How Much House Can We Afford in HCOL Area?

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Topic Author
hereverycentcounts
Posts: 97
Joined: Wed Sep 02, 2020 8:09 pm
Location: Somewhere Very HCOL

How Much House Can We Afford in HCOL Area?

Post by hereverycentcounts »

Hello! I've been on kind of an informal FIRE journey since my early 20s. Of the networth info below, only about $100k of that is my husband's and the rest is my savings. :) We live pretty cheaply for this area ($2500/month for a 1 bedroom apartment with our toddler) but I'm pregnant and have saved "enough" and think I'm ready to buy a house.

The problem is that I don't want to buy a "starter home" because that means spending $1.5M on something horrible, or $1.2M on something with a really horrible commute. Right now we can get about 2.7% 30 year fixed w/ 20% down, so something tells me that's a good deal for our "forever home," even if it's... like... $2M. Ok, so I'm posting here to get some sense shook into me because I grew up in an area where you can get a compound for $2M. Here... not so much. (And before you recommend moving - we are not leaving the area. Have lots of family here and plan to stay for the long haul.)


***Alt option is to rent a $5000-$6000 a month home (we need to move closer to in laws for free childcare/help and they don't drive.)
Can we stay in $2500/mo 1br -- not really. In laws won't be able to get to us. I'm due with baby #2 in January. Will be very hard without them.



Our data below:


(I've been tracking my networth for 15 years now, so you can get a sense for growth over time - does not include husband's savings https://www.networthshare.com/user/hereverycentcounts )

Her Income - $170 base + 20% bonus + RSU (Historical income/offers OTE in last 7 years $150k-$190k -- want to go part time in a few years so want to plan for no more than $170k income for next 30 years even though I may make more)

His Income - $90k 1099, no deductions (has had same client for past 10 years, relatively stable) and he also is a PT SAHD

TOTAL INCOME: $260k (+ bonus)

Debts/Ongoing
- Term Life $4000/yr
- Prob will buy a minivan soon. Always drove used cars paid in cash. Might buy new this time because... kids, safety, fear.

Savings/Retirement

Cash: $293k
Stocks/Bonds: $989.5k (owned, pre cap gains)
IRA: $386.2k (pre tax)
Roth: $139k
529: $79.3k (for 2 kids thus far, age 0 and 2, planning on 1 more kid)

Potential Upside
2020 RSU & ESPP, after tax value ~$200k
2021 RSU & ESPP, after tax value ~$400k
***plan to put all new vest into 529 plan and backdoor Roth, then basic diversified investments

What can we afford?

Based on standard recommendations (28% of gross income not including bonus) we can afford about $6000 a month in PITI, or a $1,400,000 home. However, the homes we like (that aren't luxurious by any stretch of the imagination) are about $1.8M-$2.0M.

On one hand, I feel like I've hit the jackpot with company stock. On the other, this is temporary, and I probably will go back to lower earnings soon and for the foreseeable future. Also stock that isn't vested and in hadn't is still very TBD -- but looking more likely since the bulk of it is vesting in next 14 months. Still, I don't want to buy more than we can afford!

Thanks for your thoughts!!! Can I buy a $2M (or $1.8M-$1.9M house?)
36 year old mom of 2 in a VHCOL area trying to figure out how to afford it all. Non techie in tech.
TimeMan
Posts: 35
Joined: Mon Feb 22, 2016 12:44 am

Re: How Much House Can We Afford in HCOL Area?

Post by TimeMan »

I'm a lot further along and bought a $825k house and am uncomfortable with it, even with 20% down. Your proposition terrifies me to think about.
Topic Author
hereverycentcounts
Posts: 97
Joined: Wed Sep 02, 2020 8:09 pm
Location: Somewhere Very HCOL

Re: How Much House Can We Afford in HCOL Area?

Post by hereverycentcounts »

Why are you terrified if you are further along and only spending $825M on a home?
36 year old mom of 2 in a VHCOL area trying to figure out how to afford it all. Non techie in tech.
boogiehead
Posts: 184
Joined: Wed Sep 27, 2017 11:45 pm

Re: How Much House Can We Afford in HCOL Area?

Post by boogiehead »

Your asking the wrong question... the question should be how much do I need to spend to satisfy my needs and not wants.

Just because you can doesn’t mean you should especially if you are thinking about fire.
fareastwarriors
Posts: 1253
Joined: Tue Feb 14, 2012 12:31 pm

Re: How Much House Can We Afford in HCOL Area?

Post by fareastwarriors »

Keep renting for a few years.
Grow income.
Save even more.
Good luck.
random_walker_77
Posts: 1171
Joined: Tue May 21, 2013 8:49 pm

Re: How Much House Can We Afford in HCOL Area?

Post by random_walker_77 »

Let me paint two pictures, and you decide how you feel about them.

Picture 1:
How would you feel about becoming house-poor? Let's say you sell all your stocks and bonds. I'm going to assume 1/3 of it is capital gains right now, so after taxes the $989 yields $900. Add on $200K of the cash, leaving you $93K for liquidity's sake, and now you have a $1.1 downpayment. If you stretch to borrow 3x base salary, that'll take you up to 1.85M.

I assume that you're in your mid-to-late 30s, and to have 1.1M in home equity, 0.75M in mortgage debt, and 0.5M in retirement accounts isn't necessarily a bad place to be, given you intend to stay forever. If the RSUs materialize (and the economy doesn't crash), you might even be in a position to pay off half of that mortgage over the next 2 years.

Picture 2:
You buy, and then the economy really does crash. One or both of you lose your income, and now you need to stay afloat. The stock market has crashed, but you've already sold stocks to buy the house so that doesn't matter, but now you have so much invested in the house that you absolutely must make the payments to avoid losing it to foreclosure. Luckily, since your mortgage is only 750K, your monthly payment is only $3.2K so you can float this for a long while.

But, maybe a job opportunity becomes available, either at an inconveniently far commute, or in another state entirely. Are you ok w/ moving to follow the job? Your house may have lost a lot of value too, meaning you either need to become landlords, or sell to lock in the loss of your home equity.

Another way of looking at this -- if things go well, you're going to be in that much better of a position to buy in 2 years. If the economy goes poorly, you're probably better off not buying just yet.

Question: school districts are going to matter a lot more in a few years. This move to be closer to in-laws -- is that still the right location to be at in 10 years (when the eldest hits middle school)?

Either way, I'm assuming that your other spending is frugal, and that your budget can handle this. Note that houses can yield surprise "emergency bills" for roof/HVAC repairs.

*If you buy, you should open a HELOC to establish a line of credit. It won't cost you any interest until you draw on it, but if you do lose your jobs, you can try and draw on the HELOC before the bank closes the credit line. Your most vulnerable time is usually the first year or two after buying a house, since that downpayment usually wipes out extra cash and many people even draw down their EF or fail to consider that a EF might not last as long w/ the required mortgage payments.
DiMAn0684
Posts: 160
Joined: Fri Oct 28, 2011 10:27 am

Re: How Much House Can We Afford in HCOL Area?

Post by DiMAn0684 »

hereverycentcounts wrote: Wed Sep 02, 2020 9:22 pm Why are you terrified if you are further along and only spending $825M on a home?
From what I have seen on this forum people usually recommend buying a house that's 3x annual income tops. Based on the numbers you have presented your family is not at that level for $2 million home yet, hence that comment above.
Topic Author
hereverycentcounts
Posts: 97
Joined: Wed Sep 02, 2020 8:09 pm
Location: Somewhere Very HCOL

Re: How Much House Can We Afford in HCOL Area?

Post by hereverycentcounts »

fareastwarriors wrote: Wed Sep 02, 2020 9:44 pm Keep renting for a few years.
Grow income.
Save even more.
Good luck.
How much do I have to save to be able to afford a house?

What if housing prices keep going up 7% per year? Is it wrong to think that we will be forever priced out?

My husband's income is not going to increase and I don't see mine going up that much...
36 year old mom of 2 in a VHCOL area trying to figure out how to afford it all. Non techie in tech.
Topic Author
hereverycentcounts
Posts: 97
Joined: Wed Sep 02, 2020 8:09 pm
Location: Somewhere Very HCOL

Re: How Much House Can We Afford in HCOL Area?

Post by hereverycentcounts »

DiMAn0684 wrote: Wed Sep 02, 2020 9:49 pm
hereverycentcounts wrote: Wed Sep 02, 2020 9:22 pm Why are you terrified if you are further along and only spending $825M on a home?
From what I have seen on this forum people usually recommend buying a house that's 3x annual income tops. Based on the numbers you have presented your family is not at that level for $2 million home yet, hence that comment above.
I understand that, but I also am trying to get a sense for if my specific situation changes that equation at all. Maybe it doesn't. But I've saved a decent amount and my RSU is worth a lot right now. I am at about $250k OTE if you include my original grant value, it has gone up to about $600k-$800k for a year or two, but will be back in $250k range soon. This year our gross will be about $700k.

But it's just not possible to consistently make $600k a year. So I guess we can never buy a home?

I think we will prob end up doing a $6000 a month rental as that's what houses cost to rent where we want to live. Seems like a waste of money but maybe it isn't.
36 year old mom of 2 in a VHCOL area trying to figure out how to afford it all. Non techie in tech.
Tingting1013
Posts: 243
Joined: Mon Aug 24, 2020 5:44 pm

Re: How Much House Can We Afford in HCOL Area?

Post by Tingting1013 »

I have good news and bad news.

The good news is, if you live in CA then your mortgage will be non-recourse and if the housing market crashes the only money you will have at risk is your home equity. Also, CA has not conformed to the latest Federal tax law changes so you will be receiving a Federal and State tax benefit of as much as $12k/yr. In my case this brings my cost of home ownership below renting.

The bad news is your income is more heavily weighted toward variable compensation than is ideal for a large fixed obligation like a mortgage. If you do end up buying a house I would invest your RSUs relatively conservatively to compensate.
DiMAn0684
Posts: 160
Joined: Fri Oct 28, 2011 10:27 am

Re: How Much House Can We Afford in HCOL Area?

Post by DiMAn0684 »

hereverycentcounts wrote: Wed Sep 02, 2020 9:52 pm
DiMAn0684 wrote: Wed Sep 02, 2020 9:49 pm
hereverycentcounts wrote: Wed Sep 02, 2020 9:22 pm Why are you terrified if you are further along and only spending $825M on a home?
From what I have seen on this forum people usually recommend buying a house that's 3x annual income tops. Based on the numbers you have presented your family is not at that level for $2 million home yet, hence that comment above.
I understand that, but I also am trying to get a sense for if my specific situation changes that equation at all. Maybe it doesn't. But I've saved a decent amount and my RSU is worth a lot right now. I am at about $250k OTE if you include my original grant value, it has gone up to about $600k-$800k for a year or two, but will be back in $250k range soon. This year our gross will be about $700k.

But it's just not possible to consistently make $600k a year. So I guess we can never buy a home?

I think we will prob end up doing a $6000 a month rental as that's what houses cost to rent where we want to live. Seems like a waste of money but maybe it isn't.
More experienced forum members will likely provide more details, but there're factors beyond house purchase you need to consider. For example, I've heard of 1% rule, which says that at least 1% of the home value goes towards maintenance projects. For $2 million home that's $20 thousand. If your combined income is $300-$350 thousand then $20 thousand for home maintenance alone is quite a lot.
oldfort
Posts: 1576
Joined: Mon Mar 02, 2020 8:45 pm

Re: How Much House Can We Afford in HCOL Area?

Post by oldfort »

Forget rules about how much to spend on housing. Make a budget. It doesn't need to be exact. See what's the most you can spend on housing monthly while meeting your other goals for spending and saving.
random_walker_77
Posts: 1171
Joined: Tue May 21, 2013 8:49 pm

Re: How Much House Can We Afford in HCOL Area?

Post by random_walker_77 »

hereverycentcounts wrote: Wed Sep 02, 2020 9:49 pm How much do I have to save to be able to afford a house?

What if housing prices keep going up 7% per year? Is it wrong to think that we will be forever priced out?

My husband's income is not going to increase and I don't see mine going up that much...
Do you think housing prices will go up faster than your investments? Fear of Missing Out is real, and it drives bubbles. Not saying that's what is happening here. Unless this is the bay area or Manhattan, how many people can afford to push up the price of crappy $1.5M homes?

Your RSUs represent a potential for aggressive savings if things pan out. That'll help if prices go up. That renting is cheaper also helps balance things out b/c you've got more cash flow and if assets are all rising, your investments are also hopefully rising 7% (or more)

devil's advocate -- if you think housing prices will go up 7%/yr, your best move is to borrow as much as you can, minimum downpayment and leverage it for all that it's worth. If you're in a non-recourse state, if it goes down, then you walk away losing just your equity and a temporary hit to your credit score. If it goes up, you make 30+ percent returns due to the magic of leverage.
Tingting1013
Posts: 243
Joined: Mon Aug 24, 2020 5:44 pm

Re: How Much House Can We Afford in HCOL Area?

Post by Tingting1013 »

DiMAn0684 wrote: Wed Sep 02, 2020 9:59 pm
hereverycentcounts wrote: Wed Sep 02, 2020 9:52 pm
DiMAn0684 wrote: Wed Sep 02, 2020 9:49 pm
hereverycentcounts wrote: Wed Sep 02, 2020 9:22 pm Why are you terrified if you are further along and only spending $825M on a home?
From what I have seen on this forum people usually recommend buying a house that's 3x annual income tops. Based on the numbers you have presented your family is not at that level for $2 million home yet, hence that comment above.
I understand that, but I also am trying to get a sense for if my specific situation changes that equation at all. Maybe it doesn't. But I've saved a decent amount and my RSU is worth a lot right now. I am at about $250k OTE if you include my original grant value, it has gone up to about $600k-$800k for a year or two, but will be back in $250k range soon. This year our gross will be about $700k.

But it's just not possible to consistently make $600k a year. So I guess we can never buy a home?

I think we will prob end up doing a $6000 a month rental as that's what houses cost to rent where we want to live. Seems like a waste of money but maybe it isn't.
More experienced forum members will likely provide more details, but there're factors beyond house purchase you need to consider. For example, I've heard of 1% rule, which says that at least 1% of the home value goes towards maintenance projects. For $2 million home that's $20 thousand. If your combined income is $300-$350 thousand then $20 thousand for home maintenance alone is quite a lot.
I don’t think the 1% rule is appropriate for VHCOL. Most of the value in a $2M house in CA is in the land. The house may only be worth $500k. So I’d say annual maintenance on a $2M aka $500k house is probably $5-10k.
rich126
Posts: 1862
Joined: Thu Mar 01, 2018 4:56 pm

Re: How Much House Can We Afford in HCOL Area?

Post by rich126 »

Hard to say without knowing the details but you are looking at homes I don't think you can afford unless you give up most of your savings. Right now in my area I would never buy because prices have gone up too much this year, 25%.

Sadly living in a hcol area means you often have to make sacrifices. Being house poor can be a big risk if something goes wrong. You might get lucky but you never know. I have taken some risks but I was single with no kids.

Putting all you savings into the house means you will lose compounding on your money. Maybe the house will greatly increase in value and you can sell it, retire early and move to a lcol area but moving doesn't seem to be in your plans. Not sure how you can FIRE with a big mortgage and children.
Topic Author
hereverycentcounts
Posts: 97
Joined: Wed Sep 02, 2020 8:09 pm
Location: Somewhere Very HCOL

Re: How Much House Can We Afford in HCOL Area?

Post by hereverycentcounts »

random_walker_77 wrote: Wed Sep 02, 2020 9:48 pm Let me paint two pictures, and you decide how you feel about them.

Picture 1:
How would you feel about becoming house-poor? Let's say you sell all your stocks and bonds. I'm going to assume 1/3 of it is capital gains right now, so after taxes the $989 yields $900. Add on $200K of the cash, leaving you $93K for liquidity's sake, and now you have a $1.1 downpayment. If you stretch to borrow 3x base salary, that'll take you up to 1.85M.

I assume that you're in your mid-to-late 30s, and to have 1.1M in home equity, 0.75M in mortgage debt, and 0.5M in retirement accounts isn't necessarily a bad place to be, given you intend to stay forever. If the RSUs materialize (and the economy doesn't crash), you might even be in a position to pay off half of that mortgage over the next 2 years.

Picture 2:
You buy, and then the economy really does crash. One or both of you lose your income, and now you need to stay afloat. The stock market has crashed, but you've already sold stocks to buy the house so that doesn't matter, but now you have so much invested in the house that you absolutely must make the payments to avoid losing it to foreclosure. Luckily, since your mortgage is only 750K, your monthly payment is only $3.2K so you can float this for a long while.

But, maybe a job opportunity becomes available, either at an inconveniently far commute, or in another state entirely. Are you ok w/ moving to follow the job? Your house may have lost a lot of value too, meaning you either need to become landlords, or sell to lock in the loss of your home equity.

Another way of looking at this -- if things go well, you're going to be in that much better of a position to buy in 2 years. If the economy goes poorly, you're probably better off not buying just yet.

Question: school districts are going to matter a lot more in a few years. This move to be closer to in-laws -- is that still the right location to be at in 10 years (when the eldest hits middle school)?

Either way, I'm assuming that your other spending is frugal, and that your budget can handle this. Note that houses can yield surprise "emergency bills" for roof/HVAC repairs.

*If you buy, you should open a HELOC to establish a line of credit. It won't cost you any interest until you draw on it, but if you do lose your jobs, you can try and draw on the HELOC before the bank closes the credit line. Your most vulnerable time is usually the first year or two after buying a house, since that downpayment usually wipes out extra cash and many people even draw down their EF or fail to consider that a EF might not last as long w/ the required mortgage payments.
Thanks. This is crazy good advice. TY TY TY!

You are right on all of this -- as you know.

I don't want to sell my stocks for the house, I want to keep in stocks and get the 2.7% loan and sell off a little stock if I have to (well I'd sell off enough to have 12 month emergency fund.) In terms of cap gains on the stock I own, I actually am like... 60% cap gains owed (so more like 2/3 not 1/3). :/ So I see that more as retirement money not to be touched anyway, to sell off after I retire and can take a little out each year and not be gouged at CA cap gains rates.

The $600k after tax RSU vest by Dec 2021 is prob about 60%+ likely at this point. Yes economy can crash in next year, but it's getting so close I feel like it's going to stay close to that in value. I will sell that immediately.

It sounds like the best thing for us to do is rent, even if that rent is $6000 a month. Still better than buying. Prob will be forever renters. It makes me sad (quite frankly depressed) but I get it. It's not like I "deserve" to own a house for my family any more than the next person. It just is hard to see my income at $600k and still not be able to afford a house. But it is what it is.
36 year old mom of 2 in a VHCOL area trying to figure out how to afford it all. Non techie in tech.
Topic Author
hereverycentcounts
Posts: 97
Joined: Wed Sep 02, 2020 8:09 pm
Location: Somewhere Very HCOL

Re: How Much House Can We Afford in HCOL Area?

Post by hereverycentcounts »

random_walker_77 wrote: Wed Sep 02, 2020 10:02 pm
hereverycentcounts wrote: Wed Sep 02, 2020 9:49 pm How much do I have to save to be able to afford a house?

What if housing prices keep going up 7% per year? Is it wrong to think that we will be forever priced out?

My husband's income is not going to increase and I don't see mine going up that much...
Do you think housing prices will go up faster than your investments? Fear of Missing Out is real, and it drives bubbles. Not saying that's what is happening here. Unless this is the bay area or Manhattan, how many people can afford to push up the price of crappy $1.5M homes?

Your RSUs represent a potential for aggressive savings if things pan out. That'll help if prices go up. That renting is cheaper also helps balance things out b/c you've got more cash flow and if assets are all rising, your investments are also hopefully rising 7% (or more)

devil's advocate -- if you think housing prices will go up 7%/yr, your best move is to borrow as much as you can, minimum downpayment and leverage it for all that it's worth. If you're in a non-recourse state, if it goes down, then you walk away losing just your equity and a temporary hit to your credit score. If it goes up, you make 30+ percent returns due to the magic of leverage.
I don't know. I saw my good friend buy a house in 2009 -- they bought for $800k. It is now worth at least $1.7M. The house next to theirs is selling soon, will prob sell $1.9M. Will it be $4M in another 10 years? I can't imagine that, but I couldn't imagine their $800k home to be worth $1.7M, so what do I know?

Right now I have a chunk of my downpayment money in cash so that's doing nothing. If we rent, it will be scary to put that back in the market. But we kind of have to if we want to have a chance to keep up with housing prices.

Do you think $6000/month rent is reasonable?
36 year old mom of 2 in a VHCOL area trying to figure out how to afford it all. Non techie in tech.
random_walker_77
Posts: 1171
Joined: Tue May 21, 2013 8:49 pm

Re: How Much House Can We Afford in HCOL Area?

Post by random_walker_77 »

DiMAn0684 wrote: Wed Sep 02, 2020 9:59 pm More experienced forum members will likely provide more details, but there're factors beyond house purchase you need to consider. For example, I've heard of 1% rule, which says that at least 1% of the home value goes towards maintenance projects. For $2 million home that's $20 thousand. If your combined income is $300-$350 thousand then $20 thousand for home maintenance alone is quite a lot.
That works great for houses in sane housing markets, where most of the house price represents the house, which requires maintenance. In HCOL/VHCOL areas, a 2.0M house might really be a 0.3M house sitting on 1.7M of land.

What's going to get you is the taxes, as even 1% of 2M is over 1500/month in property taxes. Often, such markets feature houses that can be rented much more cheaply than the equivalent mortgage PITI (not to mention opportunity cost on the downpayment money)
Topic Author
hereverycentcounts
Posts: 97
Joined: Wed Sep 02, 2020 8:09 pm
Location: Somewhere Very HCOL

Re: How Much House Can We Afford in HCOL Area?

Post by hereverycentcounts »

rich126 wrote: Wed Sep 02, 2020 10:04 pm Hard to say without knowing the details but you are looking at homes I don't think you can afford unless you give up most of your savings. Right now in my area I would never buy because prices have gone up too much this year, 25%.

Sadly living in a hcol area means you often have to make sacrifices. Being house poor can be a big risk if something goes wrong. You might get lucky but you never know. I have taken some risks but I was single with no kids.

Putting all you savings into the house means you will lose compounding on your money. Maybe the house will greatly increase in value and you can sell it, retire early and move to a lcol area but moving doesn't seem to be in your plans. Not sure how you can FIRE with a big mortgage and children.
Yea -- all true. So my FIRE plans are actually to get to a point where I can work and cover annual expenses but not have to save anymore. I want to be able to have flexibility to consult or work for a non-profit or start a company or who knows what by the time I'm 45 or 50ish (I'm 37 now.) I do value freedom more than anything so being locked into a massive mortgage scares the crap out of me. So does being priced out of renting here.

We are crazy maybe but we plan to stay in Bay Area forever. Husband grew up here, I've been here 15+ years--it's home. No where else we want to be. I know that's our fault for being so stubborn about it... but knowing we want to retire here, isn't buying somewhat reasonable?
36 year old mom of 2 in a VHCOL area trying to figure out how to afford it all. Non techie in tech.
oldfort
Posts: 1576
Joined: Mon Mar 02, 2020 8:45 pm

Re: How Much House Can We Afford in HCOL Area?

Post by oldfort »

Tingting1013 wrote: Wed Sep 02, 2020 10:02 pm
DiMAn0684 wrote: Wed Sep 02, 2020 9:59 pm
hereverycentcounts wrote: Wed Sep 02, 2020 9:52 pm
DiMAn0684 wrote: Wed Sep 02, 2020 9:49 pm
hereverycentcounts wrote: Wed Sep 02, 2020 9:22 pm Why are you terrified if you are further along and only spending $825M on a home?
From what I have seen on this forum people usually recommend buying a house that's 3x annual income tops. Based on the numbers you have presented your family is not at that level for $2 million home yet, hence that comment above.
I understand that, but I also am trying to get a sense for if my specific situation changes that equation at all. Maybe it doesn't. But I've saved a decent amount and my RSU is worth a lot right now. I am at about $250k OTE if you include my original grant value, it has gone up to about $600k-$800k for a year or two, but will be back in $250k range soon. This year our gross will be about $700k.

But it's just not possible to consistently make $600k a year. So I guess we can never buy a home?

I think we will prob end up doing a $6000 a month rental as that's what houses cost to rent where we want to live. Seems like a waste of money but maybe it isn't.
More experienced forum members will likely provide more details, but there're factors beyond house purchase you need to consider. For example, I've heard of 1% rule, which says that at least 1% of the home value goes towards maintenance projects. For $2 million home that's $20 thousand. If your combined income is $300-$350 thousand then $20 thousand for home maintenance alone is quite a lot.
I don’t think the 1% rule is appropriate for VHCOL. Most of the value in a $2M house in CA is in the land. The house may only be worth $500k. So I’d say annual maintenance on a $2M aka $500k house is probably $5-10k.
$5k seems low. In the Bay area, it's not hard to spend $80k on a midrange kitchen remodel.
Topic Author
hereverycentcounts
Posts: 97
Joined: Wed Sep 02, 2020 8:09 pm
Location: Somewhere Very HCOL

Re: How Much House Can We Afford in HCOL Area?

Post by hereverycentcounts »

oldfort wrote: Wed Sep 02, 2020 10:00 pm Forget rules about how much to spend on housing. Make a budget. It doesn't need to be exact. See what's the most you can spend on housing monthly while meeting your other goals for spending and saving.
That makes sense. I just am horrible at predicting future income. I have some mental health issues and have managed to get rehired after past job losses (always making more each time somehow) but I just don't ever feel confident in my future income -- all I can count on is what I've saved and then maybe what I'll earn in next 12 months if I am feeling mentally ok for the time being. :/

It's not like I've been out of work for extended periods of time... longest I've been out of work was 3 months after getting fired last and I went from 190k OTE to 250k OTE including RSU that is now worth 600k-800k a year... so not exactly the worst outcome there.

But now that I have a family -- and knowing my husband has no interested in a career or earning more than $90k a year (yet he also has very high house standards and won't buy anything that doesn't meet them I feel super hopeless. I don't know how to get from where I am now to where I can actually afford a house that we want to buy. Maybe it's just impossible. I keep hoping it's not...
36 year old mom of 2 in a VHCOL area trying to figure out how to afford it all. Non techie in tech.
Tingting1013
Posts: 243
Joined: Mon Aug 24, 2020 5:44 pm

Re: How Much House Can We Afford in HCOL Area?

Post by Tingting1013 »

oldfort wrote: Wed Sep 02, 2020 10:13 pm
Tingting1013 wrote: Wed Sep 02, 2020 10:02 pm
DiMAn0684 wrote: Wed Sep 02, 2020 9:59 pm
hereverycentcounts wrote: Wed Sep 02, 2020 9:52 pm
DiMAn0684 wrote: Wed Sep 02, 2020 9:49 pm

From what I have seen on this forum people usually recommend buying a house that's 3x annual income tops. Based on the numbers you have presented your family is not at that level for $2 million home yet, hence that comment above.
I understand that, but I also am trying to get a sense for if my specific situation changes that equation at all. Maybe it doesn't. But I've saved a decent amount and my RSU is worth a lot right now. I am at about $250k OTE if you include my original grant value, it has gone up to about $600k-$800k for a year or two, but will be back in $250k range soon. This year our gross will be about $700k.

But it's just not possible to consistently make $600k a year. So I guess we can never buy a home?

I think we will prob end up doing a $6000 a month rental as that's what houses cost to rent where we want to live. Seems like a waste of money but maybe it isn't.
More experienced forum members will likely provide more details, but there're factors beyond house purchase you need to consider. For example, I've heard of 1% rule, which says that at least 1% of the home value goes towards maintenance projects. For $2 million home that's $20 thousand. If your combined income is $300-$350 thousand then $20 thousand for home maintenance alone is quite a lot.
I don’t think the 1% rule is appropriate for VHCOL. Most of the value in a $2M house in CA is in the land. The house may only be worth $500k. So I’d say annual maintenance on a $2M aka $500k house is probably $5-10k.
$5k seems low. In the Bay area, it's not hard to spend $80k on a midrange kitchen remodel.
I don’t consider a remodel “maintenance”. I am only talking about what it takes to maintain a house in its current condition. Roof, appliances, landscaping, etc.

Remodels are ideally capital improvements that pay for themselves.
oldfort
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Re: How Much House Can We Afford in HCOL Area?

Post by oldfort »

hereverycentcounts wrote: Wed Sep 02, 2020 10:13 pm
oldfort wrote: Wed Sep 02, 2020 10:00 pm Forget rules about how much to spend on housing. Make a budget. It doesn't need to be exact. See what's the most you can spend on housing monthly while meeting your other goals for spending and saving.
That makes sense. I just am horrible at predicting future income. I have some mental health issues and have managed to get rehired after past job losses (always making more each time somehow) but I just don't ever feel confident in my future income -- all I can count on is what I've saved and then maybe what I'll earn in next 12 months if I am feeling mentally ok for the time being. :/

It's not like I've been out of work for extended periods of time... longest I've been out of work was 3 months after getting fired last and I went from 190k OTE to 250k OTE including RSU that is now worth 600k-800k a year... so not exactly the worst outcome there.

But now that I have a family -- and knowing my husband has no interested in a career or earning more than $90k a year (yet he also has very high house standards and won't buy anything that doesn't meet them I feel super hopeless. I don't know how to get from where I am now to where I can actually afford a house that we want to buy. Maybe it's just impossible. I keep hoping it's not...
I must be missing something here. Are you saying your total comp is $850k-$1050k a year and you want to buy a $2M house?
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hereverycentcounts
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Re: How Much House Can We Afford in HCOL Area?

Post by hereverycentcounts »

oldfort wrote: Wed Sep 02, 2020 10:20 pm
hereverycentcounts wrote: Wed Sep 02, 2020 10:13 pm
oldfort wrote: Wed Sep 02, 2020 10:00 pm Forget rules about how much to spend on housing. Make a budget. It doesn't need to be exact. See what's the most you can spend on housing monthly while meeting your other goals for spending and saving.
That makes sense. I just am horrible at predicting future income. I have some mental health issues and have managed to get rehired after past job losses (always making more each time somehow) but I just don't ever feel confident in my future income -- all I can count on is what I've saved and then maybe what I'll earn in next 12 months if I am feeling mentally ok for the time being. :/

It's not like I've been out of work for extended periods of time... longest I've been out of work was 3 months after getting fired last and I went from 190k OTE to 250k OTE including RSU that is now worth 600k-800k a year... so not exactly the worst outcome there.

But now that I have a family -- and knowing my husband has no interested in a career or earning more than $90k a year (yet he also has very high house standards and won't buy anything that doesn't meet them I feel super hopeless. I don't know how to get from where I am now to where I can actually afford a house that we want to buy. Maybe it's just impossible. I keep hoping it's not...
I must be missing something here. Are you saying your total comp is $850k-$1050k a year and you want to buy a $2M house?
When I joined this company, my total comp was = $170k base, 20% bonus, about $50k a year in RSU. (So about $250k all in.)

Because of stock growth, this year and next year I'm making a lot more. But that's just this year and next year.

In 2022 I'll be at about $300k. In 2023 I'll be closer to $250k (unless I get a new job with a new RSU package, which I probably will have to do at that point, but I don't know what I can actually get as far as comp goes -- my prior job was $190k but that was base and I didn't have bonus.)
36 year old mom of 2 in a VHCOL area trying to figure out how to afford it all. Non techie in tech.
oldfort
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Re: How Much House Can We Afford in HCOL Area?

Post by oldfort »

Tingting1013 wrote: Wed Sep 02, 2020 10:17 pm
oldfort wrote: Wed Sep 02, 2020 10:13 pm
Tingting1013 wrote: Wed Sep 02, 2020 10:02 pm
DiMAn0684 wrote: Wed Sep 02, 2020 9:59 pm
hereverycentcounts wrote: Wed Sep 02, 2020 9:52 pm

I understand that, but I also am trying to get a sense for if my specific situation changes that equation at all. Maybe it doesn't. But I've saved a decent amount and my RSU is worth a lot right now. I am at about $250k OTE if you include my original grant value, it has gone up to about $600k-$800k for a year or two, but will be back in $250k range soon. This year our gross will be about $700k.

But it's just not possible to consistently make $600k a year. So I guess we can never buy a home?

I think we will prob end up doing a $6000 a month rental as that's what houses cost to rent where we want to live. Seems like a waste of money but maybe it isn't.
More experienced forum members will likely provide more details, but there're factors beyond house purchase you need to consider. For example, I've heard of 1% rule, which says that at least 1% of the home value goes towards maintenance projects. For $2 million home that's $20 thousand. If your combined income is $300-$350 thousand then $20 thousand for home maintenance alone is quite a lot.
I don’t think the 1% rule is appropriate for VHCOL. Most of the value in a $2M house in CA is in the land. The house may only be worth $500k. So I’d say annual maintenance on a $2M aka $500k house is probably $5-10k.
$5k seems low. In the Bay area, it's not hard to spend $80k on a midrange kitchen remodel.
I don’t consider a remodel “maintenance”. I am only talking about what it takes to maintain a house in its current condition. Roof, appliances, landscaping, etc.

Remodels are ideally capital improvements that pay for themselves.
If you want to make a semantic split between remodels and maintenance fine, but the OP should include both in the budget. Most people, especially women, aren't going to be happy with a 20 year old dated Formica kitchen in their $2M home.
random_walker_77
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Re: How Much House Can We Afford in HCOL Area?

Post by random_walker_77 »

hereverycentcounts wrote: Wed Sep 02, 2020 10:07 pm
I don't know. I saw my good friend buy a house in 2009 -- they bought for $800k. It is now worth at least $1.7M. The house next to theirs is selling soon, will prob sell $1.9M. Will it be $4M in another 10 years? I can't imagine that, but I couldn't imagine their $800k home to be worth $1.7M, so what do I know?

Right now I have a chunk of my downpayment money in cash so that's doing nothing. If we rent, it will be scary to put that back in the market. But we kind of have to if we want to have a chance to keep up with housing prices.

Do you think $6000/month rent is reasonable?
Well, good for your friend that it's up to 1.7M. Be happy for them. It's interesting to note that interest rates do have an impact on affordability. 6K/mo can pay a 1.45M loan at today's 2.7% rate, but when rates were 5%, that same 6K/month would cover a loan of 1.1M. The drop in rates has got to have had some effect (maybe not that this much) on housing prices by simply making houses more affordable. After all, there's a reason why car salesmen find out early on how much a buyer can afford to pay per month...

Note also that there've been 11 years of inflation between '09 and now. At 2% w/o compounding, that's 22%. So that 800K in '09 is more like 1.0M in today's dollars. The decrease in interest rates makes that 1.0M (in 2020 dollars) nearly as affordable as 1.3M today. It's good your friend's house has appreciated to 1.7M. Unfortunately, they've now gone past the 0.5M capital gain exclusion so they're going to owe when the sell.

To be fair, stocks invested in 2009 will also have grown a lot over the last 11 years. If the S&P total return index "TR" is to be believed, 800K in '09 would be up to 3.4M now. (1700 at end of '09 to 7300 now. Even more if you take from earlier in '09 when it was down as low as 1300)

Whether 6K/month in rent is reasonable depends. Can you afford it? Do you need it? (yes, and presumably yes)
How much would the equivalent Interest and taxes be on that home? (w/ 0% down, so we don't have to figure in the opportunity cost of the downpayment)
random_walker_77
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Re: How Much House Can We Afford in HCOL Area?

Post by random_walker_77 »

hereverycentcounts wrote: Wed Sep 02, 2020 10:23 pm
When I joined this company, my total comp was = $170k base, 20% bonus, about $50k a year in RSU. (So about $250k all in.)

Because of stock growth, this year and next year I'm making a lot more. But that's just this year and next year.
Hmm... bay area tech companies whose stock has gone up 10x in the past few years... that narrows it down considerably :sharebeer
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Re: How Much House Can We Afford in HCOL Area?

Post by hereverycentcounts »

random_walker_77 wrote: Wed Sep 02, 2020 10:33 pm
hereverycentcounts wrote: Wed Sep 02, 2020 10:07 pm
I don't know. I saw my good friend buy a house in 2009 -- they bought for $800k. It is now worth at least $1.7M. The house next to theirs is selling soon, will prob sell $1.9M. Will it be $4M in another 10 years? I can't imagine that, but I couldn't imagine their $800k home to be worth $1.7M, so what do I know?

Right now I have a chunk of my downpayment money in cash so that's doing nothing. If we rent, it will be scary to put that back in the market. But we kind of have to if we want to have a chance to keep up with housing prices.

Do you think $6000/month rent is reasonable?
Well, good for your friend that it's up to 1.7M. Be happy for them. It's interesting to note that interest rates do have an impact on affordability. 6K/mo can pay a 1.45M loan at today's 2.7% rate, but when rates were 5%, that same 6K/month would cover a loan of 1.1M. The drop in rates has got to have had some effect (maybe not that this much) on housing prices by simply making houses more affordable. After all, there's a reason why car salesmen find out early on how much a buyer can afford to pay per month...

Note also that there've been 11 years of inflation between '09 and now. At 2% w/o compounding, that's 22%. So that 800K in '09 is more like 1.0M in today's dollars. The decrease in interest rates makes that 1.0M (in 2020 dollars) nearly as affordable as 1.3M today. It's good your friend's house has appreciated to 1.7M. Unfortunately, they've now gone past the 0.5M capital gain exclusion so they're going to owe when the sell.

To be fair, stocks invested in 2009 will also have grown a lot over the last 11 years. If the S&P total return index "TR" is to be believed, 800K in '09 would be up to 3.4M now. (1700 at end of '09 to 7300 now. Even more if you take from earlier in '09 when it was down as low as 1300)

Whether 6K/month in rent is reasonable depends. Can you afford it? Do you need it? (yes, and presumably yes)
How much would the equivalent Interest and taxes be on that home? (w/ 0% down, so we don't have to figure in the opportunity cost of the downpayment)
I am happy for my friend! :) Yea cap gains exclusion sucks in HCOL area. They did a lot of work on the house those so they have some more than $500k to take tax free. And they're still going to benefit from prop 13 forever with low tax rates.

...I'm just worried if we continue saving and plan to buy in, say, 5-10 years, we will be totally priced out.

Your math makes sense though.

It seems like there is value in putting 20% down yet getting 7% YoY on the full value of the property. It's hard to match that by taking your 20% down and just getting ROI on that.

It psychologically gets harder to put all my savings in the stock market the more money I have. At some point owning a house feels more like I, well, own something I need, even if it may be overpriced.

I think we should rent a $3500 2br/1 bath for a while. I wouldn't be happy in it, but when renting it doesn't matter much I guess. We've been in this 1br for 5 years now. Said we'd move when my son turned 1 and he just turned 2. Tempted to stay here for a year with #2, landlord said we could. Wouldn't hurt to spend $2500 a month for another year... to keep saving.

We'll miss out on the 2.7% interest rate. Will house prices come down if rates go up? If that really happens then I guess it doesn't matter. I wonder if that actually happens here though. It seems like things only go up.
36 year old mom of 2 in a VHCOL area trying to figure out how to afford it all. Non techie in tech.
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hereverycentcounts
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Re: How Much House Can We Afford in HCOL Area?

Post by hereverycentcounts »

random_walker_77 wrote: Wed Sep 02, 2020 10:36 pm
hereverycentcounts wrote: Wed Sep 02, 2020 10:23 pm
When I joined this company, my total comp was = $170k base, 20% bonus, about $50k a year in RSU. (So about $250k all in.)

Because of stock growth, this year and next year I'm making a lot more. But that's just this year and next year.
Hmm... bay area tech companies whose stock has gone up 10x in the past few years... that narrows it down considerably :sharebeer
I'm Elon Musk, obvs.
36 year old mom of 2 in a VHCOL area trying to figure out how to afford it all. Non techie in tech.
random_walker_77
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Re: How Much House Can We Afford in HCOL Area?

Post by random_walker_77 »

I will say this, the leverage you get when you buy a house can cut both ways, but when it goes up, it can be fantastic. I actually once owned a house for 3 years in the bay area. It went up 40%, and so one way of looking at it is that we nearly doubled our (down payment) money in 3 years, plus got free rent. We were incredibly lucky, but I'm still really glad that we cashed out and moved to Texas.

When the '08 crash happened, I saw that my old house's zillow valuation dropped in half, meaning my buyer's equity was completely gone. Leverage cuts both ways...
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hereverycentcounts
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Re: How Much House Can We Afford in HCOL Area?

Post by hereverycentcounts »

random_walker_77 wrote: Wed Sep 02, 2020 10:43 pm I will say this, the leverage you get when you buy a house can cut both ways, but when it goes up, it can be fantastic. I actually once owned a house for 3 years in the bay area. It went up 40%, and so one way of looking at it is that we nearly doubled our (down payment) money in 3 years, plus got free rent. We were incredibly lucky, but I'm still really glad that we cashed out and moved to Texas.

When the '08 crash happened, I saw that my old house's zillow valuation dropped in half, meaning my buyer's equity was completely gone. Leverage cuts both ways...
Yea, I'm just gonna rent until I win the lotto or have $10M. Whichever comes first. Or next life.
36 year old mom of 2 in a VHCOL area trying to figure out how to afford it all. Non techie in tech.
soxfan10
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Re: How Much House Can We Afford in HCOL Area?

Post by soxfan10 »

oldfort wrote: Wed Sep 02, 2020 10:29 pm
Tingting1013 wrote: Wed Sep 02, 2020 10:17 pm
oldfort wrote: Wed Sep 02, 2020 10:13 pm
Tingting1013 wrote: Wed Sep 02, 2020 10:02 pm
DiMAn0684 wrote: Wed Sep 02, 2020 9:59 pm

More experienced forum members will likely provide more details, but there're factors beyond house purchase you need to consider. For example, I've heard of 1% rule, which says that at least 1% of the home value goes towards maintenance projects. For $2 million home that's $20 thousand. If your combined income is $300-$350 thousand then $20 thousand for home maintenance alone is quite a lot.
I don’t think the 1% rule is appropriate for VHCOL. Most of the value in a $2M house in CA is in the land. The house may only be worth $500k. So I’d say annual maintenance on a $2M aka $500k house is probably $5-10k.
$5k seems low. In the Bay area, it's not hard to spend $80k on a midrange kitchen remodel.
I don’t consider a remodel “maintenance”. I am only talking about what it takes to maintain a house in its current condition. Roof, appliances, landscaping, etc.

Remodels are ideally capital improvements that pay for themselves.
If you want to make a semantic split between remodels and maintenance fine, but the OP should include both in the budget. Most people, especially women, aren't going to be happy with a 20 year old dated Formica kitchen in their $2M home.
I dont think thats a semantic split. Maintenance needs to be included in any discussion if a house is affordable, but that doesnt include improvements/remodels. Those are by their nature optional/life style inflation type expenses. Remodeling a kitchen is only relevant to the decision if they dont want to purchase the house without the remodel.
mervinj7
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Re: How Much House Can We Afford in HCOL Area?

Post by mervinj7 »

random_walker_77 wrote: Wed Sep 02, 2020 10:43 pm I will say this, the leverage you get when you buy a house can cut both ways, but when it goes up, it can be fantastic. I actually once owned a house for 3 years in the bay area. It went up 40%, and so one way of looking at it is that we nearly doubled our (down payment) money in 3 years, plus got free rent. We were incredibly lucky, but I'm still really glad that we cashed out and moved to Texas.

When the '08 crash happened, I saw that my old house's zillow valuation dropped in half, meaning my buyer's equity was completely gone. Leverage cuts both ways...
Did you ever check the value more recently?
:moneybag
random_walker_77
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Re: How Much House Can We Afford in HCOL Area?

Post by random_walker_77 »

hereverycentcounts wrote: Wed Sep 02, 2020 10:40 pm
I am happy for my friend! :) Yea cap gains exclusion sucks in HCOL area. They did a lot of work on the house those so they have some more than $500k to take tax free. And they're still going to benefit from prop 13 forever with low tax rates.

...I'm just worried if we continue saving and plan to buy in, say, 5-10 years, we will be totally priced out.

Your math makes sense though.

It seems like there is value in putting 20% down yet getting 7% YoY on the full value of the property. It's hard to match that by taking your 20% down and just getting ROI on that.

It psychologically gets harder to put all my savings in the stock market the more money I have. At some point owning a house feels more like I, well, own something I need, even if it may be overpriced.

I think we should rent a $3500 2br/1 bath for a while. I wouldn't be happy in it, but when renting it doesn't matter much I guess. We've been in this 1br for 5 years now. Said we'd move when my son turned 1 and he just turned 2. Tempted to stay here for a year with #2, landlord said we could. Wouldn't hurt to spend $2500 a month for another year... to keep saving.

We'll miss out on the 2.7% interest rate. Will house prices come down if rates go up? If that really happens then I guess it doesn't matter. I wonder if that actually happens here though. It seems like things only go up.
You need to change locations, and that makes sense perfect sense. You've got the income, you've got a growing family, and these are pandemic times. Why not go ahead and rent a 3bed/2ba house (or townhome)? Especially w/ the WFH, and you're soon going to need to keep the baby and the toddler from waking each other up during nap times... and, you have some ability to arbitrage since don't have any need to rent in a good school district yet.
random_walker_77
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Re: How Much House Can We Afford in HCOL Area?

Post by random_walker_77 »

mervinj7 wrote: Wed Sep 02, 2020 10:48 pm
random_walker_77 wrote: Wed Sep 02, 2020 10:43 pm I will say this, the leverage you get when you buy a house can cut both ways, but when it goes up, it can be fantastic. I actually once owned a house for 3 years in the bay area. It went up 40%, and so one way of looking at it is that we nearly doubled our (down payment) money in 3 years, plus got free rent. We were incredibly lucky, but I'm still really glad that we cashed out and moved to Texas.

When the '08 crash happened, I saw that my old house's zillow valuation dropped in half, meaning my buyer's equity was completely gone. Leverage cuts both ways...
Did you ever check the value more recently?
:moneybag
I just checked, and it's up 45% from when I sold it 13 years ago. I'm good with that -- 13 years of inflation makes that sort of gain look reasonable, and my stocks have done really well in the interim. Plus, my newer home is much much nicer, my kids are in superb public schools, and I don't have lead paint, asbestos, and the other drawbacks of an old bay area house.
runner540
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Re: How Much House Can We Afford in HCOL Area?

Post by runner540 »

hereverycentcounts wrote: Wed Sep 02, 2020 10:04 pm
random_walker_77 wrote: Wed Sep 02, 2020 9:48 pm Let me paint two pictures, and you decide how you feel about them.

Picture 1:
How would you feel about becoming house-poor? Let's say you sell all your stocks and bonds. I'm going to assume 1/3 of it is capital gains right now, so after taxes the $989 yields $900. Add on $200K of the cash, leaving you $93K for liquidity's sake, and now you have a $1.1 downpayment. If you stretch to borrow 3x base salary, that'll take you up to 1.85M.

I assume that you're in your mid-to-late 30s, and to have 1.1M in home equity, 0.75M in mortgage debt, and 0.5M in retirement accounts isn't necessarily a bad place to be, given you intend to stay forever. If the RSUs materialize (and the economy doesn't crash), you might even be in a position to pay off half of that mortgage over the next 2 years.

Picture 2:
You buy, and then the economy really does crash. One or both of you lose your income, and now you need to stay afloat. The stock market has crashed, but you've already sold stocks to buy the house so that doesn't matter, but now you have so much invested in the house that you absolutely must make the payments to avoid losing it to foreclosure. Luckily, since your mortgage is only 750K, your monthly payment is only $3.2K so you can float this for a long while.

But, maybe a job opportunity becomes available, either at an inconveniently far commute, or in another state entirely. Are you ok w/ moving to follow the job? Your house may have lost a lot of value too, meaning you either need to become landlords, or sell to lock in the loss of your home equity.

Another way of looking at this -- if things go well, you're going to be in that much better of a position to buy in 2 years. If the economy goes poorly, you're probably better off not buying just yet.

Question: school districts are going to matter a lot more in a few years. This move to be closer to in-laws -- is that still the right location to be at in 10 years (when the eldest hits middle school)?

Either way, I'm assuming that your other spending is frugal, and that your budget can handle this. Note that houses can yield surprise "emergency bills" for roof/HVAC repairs.

*If you buy, you should open a HELOC to establish a line of credit. It won't cost you any interest until you draw on it, but if you do lose your jobs, you can try and draw on the HELOC before the bank closes the credit line. Your most vulnerable time is usually the first year or two after buying a house, since that downpayment usually wipes out extra cash and many people even draw down their EF or fail to consider that a EF might not last as long w/ the required mortgage payments.
Thanks. This is crazy good advice. TY TY TY!

You are right on all of this -- as you know.

I don't want to sell my stocks for the house, I want to keep in stocks and get the 2.7% loan and sell off a little stock if I have to (well I'd sell off enough to have 12 month emergency fund.) In terms of cap gains on the stock I own, I actually am like... 60% cap gains owed (so more like 2/3 not 1/3). :/ So I see that more as retirement money not to be touched anyway, to sell off after I retire and can take a little out each year and not be gouged at CA cap gains rates.

The $600k after tax RSU vest by Dec 2021 is prob about 60%+ likely at this point. Yes economy can crash in next year, but it's getting so close I feel like it's going to stay close to that in value. I will sell that immediately.

It sounds like the best thing for us to do is rent, even if that rent is $6000 a month. Still better than buying. Prob will be forever renters. It makes me sad (quite frankly depressed) but I get it. It's not like I "deserve" to own a house for my family any more than the next person. It just is hard to see my income at $600k and still not be able to afford a house. But it is what it is.
+1 to renting something nicer/closer to parents. I didn't see how much you plan to put down, but rent of $5-6k/month is probably much less than the interest, taxes and insurance on a $2MM house.
Lots to talk about: you're a parent in a pandemic with another baby on the way. You have what I assume is a high pressure job. You have a spouse that mention is a stay at home parent but still earns $90K (that is great!) but you sound disappointed he's not earning more. You have planned and saved and want to own a home of a certain standard.
Not medical advice, but I strongly encourage you to talk through all of these facts and feelings with a trusted friend, clergy, or counselor. (esp since you mention mental health issues later in the thread).

Good luck.
Last edited by runner540 on Wed Sep 02, 2020 11:02 pm, edited 1 time in total.
Topic Author
hereverycentcounts
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Re: How Much House Can We Afford in HCOL Area?

Post by hereverycentcounts »

random_walker_77 wrote: Wed Sep 02, 2020 10:49 pm
hereverycentcounts wrote: Wed Sep 02, 2020 10:40 pm
I am happy for my friend! :) Yea cap gains exclusion sucks in HCOL area. They did a lot of work on the house those so they have some more than $500k to take tax free. And they're still going to benefit from prop 13 forever with low tax rates.

...I'm just worried if we continue saving and plan to buy in, say, 5-10 years, we will be totally priced out.

Your math makes sense though.

It seems like there is value in putting 20% down yet getting 7% YoY on the full value of the property. It's hard to match that by taking your 20% down and just getting ROI on that.

It psychologically gets harder to put all my savings in the stock market the more money I have. At some point owning a house feels more like I, well, own something I need, even if it may be overpriced.

I think we should rent a $3500 2br/1 bath for a while. I wouldn't be happy in it, but when renting it doesn't matter much I guess. We've been in this 1br for 5 years now. Said we'd move when my son turned 1 and he just turned 2. Tempted to stay here for a year with #2, landlord said we could. Wouldn't hurt to spend $2500 a month for another year... to keep saving.

We'll miss out on the 2.7% interest rate. Will house prices come down if rates go up? If that really happens then I guess it doesn't matter. I wonder if that actually happens here though. It seems like things only go up.
You need to change locations, and that makes sense perfect sense. You've got the income, you've got a growing family, and these are pandemic times. Why not go ahead and rent a 3bed/2ba house (or townhome)? Especially w/ the WFH, and you're soon going to need to keep the baby and the toddler from waking each other up during nap times... and, you have some ability to arbitrage since don't have any need to rent in a good school district yet.
We need to be close to my in laws (they don't drive, will help a lot with new baby and my son) and ideally the hospital I want to deliver in, so moving far away doesn't make a ton of sense. A decent 3/2 is going to be about $5500 a month. That's prob what we need to do. If we didn't need to stay in the area, it makes total sense to get out. I have an empty family home on the east coast that a relative can't get back to due to COVID, we could have so much space out there for same as our 1br rent here. But it just doesn't work unfortunately.
36 year old mom of 2 in a VHCOL area trying to figure out how to afford it all. Non techie in tech.
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Watty
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Re: How Much House Can We Afford in HCOL Area?

Post by Watty »

hereverycentcounts wrote: Wed Sep 02, 2020 8:18 pm I'm pregnant.....
.....
for 2 kids thus far, age 0 and 2, planning on 1 more kid)
Unless I missed it something that has not been mentioned is that there us risk that there could be complications with the upcoming kids or that you might need expensive fertility treatments or adoption costs for the next kid. Twins are also a possibility.

I did not try to crunch the numbers but it is pretty clear that you would be stretched thin with a $2 million dollar house.

With all the unknowns with the kids and jobs I don't think you are there yet.

I think that you should really just rent a bigger place for the next few years and save like crazy then buy after you have saved up more.

You likely have about three years until your 2 year old will start school so there is not urgent need to buy before then. If things go well you might be able to save up the better part of another million dollars by then.
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hereverycentcounts
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Re: How Much House Can We Afford in HCOL Area?

Post by hereverycentcounts »

Watty wrote: Wed Sep 02, 2020 10:59 pm
hereverycentcounts wrote: Wed Sep 02, 2020 8:18 pm I'm pregnant.....
.....
for 2 kids thus far, age 0 and 2, planning on 1 more kid)
Unless I missed it something that has not been mentioned is that there us risk that there could be complications with the upcoming kids or that you might need expensive fertility treatments or adoption costs for the next kid. Twins are also a possibility.

I did not try to crunch the numbers but it is pretty clear that you would be stretched thin with a $2 million dollar house.

With all the unknowns with the kids and jobs I don't think you are there yet.

I think that you should really just rent a bigger place for the next few years and save like crazy then buy after you have saved up more.

You likely have about three years until your 2 year old will start school so there is not urgent need to buy before then. If things go well you might be able to save up the better part of another million dollars by then.
What amount do you think I need to have saved before I can afford a $2M house?
36 year old mom of 2 in a VHCOL area trying to figure out how to afford it all. Non techie in tech.
Tingting1013
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Re: How Much House Can We Afford in HCOL Area?

Post by Tingting1013 »

runner540 wrote: Wed Sep 02, 2020 10:55 pm +1 to renting something nicer/closer to parents. I didn't see how much you plan to put down, but rent of $5-6k/month is probably much less than the interest, taxes and insurance on a $2MM house.
It is about the same:

2.7% interest on a $1.6M mortgage: $43k
1.1% property tax: $22k
Insurance: $2k
Maintenance: $10k
Federal tax benefit (assuming 37% bracket): -$7k
State tax benefit (assuming 10.3% bracket): -$5k

Net cost: $65k/yr
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Watty
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Re: How Much House Can We Afford in HCOL Area?

Post by Watty »

hereverycentcounts wrote: Wed Sep 02, 2020 10:56 pm We need to be close to my in laws (they don't drive, will help a lot with new baby and my son)
It will be great if they can help you out a lot but you need to be prepared to pay for help in case that does not work out.

We have two grandkids that are 2 and 4 and when we watch them for the day we are bushed and as they got to be toddlers that got to be a lot harder to do. My wife has to be very careful with her back even even when she picks up the 2 year old.

It would have to be a real emergency for us to take care of the kids that most days just because of the physical demands.

In normal times we also have our activities, Dr. appointments, and people to see which would interfere with frequently taking care of the kids.
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hereverycentcounts
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Re: How Much House Can We Afford in HCOL Area?

Post by hereverycentcounts »

Tingting1013 wrote: Wed Sep 02, 2020 11:02 pm
runner540 wrote: Wed Sep 02, 2020 10:55 pm +1 to renting something nicer/closer to parents. I didn't see how much you plan to put down, but rent of $5-6k/month is probably much less than the interest, taxes and insurance on a $2MM house.
It is about the same:

2.7% interest on a $1.6M mortgage: $43k
1.1% property tax: $22k
Insurance: $2k
Maintenance: $10k
Federal tax benefit (assuming 37% bracket): -$7k
State tax benefit (assuming 10.3% bracket): -$5k

Net cost: $65k/yr
I figured the total tax benefit is about $5k max since SALT deductions are gone. Where are you getting the $12k?

The good thing about renting is if I lose my job we can move somewhere cheaper. I like that.
36 year old mom of 2 in a VHCOL area trying to figure out how to afford it all. Non techie in tech.
oldfort
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Re: How Much House Can We Afford in HCOL Area?

Post by oldfort »

soxfan10 wrote: Wed Sep 02, 2020 10:47 pm
oldfort wrote: Wed Sep 02, 2020 10:29 pm
Tingting1013 wrote: Wed Sep 02, 2020 10:17 pm
oldfort wrote: Wed Sep 02, 2020 10:13 pm
Tingting1013 wrote: Wed Sep 02, 2020 10:02 pm

I don’t think the 1% rule is appropriate for VHCOL. Most of the value in a $2M house in CA is in the land. The house may only be worth $500k. So I’d say annual maintenance on a $2M aka $500k house is probably $5-10k.
$5k seems low. In the Bay area, it's not hard to spend $80k on a midrange kitchen remodel.
I don’t consider a remodel “maintenance”. I am only talking about what it takes to maintain a house in its current condition. Roof, appliances, landscaping, etc.

Remodels are ideally capital improvements that pay for themselves.
If you want to make a semantic split between remodels and maintenance fine, but the OP should include both in the budget. Most people, especially women, aren't going to be happy with a 20 year old dated Formica kitchen in their $2M home.
I dont think thats a semantic split. Maintenance needs to be included in any discussion if a house is affordable, but that doesnt include improvements/remodels. Those are by their nature optional/life style inflation type expenses. Remodeling a kitchen is only relevant to the decision if they dont want to purchase the house without the remodel.
A useful budget needs realistic assumptions about what your future spending is likely to be. Pretending you're never going to remodel the house ever doesn't strike me as realistic for most people in the OP's financial situation.
random_walker_77
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Re: How Much House Can We Afford in HCOL Area?

Post by random_walker_77 »

Tingting1013 wrote: Wed Sep 02, 2020 11:02 pm
runner540 wrote: Wed Sep 02, 2020 10:55 pm +1 to renting something nicer/closer to parents. I didn't see how much you plan to put down, but rent of $5-6k/month is probably much less than the interest, taxes and insurance on a $2MM house.
It is about the same:

2.7% interest on a $1.6M mortgage: $43k
1.1% property tax: $22k
Insurance: $2k
Maintenance: $10k
Federal tax benefit (assuming 37% bracket): -$7k
State tax benefit (assuming 10.3% bracket): -$5k

Net cost: $65k/yr
Even less if it's a 800K mortgage (they could put 1.1M down), but then they wouldn't get the investment earnings on the 1.1M...
gougou
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Location: San Francisco Bay Area

Re: How Much House Can We Afford in HCOL Area?

Post by gougou »

If you rent, you are basically shorting a house, because you need a house for your family but you don't own one.

Keep in mind that the housing market can stay irrational for an extremely long time and might never fall. So renting and attempting to time the market is not a good idea.

$2M house with 20% down requires about $9K/month PITI. You can afford that even though it makes you a little house-poor. You have enough cushion in stocks/investments if we go into a recession.
Tingting1013
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Re: How Much House Can We Afford in HCOL Area?

Post by Tingting1013 »

hereverycentcounts wrote: Wed Sep 02, 2020 11:11 pm
Tingting1013 wrote: Wed Sep 02, 2020 11:02 pm
runner540 wrote: Wed Sep 02, 2020 10:55 pm +1 to renting something nicer/closer to parents. I didn't see how much you plan to put down, but rent of $5-6k/month is probably much less than the interest, taxes and insurance on a $2MM house.
It is about the same:

2.7% interest on a $1.6M mortgage: $43k
1.1% property tax: $22k
Insurance: $2k
Maintenance: $10k
Federal tax benefit (assuming 37% bracket): -$7k
State tax benefit (assuming 10.3% bracket): -$5k

Net cost: $65k/yr
I figured the total tax benefit is about $5k max since SALT deductions are gone. Where are you getting the $12k?

The good thing about renting is if I lose my job we can move somewhere cheaper. I like that.
For Federal taxes, the mortgage interest deduction is not gone, just limited to $750k in loan balance.

$750k * 2.7% * 37% = $7k in federal tax savings

For CA taxes, the mortgage interest limit remains at $1M and property taxes are still fully deductible

($1M * 2.7% + 22k) * 10.3% = $5k in CA tax savings
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unclescrooge
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Re: How Much House Can We Afford in HCOL Area?

Post by unclescrooge »

I think you can afford it. Just barely.

But a downturn in your employment can make things really dicey.

Considering you're planning for your first kid, and kids are insanely expensive, you might want to consider renting for a few years.

I don't think SF home prices are going anywhere for a few years. I personally know people moving to tertiary towns from HCOL cities and getting bigger houses for 1/4th the cost. This will definitely have an impact on higher end homes.

Personally, I would spend $6k on rent. And that's coming from someone who lives in $2 million dollar+ house in a HCOL city.
random_walker_77
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Re: How Much House Can We Afford in HCOL Area?

Post by random_walker_77 »

hereverycentcounts wrote: Wed Sep 02, 2020 11:11 pm The good thing about renting is if I lose my job we can move somewhere cheaper. I like that.
In the bay area, this is no small matter. You also have the freedom to move to minimize commutes if you change jobs.

One thought: since your spouse is a 1099, working from home, I think that means if you rented a bigger place and set aside a bedroom as their dedicated office, that portion of the rent can be written off as an above-the-line business expense... check the rules on this. If so, your marginal tax rate for the next couple of years has got to be around 50% between federal and state, so that's a hefty subsidy. This could be an incentive to upgrade the rental and free up more space for you and the kid(s).
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Watty
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Re: How Much House Can We Afford in HCOL Area?

Post by Watty »

hereverycentcounts wrote: Wed Sep 02, 2020 11:02 pm What amount do you think I need to have saved before I can afford a $2M house?
With your plans for three kids I would feel uncomfortable with having a mortgage that was larger than $600K. That would be tight but doable if there is a recession and one of you is laid off and the other persons RSUs are not worth a lot. I would also want to keep maybe $200K in your emergency fund and taxable account.

That would mean you would need about $1.6 million dollars in addition to any capital gains taxes that you would need to pay. You are not all that far away from that.

But that is just me.
Last edited by Watty on Wed Sep 02, 2020 11:23 pm, edited 1 time in total.
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hereverycentcounts
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Re: How Much House Can We Afford in HCOL Area?

Post by hereverycentcounts »

unclescrooge wrote: Wed Sep 02, 2020 11:17 pm I think you can afford it. Just barely.

But a downturn in your employment can make things really dicey.

Considering you're planning for your first kid, and kids are insanely expensive, you might want to consider renting for a few years.

I don't think SF home prices are going anywhere for a few years. I personally know people moving to tertiary towns from HCOL cities and getting bigger houses for 1/4th the cost. This will definitely have an impact on higher end homes.

Personally, I would spend $6k on rent. And that's coming from someone who lives in $2 million dollar+ house in a HCOL city.
I'm leaning towards trying to find a place that is $4k rent. After all these discussions, I've realized I need focus on my base salary alone in affordability, in case my in laws cannot watch my kids (I have a kid, I'm having a second in January) and that gets me to about $4k that I can spend on rent. I don't know how I'll find something that meets our needs at $4k, but I'm going to try.
36 year old mom of 2 in a VHCOL area trying to figure out how to afford it all. Non techie in tech.
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