise.. . . The monthly cost on this townhouse will be about $8500 and that’s after giving up about $750k to put as a down payment. Once we sell our condo, we will have about $500k in liquid assets (not including retirement Accounts that are at about $700k)

My family is used to living well below our means, but this townhome definitely increases our cost of living and I’m having so much anxiety about it, I can’t sleep. . . .

The only other option is renting which would cost like $5500 a month.
If you feel anxiety now just thinking about buying this house, you'll probably feel a lot more anxiety if you actually own it. Do you really want to spend more money so you can be more anxious and less happy?

The mortgage interest deduction is now capped at a $750K mortgage, and property taxes are effectively non-deductible. You might be giving up a large standard deduction to itemize. The tax advantages of ownership relative to renting might be a lot lower than you'd think if you have not been following tax reform.

You'll be putting all your eggs in one basket--(which could get destroyed in an earthquake). Have you factored in the costs of earthquake insurance?

You'll be locking yourself into a highly illiquid investment that could easily cost 7-10% to sell.

And that investment is highly correlated with your and your husband's salaries--if there's a tech slump your jobs will become less secure *and* your house will go down in value at the same time.

The stock market is more liquid and provides more diversification than local real estate.

You're basically asking if you should should borrow 70% of your networth to bet on the local economy continuing to go up faster than the rest of the country.

Would you borrow 70% of your networth to invest in a NASDAQ index fund? If not, why would you borrow 70% of your networth to invest in Bay Area housing?

You are right to feel anxious. What you're thinking about doing is extremely risky.

Unemployment and interest rates probably cannot get much lower than they are today. That means that in real terms, housing costs are probably close to a peak.

sounds like you are market timing here. What makes you think you know more about bay area real estate than everyone else?
Yeah, but so are you. And the fact that a couple making 400k/yr is feeling anxious about housing prices shows that prices are a getting a little ridiculous. It is foolish to believe prices will always go up and never go down. There's nothing to "know about bay area real estate." Prices can not go up forever, that's all you need to know.
The mean annual wage in San Francisco is $70,000.
https://www.bls.gov/oes/current/oes_41860.htm

If a couple making $400K can barely afford a town home---not even a detached single family home--that's a sign of a housing bubble.

In the greater New York metropolitan area--where average incomes are only $10K lower--a 4 bedroom house in nice suburb would cost half as much.

This is the case schiller index for San Francisco.
https://fred.stlouisfed.org/series/SFXRSA

Housing prices go up and down. They go down in recessions when people lose their jobs--even engineers and accountants. And they can go down by a lot.

panchilly
Posts: 212
Joined: Sat May 14, 2016 9:57 am

Re: Can I afford this house?

Post by panchilly » Sun Feb 04, 2018 3:44 pm

MNS CA wrote:
Sun Feb 04, 2018 3:38 pm
hightower wrote:
Sun Feb 04, 2018 3:32 pm
panchilly wrote:
Sun Feb 04, 2018 3:27 pm
MNS CA wrote:
Sun Feb 04, 2018 3:19 pm
Timon0201 wrote:
Fri Feb 02, 2018 3:53 am
I’m having anxiety and need some advise.. . . The monthly cost on this townhouse will be about $8500 and that’s after giving up about $750k to put as a down payment. Once we sell our condo, we will have about $500k in liquid assets (not including retirement Accounts that are at about $700k)

My family is used to living well below our means, but this townhome definitely increases our cost of living and I’m having so much anxiety about it, I can’t sleep. . . .

The only other option is renting which would cost like $5500 a month.
If you feel anxiety now just thinking about buying this house, you'll probably feel a lot more anxiety if you actually own it. Do you really want to spend more money so you can be more anxious and less happy?

The mortgage interest deduction is now capped at a $750K mortgage, and property taxes are effectively non-deductible. You might be giving up a large standard deduction to itemize. The tax advantages of ownership relative to renting might be a lot lower than you'd think if you have not been following tax reform.

You'll be putting all your eggs in one basket--(which could get destroyed in an earthquake). Have you factored in the costs of earthquake insurance?

You'll be locking yourself into a highly illiquid investment that could easily cost 7-10% to sell.

And that investment is highly correlated with your and your husband's salaries--if there's a tech slump your jobs will become less secure *and* your house will go down in value at the same time.

The stock market is more liquid and provides more diversification than local real estate.

You're basically asking if you should should borrow 70% of your networth to bet on the local economy continuing to go up faster than the rest of the country.

Would you borrow 70% of your networth to invest in a NASDAQ index fund? If not, why would you borrow 70% of your networth to invest in Bay Area housing?

You are right to feel anxious. What you're thinking about doing is extremely risky.

Unemployment and interest rates probably cannot get much lower than they are today. That means that in real terms, housing costs are probably close to a peak.

sounds like you are market timing here. What makes you think you know more about bay area real estate than everyone else?
Yeah, but so are you. And the fact that a couple making 400k/yr is feeling anxious about housing prices shows that prices are a getting a little ridiculous. It is foolish to believe prices will always go up and never go down. There's nothing to "know about bay area real estate." Prices can not go up forever, that's all you need to know.
The mean annual wage in San Francisco is $70,000.
https://www.bls.gov/oes/current/oes_41860.htm

If a couple making $400K can barely afford a town home---not even a detached single family home--that's a sign of a housing bubble.

In the greater New York metropolitan area--where average incomes are only $10K lower--a 4 bedroom house in nice suburb would cost half as much.
The S&P500 looks pretty high too, is that in a bubble?

I think the OP should make this decision in there here and now because i do not believe it is possible to time the housing market. Market timing is a fools errand. The market could indeed continue higher for longer... potentially a LOT longer if inflation starts to come into the picture here.

I believe the OP should use this formula to determine if he/she should buy:

Code: Select all

max_monthly_rent = ( (yearly gross pre-tax income) * .18) / 12

monthly_maintenance = (sum of estimated maintenance during next 10 years) / 120

year_1_iti = monthly interest, taxes, and insurance for year 1 of the mortgage. Include PMI if relevant.

year_1_rental_cost = year_1_iti + monthly_maintenance 

if (year_1_rental_cost <= max_monthly_rent) then YOU CAN AFFORD
else you can not afford.

hightower
Posts: 627
Joined: Mon Dec 12, 2016 2:28 am

Re: Can I afford this house?

Post by hightower » Sun Feb 04, 2018 4:40 pm

@panchilly
The point is not to argue whether or not the housing market is about to crash in California. The point is that the OP is placing all of their eggs in one basket...a single property. That is inherently risky because a housing market crash could wipe out a significant portion of her net worth. It's equivalent to buying a whole lot of shares of a single company's stock.
Sure, the prices could keep climbing for another 10 years. Who knows? But, they could also plummet in the next 1 year or 1 month, again no one knows.
If you're going to talk about market timing, you should also be reminded of the fact that past performance does not guarantee future returns. That's as true for the housing market as it is for the stock market. It doesn't matter what California's real estate market did in the 1980's. That doesn't mean it's going to behave the same in 2018 or later.

stan1
Posts: 8003
Joined: Mon Oct 08, 2007 4:35 pm

Re: Can I afford this house?

Post by stan1 » Sun Feb 04, 2018 4:51 pm

There's another very high cost of living thread live right now also looking at a $2M house. They have a lot more savings than you do at about the same income level. I live in a VHCOL area as well. I understand why people do not want to move to Texas, Nevada, or Idaho. In the other thread I told them they'd be fine if their decision is to buy a $2M house as they could liquidate their taxable accounts to pay cash for the house.

You are are in a different situation. I realize your friends and co-workers and maybe even relatives are probably buying $2M houses on similar income. In your case I think you are right on the cusp. What could you get for $1.5M? If the townhouse is very close to family and they will be providing day care plus you'd be able to use public schools that might push me into the "buy" column.

Topic Author
Timon0201
Posts: 85
Joined: Thu Oct 23, 2014 3:20 am

Re: Can I afford this house?

Post by Timon0201 » Mon Feb 05, 2018 8:19 pm

Thank you all for taking the time to respond to my post.

for those dying to know, we decided not to get the townhouse. it was really at our max budget and we just could not get comfortable with it.

i do laugh though because all the non-bay area people making comments about moving out of the bay and prices can't go up forever. i've been hearing this same chatter for many years and my neighborhood went up 20% just last year (and a year ago we were all saying that prices couldn't go up anymore). haha

crazy market!

we are super lucky to own this condo!

likashing
Posts: 162
Joined: Tue Mar 06, 2007 7:58 pm

Re: Can I afford this house?

Post by likashing » Tue Feb 06, 2018 12:37 am

1) Have you considered renting out your condo, and then rent a bigger house? $5.5k for a $2m house is a yield of only 3.3%. If you look hard enough (zillow.com / craigslist listings), you might be able to find an equivalent home renting for $5k.

2) Property tax, maintenance and insurance etc will add up to 2% of the house's price quickly. You are not losing much if you exercise (1). Is your only reason to purchase simply because you are afraid you might miss out on the 10% gains on the currently $2m house?

3) It looks like both of you are w2 workers. Standard deduction is $24k moving forward. SALT is capped at $10k. So it means if you don't buy, assuming your mortgage interest is below $14k now, you will be taking the standard deduction (i.e. free profit).

4) It also means that if you pick up the $1.25m mortgage, your first $14k of interest is basically useless, because you would be taking the standard deduction if you are not buying. $14k is roughly the interest of a $400k loan. Mortgage interest deduction is also limited to the first $750k of the loan, so basically for your $1.25m loan, only the amount between $400k-$750k is extra tax benefits. Run the numbers and find out your *effective* mortgage interest rate. It will be lower in 2018, than 2017, for the same scenario. Your mortgage interest won't get as much tax benefit as 2017 and before.

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