Affording a 1.3 million home?

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john94549
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Re: Affording a 1.3 million home?

Post by john94549 » Thu Aug 07, 2014 7:24 pm

I suspect any folks springing for a $1M+ home in the Bay Area might be stretched. Gosh golly, we were stretched buying in Sunnyvale in 1973 ($43K) and in Lafayette in 1978 ($180K). Of course, today, such prices seem laughable.

madbrain
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Re: Affording a 1.3 million home?

Post by madbrain » Thu Aug 07, 2014 7:29 pm

dgdevil wrote:
vitaflo wrote:
Here's how I look at it. With interest rates so low, I'd do only 20% down to get rid of PMI, invest the remainder. In a high tax bracket, with low interest, mortgage deduction and inflation, it's basically a 0% loan at that point.
+1. Minimum downpayment also obviates need for earthquake insurance.
Earthquake insurance is never required by lenders in California, regardless of downpayment.
A <20% downpayment only affects the PMI requirement.

john94549
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Re: Affording a 1.3 million home?

Post by john94549 » Thu Aug 07, 2014 7:35 pm

As a PS to my earlier post, when we bought in Lafayette we were both but 31 years of age, two kids. I suspect we were the youngest new home buyers in Lafayette at the time, and I also suspect everyone thought we were nuts (including parents on both sides). Yet here we are, many years later, same house. Never missed a payment.

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gunn_show
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Re: Affording a 1.3 million home?

Post by gunn_show » Thu Aug 07, 2014 7:44 pm

SpartanSJ wrote:thanks for all the inputs folks..
With my profile, would would be the max you guys recommend we spend on a home?? (

In terms of moving from bay area, we can easily get jobs in SoCAl (SD) but what i am hearing from my friends is that the housing market there has also picked up a lot. We would probably get a much better home for the same price but in good school district with less commute, the home prices are still north of 900K/1million
SD'er here, and also tech guy ... you can get A LOT of house for $1mil or less, so either you are looking at a monster pad in La Jolla or Carlsbad or some penthouse high rise in Gaslamp, or your friends are giving you weird figures. I bought recently for far under a mil, in a great part of town, and did a lot of looking around, and for $850k in Carlsbad/Encinitas you can get a very large 4bd/2500+sqft house. Yes, the market is very hot, but we are still not close to SF (definitely no $1mil 2 bedroom houses here like the earlier poster noted). If you go to the popular school areas (Poway, Scripps Ranch) a mil gets you quite a lot. Don't at all see why you wouldn't be heavily considering SoCal for the cost. No chance in hell I would be buying $1.3mil house in the bay for average specs. Can you afford it, yes, but man so many variables can push it the wrong direction with kids, daycare, tech volatility...
"The best life hack of all is to just put the work in and never give up." Bas Rutten

dgdevil
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Re: Affording a 1.3 million home?

Post by dgdevil » Thu Aug 07, 2014 7:49 pm

madbrain wrote:
dgdevil wrote:
vitaflo wrote:
Here's how I look at it. With interest rates so low, I'd do only 20% down to get rid of PMI, invest the remainder. In a high tax bracket, with low interest, mortgage deduction and inflation, it's basically a 0% loan at that point.
+1. Minimum downpayment also obviates need for earthquake insurance.
Earthquake insurance is never required by lenders in California, regardless of downpayment.
A <20% downpayment only affects the PMI requirement.
Yeah, I know. Mine was an oblique reference to this very learned post from a ways back:
ralph124cf wrote: A lawyer friend mentioned that the easiest way to maintain earthquake insurance with a 10% deductible is to take out a 90% mortgage. If your house drops into the ground, then you give it back to the bank and walk away

Ralph

SpartanSJ
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Re: Affording a 1.3 million home?

Post by SpartanSJ » Thu Aug 07, 2014 8:29 pm

IN SD we will be looking at carmel valley area for super short commute and to be closer to beach...Agree is cheaper than bay area but still in 900K-1million. See redfin stats


From redfin (last 90 days)

Median List Price $965K
Median List $/Sq Ft $418
Median Sale Price $914K
Median Sale $/Sq Ft $405
Median Sale / List 97.7%
Avg. Number of Offers 2.1
Avg. Down Payment 49.4%
Number of Homes Sold 186


tommy_gunn wrote:
SpartanSJ wrote:thanks for all the inputs folks..
With my profile, would would be the max you guys recommend we spend on a home?? (

In terms of moving from bay area, we can easily get jobs in SoCAl (SD) but what i am hearing from my friends is that the housing market there has also picked up a lot. We would probably get a much better home for the same price but in good school district with less commute, the home prices are still north of 900K/1million
SD'er here, and also tech guy ... you can get A LOT of house for $1mil or less, so either you are looking at a monster pad in La Jolla or Carlsbad or some penthouse high rise in Gaslamp, or your friends are giving you weird figures. I bought recently for far under a mil, in a great part of town, and did a lot of looking around, and for $850k in Carlsbad/Encinitas you can get a very large 4bd/2500+sqft house. Yes, the market is very hot, but we are still not close to SF (definitely no $1mil 2 bedroom houses here like the earlier poster noted). If you go to the popular school areas (Poway, Scripps Ranch) a mil gets you quite a lot. Don't at all see why you wouldn't be heavily considering SoCal for the cost. No chance in hell I would be buying $1.3mil house in the bay for average specs. Can you afford it, yes, but man so many variables can push it the wrong direction with kids, daycare, tech volatility...

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gunn_show
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Re: Affording a 1.3 million home?

Post by gunn_show » Thu Aug 07, 2014 9:44 pm

SpartanSJ wrote:IN SD we will be looking at carmel valley area for super short commute and to be closer to beach...Agree is cheaper than bay area but still in 900K-1million. See redfin stats

From redfin (last 90 days)

Median List Price $965K
Median List $/Sq Ft $418
Median Sale Price $914K
Median Sale $/Sq Ft $405
Median Sale / List 97.7%
Avg. Number of Offers 2.1
Avg. Down Payment 49.4%
Number of Homes Sold 186
Stats are just stats, I can show you stats for $500k if you want. Have you actually looked up homes in CV that fit your needs? For every 900k average there is a $1.1mil home and a $700k home. But anyway, let's just take $900k, which buys a lot for CV. That is $400-500k LESS than what you mentioned as budget for SF. Plus FAR better weather. SHORT commute. Close to beach. It's San Diego. Pizza Port close by. Airport half as clogged and 99% fewer fog delays than SFO, cheap Uber rides all over, we can go on. Probably a ton more house for the money, bigger lot, you name it. CV is a very nice area. Most assuredly in that price range you are in a community with a pool and facilities. For that price range you could also look in Carlsbad, Encinitas, Leucadia, other coastal towns with nice 2-story 4+ bed 2000+sqft for under a mil. In those areas, will likely appreciate just as much as SF (to a degree) in time.

Assuming you can move and keep the same jobs, or similar job same pay, good lord, barring you have close family in SF, why not move to SD? The cost savings and weather alone are worth it. Yes, I am biased :beer
"The best life hack of all is to just put the work in and never give up." Bas Rutten

madbrain
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Re: Affording a 1.3 million home?

Post by madbrain » Thu Aug 07, 2014 10:19 pm

dgdevil wrote:Yeah, I know. Mine was an oblique reference to this very learned post from a ways back:
ralph124cf wrote: A lawyer friend mentioned that the easiest way to maintain earthquake insurance with a 10% deductible is to take out a 90% mortgage. If your house drops into the ground, then you give it back to the bank and walk away

Ralph
This only works if you never refinance the mortgage. Only the original purchase mortgage is a non-recourse loan in California. Any refinance will become a recourse loan.
So, the lender could still sue you after foreclosing if they can't sell your lot with a broken house on it for at least as much as the loan balance.

Putting 10% down is not always an option - it wasn't for me when I bought my house 4 years ago, because the additional interest and PMI would have put me over maximum debt to income ratio. I ended up putting 20% down. I also refinance the mortgage later when rates dropped, so my current loan is now a recourse loan, unfortunately.

Most mortgage payments include principal payments also, so as you build equity over time, you end up losing this "earthquake insurance".
I don't think you can get interest-only mortgages anymore.

random_walker_77
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Re: Affording a 1.3 million home?

Post by random_walker_77 » Thu Aug 07, 2014 10:29 pm

Keep in mind that for earthquakes, you're insuring the building, not the land. 1.3M homes in the bay area are typically 200K homes located on 1.1M land plots. Clearing and rebuilding after an earthquake will presumably be expensive due to high labor costs and shortages of tradesmen in the aftermath of a major earthquake.

denovo
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Re: Affording a 1.3 million home?

Post by denovo » Thu Aug 07, 2014 10:41 pm

Holy smokes, poor guy comes here with a simple question about whether or not he can afford a home, and we have advice being given to him to move half away across the country, down south , or to retire early in Middle America.

OP, I would make a budget for yourself, if you don't already have one, with what expenses you have now, and the expenses you expect to have in the future, and see if it fits with a margin of safety. The expenses that you should add that will go up considerably are child care and diapers, and higher property taxes, insurance, and mortgage rates.

The fact that you have built up a nice warchest of money with no car debt or yacht debt, tells me you are frugal, and can afford it. I didn't go as for as giving a seal of approval because I don't know your entire budgetary situation or the cost of raising a child in your area. Being that it is a huge commitment, I would only buy somewhere were you want to live for a good period of time. If you want 2 children, is the place you can envision sending them to elementary school and middle school? Is this your forever home? You can post your budget here or sketch it out for yourself personally, I think you'd be fine either way. Some people here may think you're frivolous, as if you're bying some kind of mansion, but I know from personal experience that a good sized home with good schools can easily reach seven figures in the Bay Area.
"Don't trust everything you read on the Internet"- Abraham Lincoln

random_walker_77
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Re: Affording a 1.3 million home?

Post by random_walker_77 » Thu Aug 07, 2014 11:03 pm

As long as you are ok w/ the risk of losing the money you've worked hard to save, I think you can afford it. Whether it's wise to buy is a different question entirely, but not the one you've asked, yet so hard to resist addressing.

There will be lots who would argue you're better off leaving for a lower cost of living area. You know, cash out, take it easy somewhere where housing isn't crazy, let compounding work for you, and then retire really early. That happens to be the path I'm on, having left SJ seven years ago. But I'm not going to dissuade you from buying into a 1300K house -- just keep in mind this means you're both going to be working until a more typical retirement age.

Your biggest risks are to cash flow. Childcare is expensive. Especially in the bay area. And you need to consider worst case scenarios. If '08 repeats itself and you get caught out w/ price drops, stock market drops, and layoffs, you need to be able to hold out and not sell. Even if the market stays down for more than a couple of years. Or if jobs are available, but not in the bay area. (Another scenario: the oft-told doomsday tales of Moore's law ending must eventually come true someday... hopefully not until after you retire).

You've got 920K in savings (maybe less after taxes on cashing out). So worse case, you put 800K down, take out a half million dollar mortgage (similar to what you're currently carrying), and you're down to 120K in cash, and maybe an extra $8K/yr in property taxes and $5K in PITI. Not too scary.

Putting more down now minimizes the required cashflow to maintain the mortgage, and minimizes the risk that you'll be unemployed and selling depressed stocks to keep the mortgage paid. Putting less down now means taking more risk for more reward. That is, it's a bet on higher returns from your investments than your mortage rates, and that no situations arise that force you to liquidate your home or investments or both. It's also a form of inflation insurance (inflation etches away at your debts).

If you do buy, be sure to consider schools and make sure this is a house you'll be staying in long-term. Transaction costs of $70+K might be peanuts compared to 1300K houses, but to us mortals, $70K (~5% of 1.3M) is serious money (and sounds to be about how much you save each year between 401k and non-retirement accounts).

Right now, you're in a nice place where you could become debt free tomorrow if you so chose. Another option is to stay where you're at. Accumulate more money. And upgrade homes to a better house or better school district when you have kids that are old enough to benefit from said schools...

Don't feel you have to buy now before you get priced out. That feeling is sometimes an indicator that maybe you shouldn't buy, or maybe should rent. ("Buy when there's blood in the streets" -- 2008/2009 would've been the time to buy, right?)

One final note -- kids are great, but can be stressful. Babies require time and money, and time, and more time. The bay area is not a low-stress place, and financial pressure makes it worse. Be careful that the purchase of an expensive house does not come at the cost of your happiness.

davidsorensen32
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Re: Affording a 1.3 million home?

Post by davidsorensen32 » Thu Aug 07, 2014 11:28 pm

You're overthinking it. Just do it. You only live once. You are in the top 1% and can afford it. Ignore the noise and listen to your heart. Your heart knows. It simply knows - Steve Jobs
SpartanSJ wrote:Hi,
Recently came across these forums and wanted to get some feedback on purchase of a new home. We live in city where the Real estate market is very hot and prices have gone up substantially in the last 1 year. The homes that we are liking with all the features/location are now in 1.3-1.4million range :( Wanted to check if buying at this price with our current profile is a good idea in terms of savings/retirement :confused
Working couple, both ~35 yrs old

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

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

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

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


thanks

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market timer
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Re: Affording a 1.3 million home?

Post by market timer » Fri Aug 08, 2014 12:12 am

random_walker_77 wrote:One final note -- kids are great, but can be stressful. Babies require time and money, and time, and more time. The bay area is not a low-stress place, and financial pressure makes it worse. Be careful that the purchase of an expensive house does not come at the cost of your happiness.
^ This. I'm astonished at how much time is going into childcare. We have a live-in nanny and grandmother helping out, but it still seems like most of my day is devoted to childcare. Having a kid really changes things. That's what I was trying to convey earlier in suggesting a rental for the next several years.

ericinvest
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Re: Affording a 1.3 million home?

Post by ericinvest » Fri Aug 08, 2014 12:43 am

If you keep current house with the 400k mortgage, it's too stretched.

But if you sell it, you can easily afford a house like that. And I'd actually suggest you do it rather than rent. You only live your life once, especially when kids are young.

From my own experience in bay area.

cheapskate
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Re: Affording a 1.3 million home?

Post by cheapskate » Fri Aug 08, 2014 1:24 am

To the OP.

Put your financial situation through a stress test. Assuming 1.4M home, with a 20% down payment, consider and model the scenario where one of you loses your job. Will you be comfortable paying the mortgage + prop taxes at that point ? Don't assume that you can sell your home if that happens, because you could have a significant downturn in tech, which depresses real estate prices (landing you with a paper loss on your home). What I outlined is not a very unrealistic scenario. In the last 15 years, we have seen 2 very significant downturns, during which I have seen many friends who have been in that situation. One of the spouses losing their job + real estate market down significantly.

Only you can run this stress test on your finances and think whether you will be OK under the stress test. It is very subjective.

I was never comfortable buying a home in the Bay Area, because for me, a large mortgage accompanied with me losing my job would have been incredibly stressful (wife stopped working after kids). We rented for 20+ years, and only bought when we had built a sizeable financial cushion, causing us to not stress about the stress test. Yes, I might have thrown money away renting, but the peace of mind was priceless - and since I did not have a large mortgage, I was able to take some risks (eg working in startups taking sizeable paycuts but good equity stakes).

The only other piece of advice I have for you is that purchasing a home, especially in the Bay Area, at these prices, is NOT a financial decision. It is a lifestyle decision. Purely financially, the right thing to do is to rent.

madbrain
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Re: Affording a 1.3 million home?

Post by madbrain » Fri Aug 08, 2014 4:26 am

random_walker_77 wrote:Keep in mind that for earthquakes, you're insuring the building, not the land. 1.3M homes in the bay area are typically 200K homes located on 1.1M land plots. Clearing and rebuilding after an earthquake will presumably be expensive due to high labor costs and shortages of tradesmen in the aftermath of a major earthquake.
Really depends what kind of home and land you got.

My 4700sq ft home on a hill in San Jose has an insurance rebuilding cost estimate of $1.8 million, even though I only paid about $800k for it in 2010.
Zillow very recently estimated its market value above $2 million, but I don't believe it for one second, I think it's still worth closer to about $1.3 million, well below what rebuilding cost would be, which would put the land at roughly zero or negative value.

Valuethinker
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Re: Affording a 1.3 million home?

Post by Valuethinker » Fri Aug 08, 2014 5:15 am

random_walker_77 wrote:
Putting more down now minimizes the required cashflow to maintain the mortgage, and minimizes the risk that you'll be unemployed and selling depressed stocks to keep the mortgage paid. Putting less down now means taking more risk for more reward. That is, it's a bet on higher returns from your investments than your mortage rates, and that no situations arise that force you to liquidate your home or investments or both. It's also a form of inflation insurance (inflation etches away at your debts).

If you do buy, be sure to consider schools and make sure this is a house you'll be staying in long-term. Transaction costs of $70+K might be peanuts compared to 1300K houses, but to us mortals, $70K (~5% of 1.3M) is serious money (and sounds to be about how much you save each year between 401k and non-retirement accounts).
.
This is all good advice, but one caveat.

Larger downpayment can eat into your liquid funds.

The great virtue of keeping out liquid funds is that if you hit some kind of problem (losing job, drop in income, major child related expenses) you've got the 'fat' to keep paying the mortgage. Without trying to tap your housing equity directly.

I am all for fast payback of mortgage, but when you buy, if your down payment is more than 20% of a $1.3m house, keeping another $50k or $100k out for the first 5 years (ie having 'too much' of a mortgage) is no bad thing. For most people $50k or $100k would pay all household expenses (even in the Bay area) for a year.

Valuethinker
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Re: Affording a 1.3 million home?

Post by Valuethinker » Fri Aug 08, 2014 5:20 am

denovo wrote: Being that it is a huge commitment, I would only buy somewhere were you want to live for a good period of time. If you want 2 children, is the place you can envision sending them to elementary school and middle school? Is this your forever home? You can post your budget here or sketch it out for yourself personally, I think you'd be fine either way. Some people here may think you're frivolous, as if you're bying some kind of mansion, but I know from personal experience that a good sized home with good schools can easily reach seven figures in the Bay Area.
Good advice. In a place like the Bay Area, greater NYC, London, a 'nice' house costs that kind of money. And it's nothing like blowing the wad.

If the OP is fairly convinced they can support the mortgage *and they still have significant emergency reserves once the deal is done* then if it is a long term 'keeper' home, then they should go for it.

They need to model 'near worst case' scenarios. Wife not working, childcare expenses, housing market drops 30%. History in CA says it can have those sort of 30-40% drops. But if it is a long term 'keeper' home then you can ride those types of swing *if* you have enough emergency cash to say pay household expenses (including mortgage) for 12 months-- at which point you've got to start selling long term investments, move to rental etc.

Also the major earthquake risk. I don't know about earthquake insurance, but on a $1.3m home (3000 square feet?) I am thinking say $100k deductible, $600k of insurance would cover a total wipeout?

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Re: Affording a 1.3 million home?

Post by Valuethinker » Fri Aug 08, 2014 5:23 am

madbrain wrote:
random_walker_77 wrote:Keep in mind that for earthquakes, you're insuring the building, not the land. 1.3M homes in the bay area are typically 200K homes located on 1.1M land plots. Clearing and rebuilding after an earthquake will presumably be expensive due to high labor costs and shortages of tradesmen in the aftermath of a major earthquake.
Really depends what kind of home and land you got.

My 4700sq ft home on a hill in San Jose has an insurance rebuilding cost estimate of $1.8 million, even though I only paid about $800k for it in 2010.
Zillow very recently estimated its market value above $2 million, but I don't believe it for one second, I think it's still worth closer to about $1.3 million, well below what rebuilding cost would be, which would put the land at roughly zero or negative value.
Land has zero or negative value?

That seems wrong. Unless the house is a wreck (and you've told us quite the opposite) that has to be demolished, then land has a positive value in most places. The other negative value on land is the long term cost of taxes: that's why Detroit houses sell for $5k etc.

$200-300 per square foot is probably reasonable reconstruction cost for a high cost area like the Bay. Oddly, it would be cheaper to knock down and rebuild from scratch than to repair a badly damaged home.

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Re: Affording a 1.3 million home?

Post by Don Christy » Fri Aug 08, 2014 5:40 am

Valuethinker wrote:
Plan for a situation where, post kids, only one of you is working (ditto circumstances if one of you is redundant).
.
In case it's not clear, in this case "redundant" means laid off / fired. British use.

And agree with points made here and by others who suggest renting and considering retiring earlier.

Unless you are pretty confident you'll remain in the area 10 years, since the market is "hot", I would seriously consider renting or otherwise minimizing your exposure (e.g. lower down payment) to a housing crash.

Don
“Speak only if it improves upon the silence." Mahatma Gandhi

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fredflinstone
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Re: Affording a 1.3 million home?

Post by fredflinstone » Fri Aug 08, 2014 6:49 am

OP, you can afford the house but you would be better off renting a nice house for $3500/month. Just because you can buy something doesn't mean you should.

TRC
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Re: Affording a 1.3 million home?

Post by TRC » Fri Aug 08, 2014 6:59 am

In the words of the wise Warren Buffett - "be fearful when others are greedy and greedy when others are fearful."

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Re: Affording a 1.3 million home?

Post by Valuethinker » Fri Aug 08, 2014 8:02 am

Don Christy wrote:
Valuethinker wrote:
Plan for a situation where, post kids, only one of you is working (ditto circumstances if one of you is redundant).
.
In case it's not clear, in this case "redundant" means laid off / fired. British use.

And agree with points made here and by others who suggest renting and considering retiring earlier.

Unless you are pretty confident you'll remain in the area 10 years, since the market is "hot", I would seriously consider renting or otherwise minimizing your exposure (e.g. lower down payment) to a housing crash.

Don
Thank you for the translation! ;-). Two nations divided by a common language etc.

(In Glasgow they use 'laid off' but I had an English colleague who had never heard of it. In Canada, they use 'laid off' perhaps reflecting the country's Scottish heritage, or 'go on the pogey' (to collect unemployment ie Employment Insurance) at least on the East Coast.)

And my 'British English' was in fact wrong. I meant made redundant (lose your job, usually due to cutbacks rather than being 'fired' for performance reasons-- the legal distinction is important in UK employment law re payouts) and wrote 'redundant' (which could mean 'not needed' eg by your family).

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Re: Affording a 1.3 million home?

Post by Valuethinker » Fri Aug 08, 2014 8:05 am

davidsorensen32 wrote:You're overthinking it. Just do it. You only live once. You are in the top 1% and can afford it. Ignore the noise and listen to your heart. Your heart knows. It simply knows - Steve Jobs
SpartanSJ wrote:Hi,
Recently came across these forums and wanted to get some feedback on purchase of a new home. We live in city where the Real estate market is very hot and prices have gone up substantially in the last 1 year. The homes that we are liking with all the features/location are now in 1.3-1.4million range :( Wanted to check if buying at this price with our current profile is a good idea in terms of savings/retirement :confused
Working couple, both ~35 yrs old

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

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

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

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


thanks
This is where I come in with caveats:

- model the downside case (1 salary, childcare, housing prices fall 30%). Can you still carry the mortgage?

- sell company stock to free up cash

- keep 12 months of household expenses (including mortgage) as a reserve fund even if that means a higher mortgage to start. After 5 years you can probably just pay that down anyways. I could make a case for 18 months

opus360
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Re: Affording a 1.3 million home?

Post by opus360 » Fri Aug 08, 2014 8:25 am

SpartanSJ wrote:Hi,
Salary: 275K combined (Bonus+ RSU: +100K/year)
What is RSU?

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Re: Affording a 1.3 million home?

Post by MossySF » Fri Aug 08, 2014 9:02 am

davidsorensen32 wrote:You are in the top 1% and can afford it.
According to NY Times calculator:
* Income = Top 6%
* Net worth = Top 7%

Not saying it's a bad financial situation in any scenario. The numbers are just a smidge above the 28% expense/income guideline but doable because OP has already proved they can save at a pretty good clip.

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Re: Affording a 1.3 million home?

Post by HornedToad » Fri Aug 08, 2014 10:39 am

MossySF wrote:
davidsorensen32 wrote:You are in the top 1% and can afford it.
According to NY Times calculator:
* Income = Top 6%
* Net worth = Top 7%

Not saying it's a bad financial situation in any scenario. The numbers are just a smidge above the 28% expense/income guideline but doable because OP has already proved they can save at a pretty good clip.
You didn't include the +100k/year from Bonuses and RSU.

Note for earlier poster: RSU = Restricted Stock Units where you actually own the shares as they vest.

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Re: Affording a 1.3 million home?

Post by denovo » Fri Aug 08, 2014 11:00 am

HornedToad wrote:
MossySF wrote:
davidsorensen32 wrote:You are in the top 1% and can afford it.
According to NY Times calculator:
* Income = Top 6%
* Net worth = Top 7%

Not saying it's a bad financial situation in any scenario. The numbers are just a smidge above the 28% expense/income guideline but doable because OP has already proved they can save at a pretty good clip.
You didn't include the +100k/year from Bonuses and RSU.

Note for earlier poster: RSU = Restricted Stock Units where you actually own the shares as they vest.
And unlike with most options, the cost basis is 0.
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Re: Affording a 1.3 million home?

Post by chuppi » Fri Aug 08, 2014 11:23 am

I am in a similar situation. Income is almost the same but there is no bonus :(. Some people have suggested renting a house. The fact is that you cannot rent a decent house in a good school district for 3500$. You can get good apartments/condos but not a good house with backyard. How about 4500$ you may say?
At this income (excluding the bonus), if you max the 401K, you essentially take home around 10K per month. I cannot imagine paying half the paycheck on rent. we are not yet talking about childcare and other expenses. There won't be much left to invest in retirement (bonus in this case would make a difference though).

I would maximize the downpayment. Take a 15year mortgage and finish off the payments.

Someone suggested to wait till you have the kids and they are school ready. I think that is a good idea. I think living is a condo is just fine until the baby is 1 year old and you can stretch it a bit if you want. Interest rate may go up in the next 3-4years. That should give you an upper hand with a bigger downpayment. Hopefully the house price will stabilize with the higher interest rates.

Also people have suggested keeping the downpayment low so that you can walk away when there is a natural disaster or house goes under water. It is easier said than done. Speaking for myself, I would really think hard before buying. Once I buy, I would live with it and not ask someone else to pay for my mistakes. I am guessing most bogleheads would think think like that.

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Re: Affording a 1.3 million home?

Post by SpartanSJ » Fri Aug 08, 2014 3:50 pm

Lot of excellent suggestions including the one i liked the most--Moving to SD :) atleast i will have a shorter commute, better weather, SD Zo, legoland, sea-world (if PETA does't take it down) and can own a home for ~20% less in the top school/most desired area, beach. :beer

back to reality:
So far, i have not been including the bonus in the take home for calculation of the budget and mortgage ..If i include that, cash flow per month is not an issue and we do have ~10-15% left for 1.3 million mortgage with 400K down @4%. Now this obviously has risk : what if the bonus dries up and so on but lest keep that aside for a moment..
My question is: Is putting ~50% (400/950K )of the total net in home as down payment a good asset allocation strategy?

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Re: Affording a 1.3 million home?

Post by LadyGeek » Fri Aug 08, 2014 5:02 pm

opus360 wrote:
SpartanSJ wrote:Hi,
Salary: 275K combined (Bonus+ RSU: +100K/year)
What is RSU?
It's this: Restricted Stock Unit
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Re: Affording a 1.3 million home?

Post by Meg77 » Fri Aug 08, 2014 5:03 pm

You can certainly afford it, especially as you easily have a 20% down payment and even more especially because you have no other debt whatsoever. I'd even go so far as to say that buying a bigger home might improve your financial situation, as an investment in real estate is arguably a lot safer (and certainly less volatile) than having that $250K in company stock. As long as you keep 6 figures in an emergency fund and continue to save as much as possible before kids arrive, I'd say it's hard to argue that you can't afford a million dollar mortgage at today's interest rates. That's a monthly payment of $5,653 (assuming a 4.5% 30 yr $1.12M mortgage) plus around $1500 in taxes and insurance which gives you a monthly housing payment of $7,153, or 31% of your gross income.

Now whether you should spend that much and whether you want to afford that kind of mortgage is another story. If it will improve your lifestyle dramatically by minimizing your commute, increasing your comfort, and allowing your kids better and cheaper education and childcare alternatives, then maybe it's worth the loss of savings that will be required to take on the increased financial burden. However you have to also factor in the increased financial burden of having children on top of the more expensive housing. You may not be able to withstand both increased housing and childcare expenses while maintaining any semblance of the lifestyle you currently enjoy without completely slashing your savings rate.
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Re: Affording a 1.3 million home?

Post by Theotree » Fri Aug 08, 2014 5:11 pm

I know you only asked for advice re: the home but I think you should sell, sell, sell those company stocks. Company stocks are a financial double risk. Ask any former Bear Stearns employee.

As for the house I agree with those who mentioned putting together a realistic budget. If the P&I plus insurance and real estate taxes (AND maintenance) put you over 50% of your salaries minus bonus, I wouldn't do it. If you need to go with a larger down payment just make sure you leave an adequate EF.

And if you have kids, I promise they only get more expensive as they get older...

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Re: Affording a 1.3 million home?

Post by AJTrenkle » Fri Aug 08, 2014 5:50 pm

At the end of the day don't overthink it. You seem like someone who is successf and you and your wife have excellent skills and job prospects. You are obviously conscientious and good at managing your money.

$1.3M is probably the top of your budget and this explains why it is even worth discussing. You do have great savings and I would suggest your incomes are as likely to rise as some of the doomsday scenario is here. Those are still worth considering though of course. You seem to know the local real estate conditions so pick a good house you can live in for a long time. Do budget in future daycare expenses and look at what specific places cost.

I would preserve as much liquidity as possible. I think it is unwise to have everything in real estate and putting less down would provide you a size able emergency fund ( or the move to Wyoming fund). Not to mention that over the long term it will probably have a greater return than the interest rate savings on the mortgage. Also if you think property values will go up it is better to be leveraged and if you think they will decline it is better to keep money in other investments. Win win. I realize others may view this differently but it's the way I have always thought of it.

If you do stretch to $1.3M the key to me is to really think it through and be absolutely sure it is th place you can be for a while. Since you don't have kids yet realize your priorities will change a lot. Being closer to family, places with good kids programs and entertainment, and less of a commute will be a bigger deal. That is maybe the one big reason to wait because it is hard to know what you will care about ahead of time.

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Re: Affording a 1.3 million home?

Post by DFWinvestor » Fri Aug 08, 2014 6:13 pm

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

I live in a $600k house. I would never consider buying a $1.3MM house.
Sorry but I am not sure how this is relevant. There are many bogleheads who make a very good salary but spend less than they could, some arguably to the point of being gluttons for punishment.

I think the OP's net worth is at a level that the home is affordable. Expensive, yes, and for most people at that salary a bad idea, but given net worth it is affordable.

Biggest question is what kind of tax burden from the result of selling company stock.

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Re: Affording a 1.3 million home?

Post by madbrain » Fri Aug 08, 2014 6:50 pm

Valuethinker wrote: Land has zero or negative value?

That seems wrong. Unless the house is a wreck (and you've told us quite the opposite) that has to be demolished, then land has a positive value in most places. The other negative value on land is the long term cost of taxes: that's why Detroit houses sell for $5k etc.

$200-300 per square foot is probably reasonable reconstruction cost for a high cost area like the Bay. Oddly, it would be cheaper to knock down and rebuild from scratch than to repair a badly damaged home.
My point was that it's possible for the house rebuilding cost to be higher than the market value of house + lot.

One can build a very nice unique house with premium materials for a lot of money, that isn't necessarily going to command a big premium in the market .
But the main drivers of home values in my area are the bad east San Jose public schools, which I couldn't care less about as I don't have kids, but which the real estate resale market does.
It doesn't mean that building costs are any more or less than in more expensive cities like Cupertino, Saratoga, or Mountain View

The problem is that assuming that a house market value = building cost + land value is not really correct. If that was true, then land value would be zero or negative for my house.
But in reality, a very nice home that would cost the same $1.8M to rebuild won't have the same market value depending on whether it's sitting in a lot in East San Jose or Cupertino, Palo Alto or East Palo Alto. And the difference in market value of land + building is more than just the difference in land value.

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Re: Affording a 1.3 million home?

Post by sscritic » Fri Aug 08, 2014 7:01 pm

madbrain wrote: My point was that it's possible for the house rebuilding cost to be higher than the market value of house + lot.
...
The problem is that assuming that a house market value = building cost + land value is not really correct. If that was true, then land value would be zero or negative for my house.
Where my father lives, the market value = land value - demolition cost. A $1.3 million house is a tear-down, so the lot must be valued at more than $1.3 million. For example, if it takes $100k to demolish the old house and clear everything down to the bare lot, the land must be worth $1.4 million, which was the actual cost of getting that bare lot.

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Re: Affording a 1.3 million home?

Post by rnitz » Fri Aug 08, 2014 9:12 pm

SpartanSJ wrote:IN SD we will be looking at carmel valley area for super short commute and to be closer to beach...Agree is cheaper than bay area but still in 900K-1million. See redfin stats


From redfin (last 90 days)

Median List Price $965K
Median List $/Sq Ft $418
Median Sale Price $914K
Median Sale $/Sq Ft $405
Median Sale / List 97.7%
Avg. Number of Offers 2.1
Avg. Down Payment 49.4%
Number of Homes Sold 186


tommy_gunn wrote:
SpartanSJ wrote:thanks for all the inputs folks..
With my profile, would would be the max you guys recommend we spend on a home?? (

In terms of moving from bay area, we can easily get jobs in SoCAl (SD) but what i am hearing from my friends is that the housing market there has also picked up a lot. We would probably get a much better home for the same price but in good school district with less commute, the home prices are still north of 900K/1million
SD'er here, and also tech guy ... you can get A LOT of house for $1mil or less, so either you are looking at a monster pad in La Jolla or Carlsbad or some penthouse high rise in Gaslamp, or your friends are giving you weird figures. I bought recently for far under a mil, in a great part of town, and did a lot of looking around, and for $850k in Carlsbad/Encinitas you can get a very large 4bd/2500+sqft house. Yes, the market is very hot, but we are still not close to SF (definitely no $1mil 2 bedroom houses here like the earlier poster noted). If you go to the popular school areas (Poway, Scripps Ranch) a mil gets you quite a lot. Don't at all see why you wouldn't be heavily considering SoCal for the cost. No chance in hell I would be buying $1.3mil house in the bay for average specs. Can you afford it, yes, but man so many variables can push it the wrong direction with kids, daycare, tech volatility...
As someone who was born, raised, and went to college on the peninsula (Palo Alto), but who moved and has lived in San Diego (Carmel Valley) the last 25 years, I think the question is: what type of lifestyle do you want? You will have more tech/business opportunity in the Bay Area, but a more relaxed lifestyle in San Diego. What's important to you (and your family/kids)? If you're aspiring for the tech megamillions I would buy and stay in the Bay Area. If you're more interested in balancing the work/family lifestyle, I would recommend considering North San Diego.

As a side note: Peninsula real estate values are incredibly volatile right now. My Mom passed away a couple of years ago and we recently sold her place this year. It sold for 2.5x the value that it appraised for in 2011 (two different appraisals, six months apart). It's hard for me to believe that there might not be a down draft in values to match this huge up draft the last few years. Good luck with your decision.

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Re: Affording a 1.3 million home?

Post by LongerPrimer » Fri Aug 08, 2014 10:19 pm

^ OP understands the numbers and alternatives. He's just not sure if he/she is getting value from this 1.3M

DS works in Seattle. Many of his friends/classmates have settled in the Bay area. He thought about moving but came to the conclusion that he really like the PNW (raised in PNW) and to move to CA, he would need 40% more than what he making now just to have the same standard of living and with fewer housing choices, and activities.

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Re: Affording a 1.3 million home?

Post by stemikger » Sat Aug 09, 2014 12:28 am

Good Luck with whatever you decide to do. You will make it work either way!
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!

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Re: Affording a 1.3 million home?

Post by Pizzasteve510 » Sat Aug 09, 2014 12:41 am

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Re: Affording a 1.3 million home?

Post by SDBoggled » Sun Aug 10, 2014 12:36 am

SpartanSJ wrote:Hi,
The homes that we are liking with all the features/location are now in 1.3-1.4million range :(
IMHO you can definitely afford it - you already have saved a very large % of the house value. Bay Area vs San Diego is a personal lifestyle choice.

Here is a strategy for your consideration: Instead of buying a house with all the features, edge into the peninsula market by securing the location and lot:

* Have a 30 year fixed mortgage
* Buy a too small house, house in need of renovation or house lacking in features, in one of the best school districts, in the feeder area for the best elementary schools.
* Use bonuses to upgrade the house, a project at a time.

I think the 30 year fixed mortgage, makes payments possible on 1 salary and there is no prepayment penalty. It may cost a bit higher interest rate, but IMHO it is pretty good tax deductible price for flexibility. The strategy of getting the ideal house over time has the advantage of lower property taxes, allows "pay-as-you-earn" and allows flexibility as priorities change (e.g.you may prefer to have a stay at home parent for periods of time or try your hand at a startup than say a top of the line kitchen, may later like the idea of an investment house instead of 100% in primary).

Chances are that your income to house cost ratio will only improve over time (perhaps dramatically).

Great problems to have. Enjoy!

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Re: Affording a 1.3 million home?

Post by RobInCT » Sun Aug 10, 2014 7:59 am

I think you can afford it, and I think you should do it as long as you are reasonably certain that this is a home you'll want to stay in for a very long time.

People who are suggesting renting for a few years seem to discount the possibility that both rent and housing prices may continue to rise, perhaps to the point where they are no longer affordable. A big advantage to having a mortgage is that you know exactly what you will be paying every month, virtually in perpetuity, regardless of what happens in the real estate market. Provided that is a number you can afford ("afford" taking into account all of the factors already mentioned in the thread--child care costs, possibility of unemployment, costs of insurance, etc.), then owning provides a tremendous peace of mind. Worst case scenario, even if the market tanks, your losses are only paper losses unless for some reason you're looking to sell.

As an anecdotal story, I have several friends in your approximate age bracket and a few years older who are moving out of New York because they did not buy 3-7 years ago when they could have afforded it "because the market was overpriced" and can now no longer afford any home that they would want to live in in any area in which they would wish to live. Rents in these areas have been similarly unstable and they're been finding themselves having to move every couple of years as they get priced out of their current rentals. Moving frequently to chase lower rent is a pretty significant burden, both financially and psychologically, particularly once small children begin to factor into the equation. Perhaps it's different in NoCal, but on the East Coast, salaries have not kept pace with rising housing costs.

Some on this thread would clearly not view being priced out of the city altogether as a bad thing, but if you're really happy there and sure you want to be there long-term, I'd recommend the financial security of a mortgage.

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Re: Affording a 1.3 million home?

Post by macchiato » Sun Aug 10, 2014 8:41 am

random_walker_77 wrote:Keep in mind that for earthquakes, you're insuring the building, not the land. 1.3M homes in the bay area are typically 200K homes located on 1.1M land plots. Clearing and rebuilding after an earthquake will presumably be expensive due to high labor costs and shortages of tradesmen in the aftermath of a major earthquake.
You have to recalibrate that a bit. It's more like $400K homes on $900K worth of land. You can't rebuild a house for $200K anymore in the Bay Area, unless you're a well-connected builder.

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Re: Affording a 1.3 million home?

Post by Leemiller » Sun Aug 10, 2014 9:29 am

SDBoggled wrote:
SpartanSJ wrote:Hi,
The homes that we are liking with all the features/location are now in 1.3-1.4million range :(
IMHO you can definitely afford it - you already have saved a very large % of the house value. Bay Area vs San Diego is a personal lifestyle choice.

Here is a strategy for your consideration: Instead of buying a house with all the features, edge into the peninsula market by securing the location and lot:

* Have a 30 year fixed mortgage
* Buy a too small house, house in need of renovation or house lacking in features, in one of the best school districts, in the feeder area for the best elementary schools.
* Use bonuses to upgrade the house, a project at a time.

I think the 30 year fixed mortgage, makes payments possible on 1 salary and there is no prepayment penalty. It may cost a bit higher interest rate, but IMHO it is pretty good tax deductible price for flexibility. The strategy of getting the ideal house over time has the advantage of lower property taxes, allows "pay-as-you-earn" and allows flexibility as priorities change (e.g.you may prefer to have a stay at home parent for periods of time or try your hand at a startup than say a top of the line kitchen, may later like the idea of an investment house instead of 100% in primary).

Chances are that your income to house cost ratio will only improve over time (perhaps dramatically).

Great problems to have. Enjoy!
That is almost exactly what we are doing. 20% down with a 30 year fixed. The house is huge, in a top public school pyramid, and in a very desirable neighborhood with a good commute. It does need serious renovations and repairs, which would be much easier if we didn't already have a child.

We decided the 30 year fixed gives us maximum flexibility & a good tax deduction. We are cash flowing the renovations so far and learning as we go (this isn't easy but we expect to have several hundred thousand in additional equity when we are done). As far as one of us losing our jobs we could probably swing the payments for awhile (child care would be minimal as one parent would be home) but I haven't run all the numbers. More likely one of us would go from private to the government and then we could definitely still afford the home. Fwiw we are at about 2x income in mortgage but will have 150-200k in renovations I expect when all is said and done.
The tax break for owning vs the high rent we were paying pushed us over the edge.

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Re: Affording a 1.3 million home?

Post by tphp99 » Mon Aug 11, 2014 8:08 am

SpartanSJ wrote:thanks for all the inputs folks..

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



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

We try to pay cash, less stress. We've taken out mortgages in the past, but we would pay them off in less than 5 years.

But... our biggest home purchase was about 75% of our average annual pay.

If the mortgage will not stress you out, go for it.

pinhead
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Re: Affording a 1.3 million home?

Post by pinhead » Mon Aug 11, 2014 3:18 pm

When famous rich people declare bankruptcy, u will notice sometimes they cant even afford a $1.3m home payments. And we are talking bout has beens who once had net worth over $50m etc...

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Re: Affording a 1.3 million home?

Post by Simple Simon » Tue Aug 12, 2014 1:31 am

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

http://www.nasdaq.com/article/bet-again ... y-cm260904

wantrepreneur
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Re: Affording a 1.3 million home?

Post by wantrepreneur » Tue Aug 12, 2014 4:54 pm

My wife and I are a couple of years younger, no kids, have almost identical yearly income, and have lived in Bay Area since 2001. Our net worth is $2.6M and we are NOT going to buy a home in the Bay Area. Back in 2010, we seriously considered buying a home, got an offer accepted for a $620K home but it didn't work out because owner didn't want to fix roof that had lived its life. The current prices are ridiculously high - the only way people can afford them is via increasing tech salaries and a constant bull market that makes RSUs/options worth more and more. I came to Bay Area when the first tech bubble had burst and have seen this bubble form. I don't consider it sustainable and my wife is happy to trust me on that. I plan to give up working for the man in the next year and pursue what I "think" is my calling in life. A house would stop me from doing that.

As lots of people have suggested, you can certainly afford at your current income level. You can also afford a Maserati or a Tesla p85 - but you aren't running out to go buy one. A house bought at current price level has a low chance of turning out to be a great "investment". If you see this house bringing your family happiness for years and years to come, then go ahead and buy it.

Good luck with whatever you decide!
Last edited by wantrepreneur on Tue Aug 12, 2014 5:10 pm, edited 1 time in total.

ticker
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Re: Affording a 1.3 million home?

Post by ticker » Tue Aug 12, 2014 5:00 pm

I would argue to go buy it.
You are at the beginning of your careers and based on the numbers I'd say you are still very low on the totem pole.
Buy the house and work your way up. With a bit of luck in a few years your income will be 3-5x and this will be the place you rent out...

T.

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