Buying a house - bay area

[osaka]

Family of 4, both software engineers in bay area, early 30s with two children under 3. Jobs are enjoyable and low stress. No current plans to pursue significant additional income growth. Or relocating elsewhere, within or outside the bay area. Trying to decide on 15 or 30 year mortgage to buy now, and planning for a potential tech crash. Or maybe waiting to buy after saving more.

Income:
$250k after tax ($350k before tax) combined base salary, or $380k after tax ($600k before tax) including RSU/bonus

Savings:
$500k in retirement accounts (401k/Roth IRA)
$700k in taxable/cash
additional cash reserved for childcare/preschool until public K-12

Expenses other than housing/childcare: about $60k/year

Desired home:
$2,500,000 with 20% down ($500k) - an entry level 3br home in the desired neighborhood
30 yr at 3.75%: $111k/year or 15 yr at 2.75%: $163k/year
property tax: $30k/year

Total expenses: $201k/year (30-yr fixed) or $253k/year (15-yr fixed)

Questions:
Given tech boom/bust cycles and a potential tech crash, how do we consider a 15 or 30 year mortgage? Anyone with experience going through the previous crashes?

15-year mortgage: annual payment seems reasonable at current incomes, and paying off the home in just 15 years would be nice. But if a tech crash happens right after buying, with only a $200k cash emergency fund after downpayment, could we rely on base salaries alone, just barely breaking even each year, to pull through? Or could we refinance to a 30-year at that point? Any other options to get through a tech crash, like dip into what's left of the $500k retirement accounts? If there isn't an immediate tech crash, the $127k/year saved income would accumulate into a larger emergency fund and/or retirement savings.

30-year mortgage: the lower payment makes it more manageable to get through a tech crash. At current $179k/year saved income, we could save up a larger buffer and then refinance to a 15-year. Or just invest it and pay off the mortgage early at some point (after 15 years?), or just go until year 30? For reference long term capital gains tax rate is 35%.

If it would be too risky to buy now with either option, how much more should we have saved before considering either of these options again?

[Goal33]

Probably do the 30 year to buy yourself flexibility.

Alternatively: How about a 7/1 arm which is payable on a 30 year pace but had rates around the 15 year? Pay it as-if it was a 15 year (or faster) but you buy yourself the option to scale back.

[ohai]

30y would be better in terms of risk management compared to 15y, since you have flexibility in payment schedules. You can always pay 30y down faster if you want, but you can't pay less for 15y. Furthermore, 30y gives you more freedom to invest in other things early on, which, in my opinion, outweighs the higher interest rates.

After paying $500k on the downpayment, you will have only $200k in non-retirement liquid assets. Keep in mind that you will pay a bit more than 20% after accounting for closing costs. You'll also expose yourself to $2.5 million in house price exposure, which is currently more than double your current net worth.

If you ask me, you don't have enough saved to buy such an expensive house. I'd wait 3-4 years to see what your financial situation looks like then. House prices might increase even further by then. However, they might also drop, and you don't have that much net worth to absorb a price decline.

[somekevinguy]

Similar income, similar ages, slightly more saved in somewhat more stable jobs + housing allowances and a pension and significantly lower baseline spending- bought a house on the peninsula at similar price point about 6 months ago (30 year fixed- and refinancing already given lower rates).

I think the thing that would worry me if I were you is that both of you are in the same field and this your risk is somewhat concentrated. With a mortgage and property tax on a 2.5M home, 200k doesn’t go very far if you are out of jobs for any significant period of time. Home prices would likely be depressed at that time too, making selling potentially more challenging (even at break even).

If you do buy, which is a judgment call about your risk tolerance etc, i’d definitely advise the 30 year for the added flexibility. It isn’t inconceivable that two people in tech/FAANG could both lose their jobs with the next significant downturn but you might have a better idea of those risks. If one of you was in tech and the other in law or medicine etc then that might be a little different.

[BusterMcTaco]

Where in the bay area is $2.5 million the cost of a 3 bedroom starter home? Are you looking in old Palo Alto?

[anoop]

Based on the numbers it looks like you'd be a bit over leveraged in your house. I would be more comfortable if house price divided by gross income was 3.5 or less, preferably closer to 2.5, especially considering this is two incomes, not one.

You are probably underestimating maintenance and other costs (e.g. insurance, increased utilities and the like). It might not seem like much, but they quickly add up.

If house prices drop, the bank is very likely to ask you to make an additional payment to keep your equity level at least at 20%, regardless of what type of loan you get. For example, if property prices drop 10%, it wipes out 250K of your downpayment, and now the bank will want you to pay something like (2.25M*0.2 - 0.25M) = 200K, in order to keep the terms of your loan. I saw this happen to a friend during the last bust. [Edit: This part was corrected below by other posters. It applies only if one tries to refinance or get a HELOC, otherwise, there are no issues.]

Things will work out OK if you get good raises and/or house prices appreciate. Both are likely given your age (raises are likely) and that we are headed to ZIRP/NIRP (house prices will appreciate), so at least in that respect I think things may be OK.

With your current numbers, you will end up being house poor initially and it's a sort of gamble, although a one with odds somewhat in your favor.

I am extremely conservative with finances so in your situation I would not buy such a pricey house. I know it's tough in the Bay Area and with the a family it can be hard to put things off for a few years, so you'll have to make the call for yourself.

[MrJones]

Where in the bay area is $2.5 million the cost of a 3 bedroom starter home? Are you looking in old Palo Alto?

Everywhere. Here's one, 1987 sqft, with questionable wallpaper in south bay. $2.6M:
https://www.zillow.com/homedetails/2023 ... 5647_zpid/

Palo Alto is more expensive. Here is a starter there for $3.5M.
https://www.zillow.com/homedetails/1020 ... 8260_zpid/

[snackdog]

I wouldn't go over $1.5mm in your situation both to keep costs low and manage risk of dual income. 30 years makes more sense with super low rates.

[HEDGEFUNDIE]

If house prices drop, the bank is very likely to ask you to make an additional payment to keep your equity level at least at 20%, regardless of what type of loan you get. For example, if property prices drop 10%, it wipes out 250K of your downpayment, and now the bank will want you to pay something like (2.25M*0.2 - 0.25M) = 200K, in order to keep the terms of your loan. I saw this happen to a friend during the last bust.

I have never heard of this happening, and have also never seen this in the paperwork for a loan.

[Goal33]

I wouldn't go over $1.5mm in your situation both to keep costs low and manage risk of dual income. 30 years makes more sense with super low rates.

I hear what you’re saying from a financial perspective but this is a family of 4 looking for a starter single family home. 1.5 will buy them maybe a 2 bed / 1 bath with $600 HOA in their target area if it even exists.

[Admiral]

So you will have 500k saved for retirement and $2m in housing debt. That sounds like a recipe for the treadmill of life. You will need to keep working and earning at a very high level for a very long time. Doesn't sound like much fun to me, but then I'm older than you are.

On paper, is it affordable. Probably. Is it desirable? Not for me. My rule has always been to take on no more housing debt than could be afforded if one half of a couple is out of work (or chooses not to work) for a long period. I realize that SF housing stock is way out in left field, but just not sure I would choose to live there in the current economic climate.

Could you move to a cheaper city? Even cutting your incomes in half you will still be very comfortable. Lots of places have software engineering jobs.

What is the equivalent rent where you are?

[Watty]

Based on the numbers it looks like you'd be a bit over leveraged in your house.

+1000

but I would say that it is not even close to being able to afford that house.

Even if your income was rock solid like you were both tenured professors that could not be fired getting a $2 million dollar mortage with $600K in gross income would be excessive.

One other problem is that you have likely been working for around ten years and your net worth is only double your gross income at $1.2 million dollars. There could be something going on like you just started earning at that level or you got a late start but while $1.2 million is a lot you are not at the point where you can buy a $2.5 million dollar house.

If it would be too risky to buy now with either option, how much more should we have saved before considering either of these options again?

It is not just about the mortage payment even if you saved up enough to pay cash buying a $2.5 million dollar house is pretty excessive for a couple with $350K in non-RSU income.

If you got your net worth up to maybe three or four million dollars it might be easier to justify buying a $2.5 million dollar home but it will take a long time to build it up that much.

Even in the Bay Area there should be a lot less expensive homes available.

[random_walker_77]

On one hand, the rate on the 15yr is barely over inflation. On the other hand, the 15 yr leaves you much more exposed to a cash flow crunch in a recession. I'd pick the 30 yr based on cash flow considerations, given your base salary. Consider that, during a downturn, your RSUs go way down. Consider, if you temporarily lose one income, that's going to hurt w/ the 30yr's payment, but it's begging disaster w/ the 15 yr. Consider, if you change employers (perhaps involuntarily), you're going to have a year w/o RSU vesting, assuming they're issuing much in RSUs at that point in time...

Go w/ the 30 yr for the reduced cash flow requirements. Maintain a healthy emergency fund, then make payments as if you're on a 15 yr mortgage. Treat the RSU income as "bonus" income and redirect a good chunk towards that huge debt load...

The one saving grace is that early 30s in tech, you still have some room for compensation increases, assuming you're both very good at what you do. That's tempered by the fact that so much compensation is equity-based, and it's risky to count on that for long-term obligations like mortgages.

[Watty]

If house prices drop, the bank is very likely to ask you to make an additional payment to keep your equity level at least at 20%, regardless of what type of loan you get. For example, if property prices drop 10%, it wipes out 250K of your downpayment, and now the bank will want you to pay something like (2.25M*0.2 - 0.25M) = 200K, in order to keep the terms of your loan. I saw this happen to a friend during the last bust.

I have never heard of this happening, and have also never seen this in the paperwork for a loan.

+1

It does not work that way in the US for a normal mortage. It might have been possible that your friend had some sort of interest only balloon loan that they might have made at the height of the housing bubble but I don't think they even make those now.

[anoop]

If house prices drop, the bank is very likely to ask you to make an additional payment to keep your equity level at least at 20%, regardless of what type of loan you get. For example, if property prices drop 10%, it wipes out 250K of your downpayment, and now the bank will want you to pay something like (2.25M*0.2 - 0.25M) = 200K, in order to keep the terms of your loan. I saw this happen to a friend during the last bust.

I have never heard of this happening, and have also never seen this in the paperwork for a loan.

+1

It does not work that way in the US for a normal mortage. It might have been possible that your friend had some sort of interest only balloon loan that they might have made at the height of the housing bubble but I don't think they even make those now.

He had a 7/1 ARM with 20% down and was in year 2 or 3 when this happened. He bought at the peak. It’s possible what the bank did to him was not legal. It was Wells. My friend did actually pay up.

[Admiral]

If house prices drop, the bank is very likely to ask you to make an additional payment to keep your equity level at least at 20%, regardless of what type of loan you get. For example, if property prices drop 10%, it wipes out 250K of your downpayment, and now the bank will want you to pay something like (2.25M*0.2 - 0.25M) = 200K, in order to keep the terms of your loan. I saw this happen to a friend during the last bust.

I have never heard of this happening, and have also never seen this in the paperwork for a loan.

+1

It does not work that way in the US for a normal mortage. It might have been possible that your friend had some sort of interest only balloon loan that they might have made at the height of the housing bubble but I don't think they even make those now.

He had a 7/1 ARM with 20% down and was in year 2 or 3 when this happened. He bought at the peak. It’s possible what the bank did to him was not legal. It was Wells.

That sounds v. sketchy. A mortgage is an obligation to pay a fixed debt. The underlying market value should be irrelevant. You owe $2,000 per month on a 500k loan and the value of the house increases to $1.5m? You still owe $2,000 per month. Value of the house drops to $250k? You owe $2,000/month.

Now if you start missing payments etc and you need to avoid foreclosure, there may be contingencies. But I have never heard of a bank demanding cash based on market gyrations. How could they? Values rise and fall all the time.

[random_walker_77]

Even if your income was rock solid like you were both tenured professors that could not be fired getting a $2 million dollar mortgage with $600K in gross income would be excessive.

But if the RSUs were rock-solid, 4x income is a stretch but not unmanageable. At these lofty VHCOL numbers, the non-housing parts of the household budget become much smaller percentages. (OP says 60K, excluding childcare)

And stretching is common in the bay area. That said, this is how people get foreclosed. Housing drops 30%, people end up underwater on their mortgages, and then a job loss knocks people into a really bad place...

I sometimes see people posting here insisting on how a good engineer will always be able to find a new job. But I remember around 2002 when our company was interviewing, but basically hiring no one. The threshold was a unanimous panel rating of "superstar" -- 4 superstar recommendations and one "very good" resulted in a decision to not extend an offer. Seemed like a waste of effort to spend time interviewing candidates... I assume other companies that were more profitable might've been hiring, but it was bad.

[osaka]

Thank you all for the responses. To add a few details:

The "additional cash" for childcare is about $350k, and if one of us were out of a job, we could consider a much cheaper co-op preschool or home schooling until public K-12. But hoping that we'll both keep working through a tech crash. Maybe that isn't realistic?

The one of us with slightly higher income just started working 3 years ago, otherwise we would have more saved.

Alternatives to buying right now:

Don't buy yet and continue saving at $250k/year, but with the moving goal posts of real estate appreciation in the area, we'd only be saving at 10%/year of the target home value and there is a risk that homes could appreciate at this rate or faster.

Buy a home that's about 20-25% cheaper with less desirable schools, but with the need to relocate again in 8-9 years (for middle/high school).

[Admiral]

Thank you all for the responses. To add a few details:

The "additional cash" for childcare is about $350k, and if one of us were out of a job, we could consider a much cheaper co-op preschool or home schooling until public K-12. But hoping that we'll both keep working through a tech crash. Maybe that isn't realistic?

The one of us with slightly higher income just started working 3 years ago, otherwise we would have more saved.

Alternatives to buying right now:

Don't buy yet and continue saving at $250k/year, but with the moving goal posts of real estate appreciation in the area, we'd only be saving at 10%/year of the target home value and there is a risk that homes could appreciate at this rate or faster.

Buy a home that's about 20-25% cheaper with less desirable schools, but with the need to relocate again in 8-9 years (for middle/high school).

What is the equivalent rent that you would/could be paying? With the understanding that most people buy more house than they would rent.

[playtothebeat]

If house prices drop, the bank is very likely to ask you to make an additional payment to keep your equity level at least at 20%, regardless of what type of loan you get. For example, if property prices drop 10%, it wipes out 250K of your downpayment, and now the bank will want you to pay something like (2.25M*0.2 - 0.25M) = 200K, in order to keep the terms of your loan. I saw this happen to a friend during the last bust.

I’m not aware of any residential loans having remarking rights or loan-to-value maintenance provisions. Maybe a private or a hard money loan?
Read your Note carefully, but I’m doubtful you’ll see any rights for the lender to require a remargin/paydown without an event of default etc

[HEDGEFUNDIE]

2.5M for an entry level house is a bit rich.

Set your cap at 1.8M and reevaluate

[barnaclebob]

+1

It does not work that way in the US for a normal mortage. It might have been possible that your friend had some sort of interest only balloon loan that they might have made at the height of the housing bubble but I don't think they even make those now.

He had a 7/1 ARM with 20% down and was in year 2 or 3 when this happened. He bought at the peak. It’s possible what the bank did to him was not legal. It was Wells. My friend did actually pay up.

My guess is you didn't have the full story. I bet he was doing a refi and had to bring cash to the table. We had to do that for the refi on our first house.

[worthit]

2.5M for an entry level house is a bit rich.

Set your cap at 1.8M and reevaluate

+1

[anoop]

+1

It does not work that way in the US for a normal mortage. It might have been possible that your friend had some sort of interest only balloon loan that they might have made at the height of the housing bubble but I don't think they even make those now.

He had a 7/1 ARM with 20% down and was in year 2 or 3 when this happened. He bought at the peak. It’s possible what the bank did to him was not legal. It was Wells. My friend did actually pay up.

My guess is you didn't have the full story. I bet he was doing a refi and had to bring cash to the table. We had to do that for the refi on our first house.

OK, I think that may have been it. Thanks for pointing it out.

Apologies to others for the confusion.

But I think it illustrates an issue to be aware of nevertheless.

[ohai]

Thank you all for the responses. To add a few details:

The "additional cash" for childcare is about $350k, and if one of us were out of a job, we could consider a much cheaper co-op preschool or home schooling until public K-12. But hoping that we'll both keep working through a tech crash. Maybe that isn't realistic?

The one of us with slightly higher income just started working 3 years ago, otherwise we would have more saved.

Alternatives to buying right now:

Don't buy yet and continue saving at $250k/year, but with the moving goal posts of real estate appreciation in the area, we'd only be saving at 10%/year of the target home value and there is a risk that homes could appreciate at this rate or faster.

Buy a home that's about 20-25% cheaper with less desirable schools, but with the need to relocate again in 8-9 years (for middle/high school).

In my opinion, "it could be more expensive later" is not a great reason to buy a house. I don't think it is rational to predict the same price appreciation as the past 5-10 years. Also, you will pay a lot of costs, as well as opportunity cost of capital when you buy an expensive house. Price appreciation must exceed all these costs to be economically effective.

I think your best action, and is echoed by most people here, is to rent for a while longer, and then reconsider in a few years, when your net worth is at least parity with home purchase price.

Anyway, what is the rent as a percentage of home prices, net of cost of ownership, for the houses you are considering? I'm guessing 3% or less, in which case, you're not paying that much to delay buying until your buffer increases.

[mervinj7]

2.5M for an entry level house is a bit rich.

Set your cap at 1.8M and reevaluate

+1 I would recommend between $1.6M and $1.8M based on your current incomes and savings. It's too risky to go $2.5M without more of a buffer in assets. If one of you did lose your job during downtown, it's not really feasible to think about pulling your kids out of preschool after they started. You would be better off spending that time looking for a new job or brushing up on your skills. Plus, would you really want to disrupt their routines?

[UALflyer]

+1

It does not work that way in the US for a normal mortage. It might have been possible that your friend had some sort of interest only balloon loan that they might have made at the height of the housing bubble but I don't think they even make those now.

He had a 7/1 ARM with 20% down and was in year 2 or 3 when this happened. He bought at the peak. It’s possible what the bank did to him was not legal. It was Wells. My friend did actually pay up.

My guess is you didn't have the full story. I bet he was doing a refi and had to bring cash to the table. We had to do that for the refi on our first house.

OK, I think that may have been it. Thanks for pointing it out.

Apologies to others for the confusion.

But I think it illustrates an issue to be aware of nevertheless.

To confirm, this is only an issue for new mortgages/refinances as well as HELOCs/lines of credit. Once the OP gets either a 15 or a 30 year fixed mortgage, regardless what happens to the housing market, the bank will not have the right to require him to make any additional payments to ensure a 20% equity cushion. This part is crystal clear.

[mac808]

I wouldn't worry too much about prices rising faster out of reach - they're already at a breaking point, as somewhat evidenced by your personal situation. People will say there is an endless stream of IPO gazillionaires supporting prices but many of my UHNW friends currently living in SF plan to leave as soon as they get liquidity and/or stop working.

On the other hand, you've got little kids and just need a home for them to grow up in - so I'm sympathetic to the quality of life argument and that may justify getting into a home even if it's not the most optimized financial move.

If you had a great long-term rental you were happy with, I might stay put. Otherwise, I think it's OK to buy. I'm assuming your FANG-like RSUs are relatively stable +/- 30%.

Have you thought about moving to another city besides SF? Your salaries are good but not great for tech, meaning you could probably keep them if you moved to Seattle, Austin, Boston or similar. Are you comfortable with your kids growing up in the environment that the Bay Area has become - a pressure cooker combining extreme inequality and ambition?

[random_walker_77]

OP stated they're not open to relocating.

The "additional cash" for childcare is about $350k, and if one of us were out of a job, we could consider a much cheaper co-op preschool or home schooling until public K-12. But hoping that we'll both keep working through a tech crash. Maybe that isn't realistic?

What's that line again? ah yes, "Hope isn't a strategy". Yes, you can hope you'll both keep working through a potential tech crash (keeping in mind that tech has historically been cyclical, but this time could be different ). But you should plan assuming bad stuff happens, to ensure that you have a good chance of not going bankrupt. (Not necessarily a perfect chance of avoiding bankruptcy, but a good enough chance, whatever that means to you)

Incidentally, is that a typo? I'm hoping you're just paying $35K/yr for childcare for 2. If it's $350K, you might consider just banking that and setting your kids up w/ a trust fund in lieu of college!!!

Don't buy yet and continue saving at $250k/year, but with the moving goal posts of real estate appreciation in the area, we'd only be saving at 10%/year of the target home value and there is a risk that homes could appreciate at this rate or faster.

Buy a home that's about 20-25% cheaper with less desirable schools, but with the need to relocate again in 8-9 years (for middle/high school).

Look at rent for a equivalent house. Subtract off the annual property tax you'll be paying if you bought that house instead. I think you'll find that what you're paying in rent seems reasonable for what you're getting.

$250K/yr is something. Give it 4 years and include investment earnings on that money, and you'll be in pretty good shape.

Consider whether you're looking for a good place to live, or whether you're trying to get in on the bay area housing-as-investment gravy train... that's worked out well for a lot of people, but but but... it definitely feels like a gamble. How much of your motivation is to buy now for fear of missing out?

[TravelGeek]

I hear what you’re saying from a financial perspective but this is a family of 4 looking for a starter single family home. 1.5 will buy them maybe a 2 bed / 1 bath with $600 HOA in their target area if it even exists.

Well, I just happened to check up on our old neighborhood on the peninsula (San Mateo county) last night. 15-year-old 3 bedroom/3 bath townhomes recently sold for $1.4M - 1.5M. I'd rather get one of those than pay a million more for a free-standing SFH that likely is 50+ years old. In fact, I did, back in the early 2000s

[visualguy]

If your jobs are reasonably stable, and you see a long-term future for you and your spouse in the area, just go ahead and do it. Waiting/renting doesn't make sense in this area when considering your situation assuming you can get a place where you would want to live long term. There's an overwhelming chance that you will regret waiting both financially and in terms of quality of life.

Also, get a place which will satisfy your needs for many years. Upgrading to a nicer or better located house later is more problematic in this area. In fact, the only case where I would consider waiting a bit is if you can't buy a place where you would want to stay long term right now, but you would be able to do it if you waited a bit.

[HEDGEFUNDIE]

I hear what you’re saying from a financial perspective but this is a family of 4 looking for a starter single family home. 1.5 will buy them maybe a 2 bed / 1 bath with $600 HOA in their target area if it even exists.

Well, I just happened to check up on our old neighborhood on the peninsula (San Mateo county) last night. 15-year-old 3 bedroom/3 bath townhomes recently sold for $1.4M - 1.5M. I'd rather get one of those than pay a million more for a free-standing SFH that likely is 50+ years old. In fact, I did, back in the early 2000s

And one can find free-standing SFHs in the same Peninsula areas for 1.5-2.0, no need to pay 2.5.

[visualguy]

I hear what you’re saying from a financial perspective but this is a family of 4 looking for a starter single family home. 1.5 will buy them maybe a 2 bed / 1 bath with $600 HOA in their target area if it even exists.

Well, I just happened to check up on our old neighborhood on the peninsula (San Mateo county) last night. 15-year-old 3 bedroom/3 bath townhomes recently sold for $1.4M - 1.5M. I'd rather get one of those than pay a million more for a free-standing SFH that likely is 50+ years old. In fact, I did, back in the early 2000s

And one can find free-standing SFHs in the same Peninsula areas for 1.5-2.0, no need to pay 2.5.

If you want a single family home of a reasonable size for a family of 4, in reasonable condition, and in a good school district in the peninsula or south bay, you are looking at $2.5M+. Most will be quite a bit higher then $2.5M, actually.

[HEDGEFUNDIE]

I hear what you’re saying from a financial perspective but this is a family of 4 looking for a starter single family home. 1.5 will buy them maybe a 2 bed / 1 bath with $600 HOA in their target area if it even exists.

Well, I just happened to check up on our old neighborhood on the peninsula (San Mateo county) last night. 15-year-old 3 bedroom/3 bath townhomes recently sold for $1.4M - 1.5M. I'd rather get one of those than pay a million more for a free-standing SFH that likely is 50+ years old. In fact, I did, back in the early 2000s

And one can find free-standing SFHs in the same Peninsula areas for 1.5-2.0, no need to pay 2.5.

If you want a single family home of a reasonable size for a family of 4, in reasonable condition, and in a good school district in the peninsula or south bay, you are looking at $2.5M+. Most will be quite a bit higher then $2.5M, actually.

I suppose it depends on your definition of "good school district" but here is one example:

https://www.zillow.com/homedetails/1520 ... 8007_zpid/

[visualguy]

I hear what you’re saying from a financial perspective but this is a family of 4 looking for a starter single family home. 1.5 will buy them maybe a 2 bed / 1 bath with $600 HOA in their target area if it even exists.

Well, I just happened to check up on our old neighborhood on the peninsula (San Mateo county) last night. 15-year-old 3 bedroom/3 bath townhomes recently sold for $1.4M - 1.5M. I'd rather get one of those than pay a million more for a free-standing SFH that likely is 50+ years old. In fact, I did, back in the early 2000s

And one can find free-standing SFHs in the same Peninsula areas for 1.5-2.0, no need to pay 2.5.

If you want a single family home of a reasonable size for a family of 4, in reasonable condition, and in a good school district in the peninsula or south bay, you are looking at $2.5M+. Most will be quite a bit higher then $2.5M, actually.

I suppose it depends on your definition of "good school district" but here is one example:

https://www.zillow.com/homedetails/1520 ... 8007_zpid/

Not a good school district, built in 1929, and small (1600 sqft) for a family of 4 in the long run.

[Ben Mathew]

There's a discussion of the 15 year vs 30 year mortgage choice in this thread:

Pay off a 30 year mortgage in 15 years? The cost of flexibility

Due to the higher interest rate, the 30 year ends up a lot more expensive than the 15 year. Paying a higher interest rate to maintain flexibility ends up being very expensive. An emergency fund (in any of its forms) will often be better.

[BusterMcTaco]

Where in the bay area is $2.5 million the cost of a 3 bedroom starter home? Are you looking in old Palo Alto?

Everywhere. Here's one, 1987 sqft, with questionable wallpaper in south bay. $2.6M:
https://www.zillow.com/homedetails/2023 ... 5647_zpid/

Palo Alto is more expensive. Here is a starter there for $3.5M.
https://www.zillow.com/homedetails/1020 ... 8260_zpid/

I guess we have vastly different definitions of a "starter home". 3 bedrooms with 2400 SF is a choice, not a limitation.

[visualguy]

Where in the bay area is $2.5 million the cost of a 3 bedroom starter home? Are you looking in old Palo Alto?

Everywhere. Here's one, 1987 sqft, with questionable wallpaper in south bay. $2.6M:
https://www.zillow.com/homedetails/2023 ... 5647_zpid/

Palo Alto is more expensive. Here is a starter there for $3.5M.
https://www.zillow.com/homedetails/1020 ... 8260_zpid/

I guess we have vastly different definitions of a "starter home". 3 bedrooms with 2400 SF is a choice, not a limitation.

The strategy of climbing the equity ladder from a starter home doesn't work well in the Bay Area. People tend to get stuck with what they bought because upgrading becomes more and more difficult with time. It's the double whammy of high appreciation of the more desirable homes, and prop 13 lock-in where upgrading means a big jump in property taxes. You need to buy something that would fit your needs for years to come if at all possible, not plan on buying something insufficient for the long-term and then upgrading. It has been a lot more cost effective to stretch to buy a "forever" home to begin with rather than a "starter" home.

[HEDGEFUNDIE]

Where in the bay area is $2.5 million the cost of a 3 bedroom starter home? Are you looking in old Palo Alto?

Everywhere. Here's one, 1987 sqft, with questionable wallpaper in south bay. $2.6M:
https://www.zillow.com/homedetails/2023 ... 5647_zpid/

Palo Alto is more expensive. Here is a starter there for $3.5M.
https://www.zillow.com/homedetails/1020 ... 8260_zpid/

I guess we have vastly different definitions of a "starter home". 3 bedrooms with 2400 SF is a choice, not a limitation.

The strategy of climbing the equity ladder from a starter home doesn't work well in the Bay Area. People tend to get stuck with what they bought because upgrading becomes more and more difficult with time. It's the double whammy of high appreciation of the more desirable homes, and prop 13 lock-in where upgrading means a big jump in property taxes. You need to buy something that would fit your needs for years to come if at all possible, not plan on buying something insufficient for the long-term and then upgrading. It has been a lot more cost effective to stretch to buy a "forever" home to begin with rather than a "starter" home.

There is a third option: adding onto your starter home.

There is even a local government website that shows you how to do it: https://secondunitcentersmc.org/

[visualguy]

Where in the bay area is $2.5 million the cost of a 3 bedroom starter home? Are you looking in old Palo Alto?

Everywhere. Here's one, 1987 sqft, with questionable wallpaper in south bay. $2.6M:
https://www.zillow.com/homedetails/2023 ... 5647_zpid/

Palo Alto is more expensive. Here is a starter there for $3.5M.
https://www.zillow.com/homedetails/1020 ... 8260_zpid/

I guess we have vastly different definitions of a "starter home". 3 bedrooms with 2400 SF is a choice, not a limitation.

The strategy of climbing the equity ladder from a starter home doesn't work well in the Bay Area. People tend to get stuck with what they bought because upgrading becomes more and more difficult with time. It's the double whammy of high appreciation of the more desirable homes, and prop 13 lock-in where upgrading means a big jump in property taxes. You need to buy something that would fit your needs for years to come if at all possible, not plan on buying something insufficient for the long-term and then upgrading. It has been a lot more cost effective to stretch to buy a "forever" home to begin with rather than a "starter" home.

There is a third option: adding onto your starter home.

Yes, that's a possibility, but you need to find a property that can be expanded in some way (there isn't a plethora of such inventory on the market), and expect to pay some premium for that because sellers are aware of it. The other problem is that construction is very expensive, time-consuming, and difficult in the Bay Area. If you and your spouse have busy careers, you don't have the bandwidth to deal with it, and even if you have the time, it's not clear you wouldn't have done just as well or better buying a larger home to begin with. You can't build the kind of second floors these days that you find in the old houses because of various set-back and other restrictions that were introduced for second floors. You may be able to expand the first floor, or build a detached unit, but then you need a house with a larger lot, and that's expensive.

[majiaknight]

Since both of your kids are <3, you may consider to delay the purchase for another 1-2 years as why paying high property tax >$30K/y w/o using the good school district?

If you buy now, I'd suggest consider 30Y fixed. There are already too much stress in raising kids and working in a very competitive env in the bay area, so I'd rather have single income (for dual-income family) to cover the family's monthly expenses including mortgage for the peace of mind.

Just one year after home purchase in south bay in 2015, my wife was laid off due to an unexpected company M&A and her whole team was impacted. She was very lucky to find a better job within 2 months from another mega corp in the bay area but I think she had been through quite a lot of stress in handling lay off depression (as this was her 1st job in industry after PhD w/ good working env), raising 2y old kid, new job interviews and financial pressures due to mortgage all at the same time. Hope for the best; plan for the worst.

[gougou]

I think you are in pretty good shape to make the purchase. I would consider a 7-year ARM. I just did a no-cost refinance at 2.79% which is about a full percentage lower than your 30-year fixed rate, that's $20K a year you could save over the next 7 years. With your income you could just pay it off after 7 years instead of paying an extra $20K per year. Or most likely you could refinance during the next 7 years into an even lower rate.

[snackdog]

I suppose it depends on your definition of "good school district" but here is one example:

https://www.zillow.com/homedetails/1520 ... 8007_zpid/

Not a good school district, built in 1929, and small (1600 sqft) for a family of 4 in the long run.

The average home size sold in the UK last year was 900 sq ft. The idea that you can't survive without an oversize home is nuts. I can forgive location preferences when it comes to real estate, but something has to give.

Pick three -
1. large home
2. Modern fancy design
3. Best location for work and school
4. Financially safe

[mchampse]

Some things to consider:

1)I would look for housing costs where you could barely get by on one salary. That way, if one of you does lose their job, you can still stay afloat and you would hopefully not be in a place where both of you are unemployed for an extended period of time so your savings would carry you. I would assume bonus/RSU at 0. Also remember that you can change your withholding if you do buy and your tax would get really low if you were only on one income.

2)As noted above, Prop 13 is something of a trap that makes it difficult to move..not to mention that the $500k capital gains exclusion actually comes into play if you were to sell. There are plenty of people in the Bay Area who basically can't move other than into a tent. I've had friends build additions (generally in the up direction and a little bit into the backyard direction) that seem to have worked out. But it's a hassle including having to find a temporary home while it's being done. It is time-consuming. Also, don't assume that you can do an addition. Many cities have restrictions on a minimum size of backyard space as well as height. And if one of your neighbors doesn't want you doing it, you could be in for a nightmare of hearings.

3)I live in San Francisco and have a number of friends with kids in the public schools. Even though San Francisco has a reputation for having crummy schools my friends seem to to be very happy. Even though most of them could afford private and/or moving out of the city, they don't. The point is don't get too hung up on being in a good school district. One of the "worst" public schools is chronicled in this book..spoiler alert its a lot better than its given credit for. Ultimately no matter where you end up, its up to you and your kids to help them thrive. You could move into an area where the reputation of the schools is mid-tier but not top-tier and put the extra money towards private tutoring.

[mchampse]

Let me add...I've been in the Bay Area for 20 years and I think just about every year that I've been here, people have been predicting a housing crash. There was a short period where housing prices did go down, but even then there were predictions that we hadn't hit bottom yet all the way until prices starting rising again. Prior to that, I'm told that the 1989 earthquake caused most property to fall about 20% but it recovered within a few years.

[HEDGEFUNDIE]

Some things to consider:

1)I would look for housing costs where you could barely get by on one salary. That way, if one of you does lose their job, you can still stay afloat and you would hopefully not be in a place where both of you are unemployed for an extended period of time so your savings would carry you.I would assume bonus/RSU at 0.

There is conservative, and then there is recklessly, needlessly conservative.

[MrJones]

Where in the bay area is $2.5 million the cost of a 3 bedroom starter home? Are you looking in old Palo Alto?

Everywhere. Here's one, 1987 sqft, with questionable wallpaper in south bay. $2.6M:
https://www.zillow.com/homedetails/2023 ... 5647_zpid/

Palo Alto is more expensive. Here is a starter there for $3.5M.
https://www.zillow.com/homedetails/1020 ... 8260_zpid/

I guess we have vastly different definitions of a "starter home". 3 bedrooms with 2400 SF is a choice, not a limitation.

You seemed to be implying that 2.5M for a 3 bedroom is uncommon in the Bay Area except in Palo Alto, and I was merely pointing out that it is in fact common in several neighborhoods outside Palo Alto.

[visualguy]

Let me add...I've been in the Bay Area for 20 years and I think just about every year that I've been here, people have been predicting a housing crash. There was a short period where housing prices did go down, but even then there were predictions that we hadn't hit bottom yet all the way until prices starting rising again. Prior to that, I'm told that the 1989 earthquake caused most property to fall about 20% but it recovered within a few years.

I don't see people predicting that anymore. These predictions used to be common about 15-20 years ago (maybe because of the dot com bubble), but I think what happened in the area since then finally silenced all that.

[mchampse]

Some things to consider:

1)I would look for housing costs where you could barely get by on one salary. That way, if one of you does lose their job, you can still stay afloat and you would hopefully not be in a place where both of you are unemployed for an extended period of time so your savings would carry you.I would assume bonus/RSU at 0.

There is conservative, and then there is recklessly, needlessly conservative.

What would you value it at? If there's a downturn and the OP or spouse loses their job and can't find another one in all likelihood the other is working for a company whose stock has taken a beating. It wasn't clear if the value of the RSUs is stock that vested this year and they sold or if it's the value of a grant this year that vests over the next 4 years. Also wasn't clear if any of their bonuses are in cash or if all of it is RSU.

[mchampse]

Let me add...I've been in the Bay Area for 20 years and I think just about every year that I've been here, people have been predicting a housing crash. There was a short period where housing prices did go down, but even then there were predictions that we hadn't hit bottom yet all the way until prices starting rising again. Prior to that, I'm told that the 1989 earthquake caused most property to fall about 20% but it recovered within a few years.

I don't see people predicting that anymore. These predictions used to be common about 15-20 years ago (maybe because of the dot com bubble), but I think what happened in the area since then finally silenced all that.

YMMV, we probably don't hang in the same crowd. The OP has definitely heard it. The point is don't listen to people who say that there is going to be a crash. If you are in a stable place, think that you are going to be in the Bay Area long term, it's worth pulling the trigger. As the Bogleheads say, don't try and time the market.