Housing affordability - what is your take?

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randomguy
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Re: Housing affordability - what is your take?

Post by randomguy » Wed Aug 15, 2018 9:14 am

FoolMeOnce wrote:
Wed Aug 15, 2018 7:10 am
Single, no kids, good apartment in a good neighborhood with surprisingly low rent and good management, why bother even considering buying something?

Some thoughts: https://jlcollinsnh.com/2013/05/29/why- ... nvestment/
stocknoob4111 wrote:
Sun Aug 12, 2018 11:41 am
A good friend of mine bought in the same area for $265,000 in 1999 and now his home is appraised for $690,000.
That isn't a great reason to buy. That price appreciation has roughly kept pace with the SP500.
Yep and that makes it an insanely great reason to buy. Run the math on how much more money the person who chose to buy that house in 1999 has versus the one who chose to rent that house and invest in the S&P 500 has. At a high level you are basically ignoring the dividend of the house (i.e. a place to live:)).

nyclon
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Re: Housing affordability - what is your take?

Post by nyclon » Wed Aug 15, 2018 9:23 am

My take is to rent.

People I know - that range from net worth percentiles from 10% to 0.01% all complain about the cost of buying. So, there's that.

Mjar
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Re: Housing affordability - what is your take?

Post by Mjar » Wed Aug 15, 2018 9:44 am

stocknoob4111 wrote:
Sun Aug 12, 2018 11:41 am
For someone Single making an income of $120k/yr, what do you think should be the maximum to be spent on housing related expenses (PITI + HOA + Maintenance) monthly? I like Dave Ramsey's formula of 25% of take home on a 15 year fixed with 20% down but it is impossible here in SoCal (and will remain impossible, EVEN IF home prices drop 50% tomorrow the formula STILL would not work! :shock:)

After tax income for $120k/yr after contributing max to 401k and Roth and $200/mo health insurance is $5,063.89
Max housing expenses @ 30% of Net: $1,520 (PITI+HOA+Maintenance)

Going backwards from payment at 20% down and a 30 yr fixed at 4.8% that would be a max home of $200,000. There are very few homes in the entire SoCal region even at triple this price level so obviously the $200k figure is far removed from reality unless prices drop 70%!!

PI = $1049
T = $209
HOA = $300
Maintenance = $100

Total: ~$1,658

Houses around my area (I don't live in any ritzy area just average suburbia), 1500sqft, 3bd run around $750,000 :shock: I'm trying to understand the disconnect between the numbers I am running above, affordability metrics and home prices. Are only very high income dual income people buying real estate in the large metros? How are single income individuals affording homes with traditional affordability metrics? Or are they using different metrics?

A good friend of mine bought in the same area for $265,000 in 1999 and now his home is appraised for $690,000.
why not find a place that doesn't have the HOA and you can move that $300 towards PI?

stoptothink
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Re: Housing affordability - what is your take?

Post by stoptothink » Wed Aug 15, 2018 10:09 am

bstewie wrote:
Tue Aug 14, 2018 8:58 pm
Other friends of ours are heavily supplemented by their parents and are definitely not saving for retirement.
I am finding out more and more that this is the case, and we're not exactly a fresh out of school couple (37 and 32). I can't believe how many of my friends, neighbors, and extended family members will openly they can't afford the living situation they put themselves in so their parents fund it. I have two cousins who are currently living with their spouses in my aunt and uncle's home. My uncle gave them money for a downpayment when both of them wed and both went out and bought homes (even with 20% I have no clue how they were approved, I assume my uncle's name is on the mortgage), but moved back home so they could rent out said homes. One of them is in fact trying to buy another home right now so they can have another rental, while continuing to live with my uncle. These are late 20's couples with combined incomes probably in the ~$50k/yr range. I have an employee, in a mid-management position, who works a 2nd job so she can do this for both her adult children. Learning more about these situations is a massive reason for my evolving perspective on raising self-reliant children.

bloom2708
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Re: Housing affordability - what is your take?

Post by bloom2708 » Wed Aug 15, 2018 10:13 am

nyclon wrote:
Wed Aug 15, 2018 9:23 am
My take is to rent.

People I know - that range from net worth percentiles from 10% to 0.01% all complain about the cost of buying. So, there's that.
+1

Get a spouse with a big salary, save up a big pile, have a kid or 2. THEN it still may make sense to rent in CA.

Don't let the "dream" of home ownership cloud things up. You need a place to sleep, eat, watch TV and store some stuff. Renting accomplishes that just fine.
"We are not here to please, but to provoke thoughtfulness." --Unknown Boglehead

surfer949
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Re: Housing affordability - what is your take?

Post by surfer949 » Wed Aug 15, 2018 10:15 am

bstewie wrote:
Tue Aug 14, 2018 8:58 pm
We purchased a home recently in SoCal at 2x our annual gross income. We have mixed income, one high earner, one low earner. We both intend to continue working for the long haul. In the past three months the prices here have gone up 5%. Fortunately for us, we had one unexpected job transition and one unexpected raise. On an adjusted basis our home purchase price is now 1.25x our annual gross income. We do not expect this to last forever so we are stashing away as much money as we can interim. Friends of ours who are responsible for themselves in the same general vicinity of SoCal are commuting ~2h each way to make ends meet and are definitely not saving for retirement. Other friends of ours are heavily supplemented by their parents and are definitely not saving for retirement.
How did you come up with the down payment and how much did you put down? I'm trying to figure how to purchase a townhome or condo in OC.

nyclon
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Re: Housing affordability - what is your take?

Post by nyclon » Wed Aug 15, 2018 10:30 am

bloom2708 wrote:
Wed Aug 15, 2018 10:13 am
nyclon wrote:
Wed Aug 15, 2018 9:23 am
My take is to rent.

People I know - that range from net worth percentiles from 10% to 0.01% all complain about the cost of buying. So, there's that.
+1

Get a spouse with a big salary, save up a big pile, have a kid or 2. THEN it still may make sense to rent in CA.

Don't let the "dream" of home ownership cloud things up. You need a place to sleep, eat, watch TV and store some stuff. Renting accomplishes that just fine.
+1

OP has a great personal balance sheet and an amazing deal. If ain't broke, don't fix it.

FoolMeOnce
Posts: 326
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Re: Housing affordability - what is your take?

Post by FoolMeOnce » Wed Aug 15, 2018 11:17 am

randomguy wrote:
Wed Aug 15, 2018 9:14 am
FoolMeOnce wrote:
Wed Aug 15, 2018 7:10 am
Single, no kids, good apartment in a good neighborhood with surprisingly low rent and good management, why bother even considering buying something?

Some thoughts: https://jlcollinsnh.com/2013/05/29/why- ... nvestment/
stocknoob4111 wrote:
Sun Aug 12, 2018 11:41 am
A good friend of mine bought in the same area for $265,000 in 1999 and now his home is appraised for $690,000.
That isn't a great reason to buy. That price appreciation has roughly kept pace with the SP500.
Yep and that makes it an insanely great reason to buy. Run the math on how much more money the person who chose to buy that house in 1999 has versus the one who chose to rent that house and invest in the S&P 500 has. At a high level you are basically ignoring the dividend of the house (i.e. a place to live:)).
Yeah, I've been thinking about that more since I posted. It was a very broad, general statement that ignored saving the rent that you would otherwise pay. On the other hand, it also ignored the property taxes you would have to pay. On another hand, it ignored that you get the full investment amount up front but get to pay for it slowly over decades. On yet another hand, it ignored the extra money you have to pay in interest. On another hand still, it ignores that the interest payments get cheaper over time due to inflation.

I think my takeaway is still that it is not a great reason to buy, and definitely not an "insanely great" reason to buy. There's a lot of math in there, plus the considerations of having less flexibility, liquidity, and diversification than renting, so I'm not convinced that a home value keeping pace with the stock market is a decisive and massive win.

stocknoob4111
Posts: 326
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Re: Housing affordability - what is your take?

Post by stocknoob4111 » Wed Aug 15, 2018 12:21 pm

just for kicks I decided to do some math here...

Housing -

Median National home price in Q1 1988: $110,000
Median National home price in Q1 2018 (30 years later): $328,000
Average Appreciation rate: 3.7%
Total interest paid @ 7%: $153,460
Inflation adjusted value of original purchase 1988-2018: $235,630
Average Inflation rate: 2.55%
Rate of return after interest: 1.54%

So in effect, housing has increased 1.15% above the average inflation rate
With interest taken into account growth rate was NEGATIVE -1.01%

S&P 500 (using 100% VFINX portfolio) -

Invested in Q1 1988: $110,000
Ending balance Q2 2018 (original principal only - no further additions): $2,379,481 :shock:
CAGR: 10.57%

Edit - with 22,000 initial investment (i.e. invest only the 20% downpayment), then contribute monthly payment.
Ending balance Q2 2018: $1,936,678

Housing vs Equities, not even close!!! The stock market has returned 7X that of housing over the last 30 years. Granted you have to deduct rental expenditure from the stock returns, however, I would counter that housing has property taxes, maintenance and interest. Interest in 1988 was shockingly high in the 10% range and did not dip below 5 until 2009. Total interest at an average rate of 7% would've been $150,000 worth of interest which is in addition to the home price.

Investing in the markets blows away any investment in housing.

QED - Quad Era Demonstrandum, housing sucks as an investment. It has other value but wealth building, as you can see, it is a very poor wealth building tool. I guess it does make sense for those who don't have any discipline to save any other way but I think that excludes the demographic of this forum at least.

One counter argument that is made is that interest rates are at historic lows, but that is changing now. Also, if we adopt the notion that prices move inverse to interest rates then even the current median would be inflated and housing would have an even lower return than above.

Sources -
Home prices: https://fred.stlouisfed.org/series/MSPUS
Inflation: https://data.bls.gov/cgi-bin/cpicalc.pl ... ar2=201703
Interest rates: http://www.fedprimerate.com/mortgage_rates.htm
Backtest Portfolio Visualizer for stock market returns
Last edited by stocknoob4111 on Wed Aug 15, 2018 1:33 pm, edited 8 times in total.

nyclon
Posts: 307
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Re: Housing affordability - what is your take?

Post by nyclon » Wed Aug 15, 2018 12:24 pm

stocknoob4111 wrote:
Wed Aug 15, 2018 12:21 pm
just for kicks I decided to do some math here...

Housing -

Median National home price in Q1 1988: $110,000
Median National home price in Q1 2018 (30 years later): $328,000
Average Appreciation rate: 3.7%
Inflation adjusted value of original purchase 1988-2018: $235,630
Average Inflation rate: 2.55%

So in effect, housing has increased 1.15% above the average inflation rate

S&P 500 (using 100% VFINX portfolio) -

Invested in Q1 1988: $110,000
Ending balance Q2 2018 (original principal only - no further additions): $2,379,481 :shock:
CAGR: 10.57%

Housing vs Equities, not even close!!! The stock market has returned 10X that of housing over the last 30 years. Granted you have to deduct rental expenditure from the stock returns, however, I would counter that housing has property taxes, maintenance and interest. Interest in 1988 was shockingly high in the 10% range and did not dip below 5 until 2009.

Investing in the markets blows away any investment in housing.

QED - Quad Era Demonstrandum, housing sucks as an investment. It has other value but wealth building, as you can see, it is a very poor wealth building tool. I guess it does make sense for those who don't have any discipline to say any other way but I think that excludes the demographic of this forum at least.

Sources -
Home prices: https://fred.stlouisfed.org/series/MSPUS
Inflation: https://data.bls.gov/cgi-bin/cpicalc.pl ... ar2=201703
Backtest Portfolio Visualizer for stock market returns
Interest rates: http://www.fedprimerate.com/mortgage_rates.htm
Other ownership costs include the buying/selling commissions+fees.

randomguy
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Re: Housing affordability - what is your take?

Post by randomguy » Wed Aug 15, 2018 1:12 pm

FoolMeOnce wrote:
Wed Aug 15, 2018 11:17 am
randomguy wrote:
Wed Aug 15, 2018 9:14 am
FoolMeOnce wrote:
Wed Aug 15, 2018 7:10 am
Single, no kids, good apartment in a good neighborhood with surprisingly low rent and good management, why bother even considering buying something?

Some thoughts: https://jlcollinsnh.com/2013/05/29/why- ... nvestment/
stocknoob4111 wrote:
Sun Aug 12, 2018 11:41 am
A good friend of mine bought in the same area for $265,000 in 1999 and now his home is appraised for $690,000.
That isn't a great reason to buy. That price appreciation has roughly kept pace with the SP500.
Yep and that makes it an insanely great reason to buy. Run the math on how much more money the person who chose to buy that house in 1999 has versus the one who chose to rent that house and invest in the S&P 500 has. At a high level you are basically ignoring the dividend of the house (i.e. a place to live:)).
Yeah, I've been thinking about that more since I posted. It was a very broad, general statement that ignored saving the rent that you would otherwise pay. On the other hand, it also ignored the property taxes you would have to pay. On another hand, it ignored that you get the full investment amount up front but get to pay for it slowly over decades. On yet another hand, it ignored the extra money you have to pay in interest. On another hand still, it ignores that the interest payments get cheaper over time due to inflation.

I think my takeaway is still that it is not a great reason to buy, and definitely not an "insanely great" reason to buy. There's a lot of math in there, plus the considerations of having less flexibility, liquidity, and diversification than renting, so I'm not convinced that a home value keeping pace with the stock market is a decisive and massive win.
It is a massive win. And it really isn't even close. First off lets ignore rent and mortgage payment and taxes. The house buyer had 265k growing at 6%. The renter had 52k (i.e. house downpayment) growing at ~5%.
52k-> 131K
265k->670K
Thats a 540k deficit. And lets not ignore how much lower the Homeowners expenses are. They have a 200k mortgage. The renter though is paying for his landlords 600k one. Renter was probably cheaper in year 1-5ish but after that it keep getting more and more expensive every year. They probalby went from like 700/month of rent to 2k over this time period.

Obviously there is a lot of hindsight bias here but if you told me a house would go up 5%/year, I am not sure anyone would suggest not buying it:)

FoolMeOnce
Posts: 326
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Re: Housing affordability - what is your take?

Post by FoolMeOnce » Wed Aug 15, 2018 1:24 pm

randomguy wrote:
Wed Aug 15, 2018 1:12 pm
FoolMeOnce wrote:
Wed Aug 15, 2018 11:17 am
randomguy wrote:
Wed Aug 15, 2018 9:14 am
FoolMeOnce wrote:
Wed Aug 15, 2018 7:10 am
Single, no kids, good apartment in a good neighborhood with surprisingly low rent and good management, why bother even considering buying something?

Some thoughts: https://jlcollinsnh.com/2013/05/29/why- ... nvestment/
stocknoob4111 wrote:
Sun Aug 12, 2018 11:41 am
A good friend of mine bought in the same area for $265,000 in 1999 and now his home is appraised for $690,000.
That isn't a great reason to buy. That price appreciation has roughly kept pace with the SP500.
Yep and that makes it an insanely great reason to buy. Run the math on how much more money the person who chose to buy that house in 1999 has versus the one who chose to rent that house and invest in the S&P 500 has. At a high level you are basically ignoring the dividend of the house (i.e. a place to live:)).
Yeah, I've been thinking about that more since I posted. It was a very broad, general statement that ignored saving the rent that you would otherwise pay. On the other hand, it also ignored the property taxes you would have to pay. On another hand, it ignored that you get the full investment amount up front but get to pay for it slowly over decades. On yet another hand, it ignored the extra money you have to pay in interest. On another hand still, it ignores that the interest payments get cheaper over time due to inflation.

I think my takeaway is still that it is not a great reason to buy, and definitely not an "insanely great" reason to buy. There's a lot of math in there, plus the considerations of having less flexibility, liquidity, and diversification than renting, so I'm not convinced that a home value keeping pace with the stock market is a decisive and massive win.
It is a massive win. And it really isn't even close. First off lets ignore rent and mortgage payment and taxes. The house buyer had 265k growing at 6%. The renter had 52k (i.e. house downpayment) growing at ~5%.
52k-> 131K
265k->670K
Thats a 540k deficit. And lets not ignore how much lower the Homeowners expenses are. They have a 200k mortgage. The renter though is paying for his landlords 600k one. Renter was probably cheaper in year 1-5ish but after that it keep getting more and more expensive every year. They probalby went from like 700/month of rent to 2k over this time period.

Obviously there is a lot of hindsight bias here but if you told me a house would go up 5%/year, I am not sure anyone would suggest not buying it:)
This just shows that if two numbers grow at an identical rate, the starting number that is larger will end up larger. I think a lot of missing from this analysis.

TOJ
Posts: 365
Joined: Wed Mar 02, 2016 9:19 pm

Re: Housing affordability - what is your take?

Post by TOJ » Wed Aug 15, 2018 1:27 pm

OP,

There is a real estate forum out there somewhere where someone making $120k is complaining that they can’t max their 401k and Roth IRA because of their $4k/mo PITI. Unfortunately the rest of the market is choosing for you. The rest of the market is willing to forego retirement savings in order to afford the house they want. Prices have gone up because people will pay, unfortunately.

TOJ
Posts: 365
Joined: Wed Mar 02, 2016 9:19 pm

Re: Housing affordability - what is your take?

Post by TOJ » Wed Aug 15, 2018 1:35 pm

FoolMeOnce wrote:
Wed Aug 15, 2018 1:24 pm
randomguy wrote:
Wed Aug 15, 2018 1:12 pm
FoolMeOnce wrote:
Wed Aug 15, 2018 11:17 am
randomguy wrote:
Wed Aug 15, 2018 9:14 am
FoolMeOnce wrote:
Wed Aug 15, 2018 7:10 am
Single, no kids, good apartment in a good neighborhood with surprisingly low rent and good management, why bother even considering buying something?

Some thoughts: https://jlcollinsnh.com/2013/05/29/why- ... nvestment/



That isn't a great reason to buy. That price appreciation has roughly kept pace with the SP500.
Yep and that makes it an insanely great reason to buy. Run the math on how much more money the person who chose to buy that house in 1999 has versus the one who chose to rent that house and invest in the S&P 500 has. At a high level you are basically ignoring the dividend of the house (i.e. a place to live:)).
Yeah, I've been thinking about that more since I posted. It was a very broad, general statement that ignored saving the rent that you would otherwise pay. On the other hand, it also ignored the property taxes you would have to pay. On another hand, it ignored that you get the full investment amount up front but get to pay for it slowly over decades. On yet another hand, it ignored the extra money you have to pay in interest. On another hand still, it ignores that the interest payments get cheaper over time due to inflation.

I think my takeaway is still that it is not a great reason to buy, and definitely not an "insanely great" reason to buy. There's a lot of math in there, plus the considerations of having less flexibility, liquidity, and diversification than renting, so I'm not convinced that a home value keeping pace with the stock market is a decisive and massive win.
It is a massive win. And it really isn't even close. First off lets ignore rent and mortgage payment and taxes. The house buyer had 265k growing at 6%. The renter had 52k (i.e. house downpayment) growing at ~5%.
52k-> 131K
265k->670K
Thats a 540k deficit. And lets not ignore how much lower the Homeowners expenses are. They have a 200k mortgage. The renter though is paying for his landlords 600k one. Renter was probably cheaper in year 1-5ish but after that it keep getting more and more expensive every year. They probalby went from like 700/month of rent to 2k over this time period.

Obviously there is a lot of hindsight bias here but if you told me a house would go up 5%/year, I am not sure anyone would suggest not buying it:)
This just shows that if two numbers grow at an identical rate, the starting number that is larger will end up larger. I think a lot of missing from this analysis.
Right. The larger number is missing all the principal and interest paid to acquire it.

FunnelCakeBob
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Re: Housing affordability - what is your take?

Post by FunnelCakeBob » Wed Aug 15, 2018 1:39 pm

bloom2708 wrote:
Wed Aug 15, 2018 10:13 am
Don't let the "dream" of home ownership cloud things up. You need a place to sleep, eat, watch TV and store some stuff. Renting accomplishes that just fine.
+100. Wisest thing I've read so far today.

bstewie
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Joined: Wed Oct 04, 2017 8:16 pm

Re: Housing affordability - what is your take?

Post by bstewie » Wed Aug 15, 2018 2:19 pm

stoptothink wrote:
Wed Aug 15, 2018 10:09 am
bstewie wrote:
Tue Aug 14, 2018 8:58 pm
Other friends of ours are heavily supplemented by their parents and are definitely not saving for retirement.
I am finding out more and more that this is the case, and we're not exactly a fresh out of school couple (37 and 32). I can't believe how many of my friends, neighbors, and extended family members will openly they can't afford the living situation they put themselves in so their parents fund it. I have two cousins who are currently living with their spouses in my aunt and uncle's home. My uncle gave them money for a downpayment when both of them wed and both went out and bought homes (even with 20% I have no clue how they were approved, I assume my uncle's name is on the mortgage), but moved back home so they could rent out said homes. One of them is in fact trying to buy another home right now so they can have another rental, while continuing to live with my uncle. These are late 20's couples with combined incomes probably in the ~$50k/yr range. I have an employee, in a mid-management position, who works a 2nd job so she can do this for both her adult children. Learning more about these situations is a massive reason for my evolving perspective on raising self-reliant children.
Yes, it is extreme and unfortunate. I have close family members still supplementing their 30+ yr old kids. In almost all cases I can think of, it doesn't need to be this way. The kids are more than capable of being on their own and renting, but it would conflict with their "lifestyle".
surfer949 wrote:
Wed Aug 15, 2018 10:15 am
bstewie wrote:
Tue Aug 14, 2018 8:58 pm
We purchased a home recently in SoCal at 2x our annual gross income. We have mixed income, one high earner, one low earner. We both intend to continue working for the long haul. In the past three months the prices here have gone up 5%. Fortunately for us, we had one unexpected job transition and one unexpected raise. On an adjusted basis our home purchase price is now 1.25x our annual gross income. We do not expect this to last forever so we are stashing away as much money as we can interim. Friends of ours who are responsible for themselves in the same general vicinity of SoCal are commuting ~2h each way to make ends meet and are definitely not saving for retirement. Other friends of ours are heavily supplemented by their parents and are definitely not saving for retirement.
How did you come up with the down payment and how much did you put down? I'm trying to figure how to purchase a townhome or condo in OC.
We put 10% down, although we had sufficient funds to put 20% down. Being first time home buyers we didn't know what we didn't know and felt more comfortable keeping a cash heavy buffer in addition to our EF. The difference in rates was .125% and the PMI is reasonable given our credit (or whatever influences that... definitely not at the top end of the spectrum of rates they could have charged for PMI). We produced the down payment using a combination of some existing cash savings outside our EF, diverting what otherwise would have been taxable contributions for a period of time, and locking down all non-essential spending for a period of time. It was rough, but we made it through and are happy with the purchase. We had a long escrow period and used that time to produce the closing costs out of normal cash flow. FWIW we purchased below median in our county, which is below OC median.

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unclescrooge
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Re: Housing affordability - what is your take?

Post by unclescrooge » Wed Aug 15, 2018 4:47 pm

Valuethinker wrote:
Wed Aug 15, 2018 8:17 am
EHEngineer wrote:
Sun Aug 12, 2018 11:58 am
Couple things.

Seems like you are buying a family house as a single person.

You are buying in a ritzy area. $500/sqft is ritzy.
;-). The poorest, cheapest area of London (London Borough of Barking and Dagenham) is c. £500 psf (say USD 650-700). I could show you what USD 500 would buy you here, think a really grotty property on a Council Estate (public housing Project).
Dave ramsey is trying to give you guidelines to put you on a comfortable/stable financial path. Buying a house that's 6X your income is not comfortable. 6X is a recipe for running on a financial treadmill for the next 30 years.

120k is a very nice income in 90% of america. But you are looking in the other 10%. It sounds like where my sibling lives. Try driving inland about 5-10 more miles.
I am not sure in greater LA that the property gradients are so steep? If 5-10 miles is only another 10-20 minutes of driving ...
Depending where you live in LA, driving 20 minutes further away can actually increase prices 20%😁

tesuzuki2002
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Re: Housing affordability - what is your take?

Post by tesuzuki2002 » Wed Aug 15, 2018 4:50 pm

stocknoob4111 wrote:
Sun Aug 12, 2018 11:41 am
For someone Single making an income of $120k/yr, what do you think should be the maximum to be spent on housing related expenses (PITI + HOA + Maintenance) monthly? I like Dave Ramsey's formula of 25% of take home on a 15 year fixed with 20% down but it is impossible here in SoCal (and will remain impossible, EVEN IF home prices drop 50% tomorrow the formula STILL would not work! :shock:)

After tax income for $120k/yr after contributing max to 401k and Roth and $200/mo health insurance is $5,063.89
Max housing expenses @ 30% of Net: $1,520 (PITI+HOA+Maintenance)

Going backwards from payment at 20% down and a 30 yr fixed at 4.8% that would be a max home of $200,000. There are very few homes in the entire SoCal region even at triple this price level so obviously the $200k figure is far removed from reality unless prices drop 70%!!

PI = $1049
T = $209
HOA = $300
Maintenance = $100

Total: ~$1,658

Houses around my area (I don't live in any ritzy area just average suburbia), 1500sqft, 3bd run around $750,000 :shock: I'm trying to understand the disconnect between the numbers I am running above, affordability metrics and home prices. Are only very high income dual income people buying real estate in the large metros? How are single income individuals affording homes with traditional affordability metrics? Or are they using different metrics?

A good friend of mine bought in the same area for $265,000 in 1999 and now his home is appraised for $690,000.
Prices here in SoCal are STUPID inflated... I rent here in CA.... and Own 2 properties outright in the Midwest....

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unclescrooge
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Re: Housing affordability - what is your take?

Post by unclescrooge » Wed Aug 15, 2018 5:08 pm

surfer949 wrote:
Wed Aug 15, 2018 10:15 am
bstewie wrote:
Tue Aug 14, 2018 8:58 pm
We purchased a home recently in SoCal at 2x our annual gross income. We have mixed income, one high earner, one low earner. We both intend to continue working for the long haul. In the past three months the prices here have gone up 5%. Fortunately for us, we had one unexpected job transition and one unexpected raise. On an adjusted basis our home purchase price is now 1.25x our annual gross income. We do not expect this to last forever so we are stashing away as much money as we can interim. Friends of ours who are responsible for themselves in the same general vicinity of SoCal are commuting ~2h each way to make ends meet and are definitely not saving for retirement. Other friends of ours are heavily supplemented by their parents and are definitely not saving for retirement.
How did you come up with the down payment and how much did you put down? I'm trying to figure how to purchase a townhome or condo in OC.
I put down 3.5% on my first condo using an FHA loan back in 2001. At the time the mortgage was the same as renting an identical condo.

It went up in value, so I took out a HELOC and bought another one. Then I sold the first one, pocketed a bunch of money tax free, and moved into the second one. Two years later, I sold the second one, pocketed some more money tax free and rented it back. That was 2006, I think.

I was then a renter until 2014 while I settled down in terms of job and family. During that time, the gains from real estate were growing in the stock market.

California housing is a gold mine. You just need to be patient and buy when it makes sense based on your circumstances, and when it's a good deal. Right now it doesn't seem like a good deal, although I don't think it'll crash either.

stocknoob4111
Posts: 326
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Re: Housing affordability - what is your take?

Post by stocknoob4111 » Wed Aug 15, 2018 6:37 pm

this was just in my news feed:

https://www.foxbusiness.com/personal-fi ... for-3-down

is it good to have buyers without any skin in the game? The last time the market soured these are the people who sent the keys to the bank creating ghost towns everywhere and a foreclosure mess. Even people who could pay were strategically defaulting because they had nothing to lose. Someone who has 20% down is much less likely to walk away from their asset.

2015
Posts: 2080
Joined: Mon Feb 10, 2014 2:32 pm

Re: Housing affordability - what is your take?

Post by 2015 » Wed Aug 15, 2018 7:15 pm

AlphaLess wrote:
Tue Aug 14, 2018 10:42 pm
2015 wrote:
Tue Aug 14, 2018 8:19 pm
AlphaLess wrote:
Sun Aug 12, 2018 7:04 pm
HEDGEFUNDIE wrote:
Sun Aug 12, 2018 11:50 am
Look on the bright side, if you lived in the Bay Area a 1500sqft 3bd would cost $1.5M
3MM in NYC.
I have been told the "compound" (only in LA, and what is a "compound", anyway?) one street over from me is being listed for $12MM. Regular 2BR/2BA condos are going for $700-upper $900K, while a newly completed uber upscale architecturally designed whatintheworldisthat? building down the street contains 1300sf 2BR/2BA condos going for $1.5M.

I've been told by realtors sales have softened this year and everyone in LA can thank me for that as I am just about to list.
Compound sounds like the place where Osama Bin Laden is hiding.

Seems like a bad marketing tactic to me.
Agreed, but people in LA fall for this sort of thing all of the time. I think they should do a realtor reality show here.

Back to OP's question, my thinking is that we have been in a bullish cycle in markets for quite some time. Rather than focusing on the macro, I'm focusing on the micro. The reason I'm selling now and closing in Jan 2019 is because it's come up within my own long ago prepared plans. OTOH, I do intend to discuss with the realtor tomorrow the idea of blowing up this year's ACA savings by selling/reaping large capital gains this year (as opposed to waiting to close in Jan. 2019) because a major 2018 black swan markets crash just might interfere with my near-term plans to move soon.

randomguy
Posts: 6489
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Re: Housing affordability - what is your take?

Post by randomguy » Wed Aug 15, 2018 8:29 pm

TOJ wrote:
Wed Aug 15, 2018 1:35 pm
FoolMeOnce wrote:
Wed Aug 15, 2018 1:24 pm
randomguy wrote:
Wed Aug 15, 2018 1:12 pm
FoolMeOnce wrote:
Wed Aug 15, 2018 11:17 am
randomguy wrote:
Wed Aug 15, 2018 9:14 am


Yep and that makes it an insanely great reason to buy. Run the math on how much more money the person who chose to buy that house in 1999 has versus the one who chose to rent that house and invest in the S&P 500 has. At a high level you are basically ignoring the dividend of the house (i.e. a place to live:)).
Yeah, I've been thinking about that more since I posted. It was a very broad, general statement that ignored saving the rent that you would otherwise pay. On the other hand, it also ignored the property taxes you would have to pay. On another hand, it ignored that you get the full investment amount up front but get to pay for it slowly over decades. On yet another hand, it ignored the extra money you have to pay in interest. On another hand still, it ignores that the interest payments get cheaper over time due to inflation.

I think my takeaway is still that it is not a great reason to buy, and definitely not an "insanely great" reason to buy. There's a lot of math in there, plus the considerations of having less flexibility, liquidity, and diversification than renting, so I'm not convinced that a home value keeping pace with the stock market is a decisive and massive win.
It is a massive win. And it really isn't even close. First off lets ignore rent and mortgage payment and taxes. The house buyer had 265k growing at 6%. The renter had 52k (i.e. house downpayment) growing at ~5%.
52k-> 131K
265k->670K
Thats a 540k deficit. And lets not ignore how much lower the Homeowners expenses are. They have a 200k mortgage. The renter though is paying for his landlords 600k one. Renter was probably cheaper in year 1-5ish but after that it keep getting more and more expensive every year. They probalby went from like 700/month of rent to 2k over this time period.

Obviously there is a lot of hindsight bias here but if you told me a house would go up 5%/year, I am not sure anyone would suggest not buying it:)
This just shows that if two numbers grow at an identical rate, the starting number that is larger will end up larger. I think a lot of missing from this analysis.
Right. The larger number is missing all the principal and interest paid to acquire it.

No it more or less includes it (there is something like 70k of principle that hasn't been paid off). Person A pays rent. Person b pays off a mortgage. The kicker is how much cheaper the homeowners housing payments are. Mortgage ,insurance, and taxes on a 265k house is going to on the order of 1500-1800/month (and there is likely some tax savings still. And there is some hand waving about property taxes. In some places the person is pay 3k/year. Others 18k. That would change the rent numbers also). The rent on a 690k house is likely 2500-3k. So the homeowner gets an extra 1k/month to invest with. You can run more exact calculations factoring everything if you want but this isn't a really close decision.

Again this is all based on some really nice appreciation. If your 265k house only goes to say 350k (i.e. about the average appreciation of houses for the whole country), the math changes quite a bit and it becomes much more of a wash or even renting winning. If you could go back to 1999 and advise the person to buy the house or rent though, you would have to be insane to advice renting.

EHEngineer
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Re: Housing affordability - what is your take?

Post by EHEngineer » Thu Aug 16, 2018 5:21 pm

Valuethinker wrote:
Wed Aug 15, 2018 8:17 am
EHEngineer wrote:
Sun Aug 12, 2018 11:58 am
Couple things.

Seems like you are buying a family house as a single person.

You are buying in a ritzy area. $500/sqft is ritzy.
;-). The poorest, cheapest area of London (London Borough of Barking and Dagenham) is c. £500 psf (say USD 650-700). I could show you what USD 500 would buy you here, think a really grotty property on a Council Estate (public housing Project).
But it's still in London. The many conveniences and opportunities that surround such a place are what make it ritzy and worth $500+/sqft.
Or, you can ... decline to let me, a stranger on the Internet, egg you on to an exercise in time-wasting, and you could say "I'm probably OK and I don't care about it that much." -Nisiprius

youdiditr2
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Joined: Mon Aug 15, 2016 10:07 pm

Re: Housing affordability - what is your take?

Post by youdiditr2 » Thu Aug 16, 2018 10:54 pm

SDLinguist wrote:
Tue Aug 14, 2018 5:22 pm
stocknoob4111 wrote:
Tue Aug 14, 2018 4:08 pm
Thanks for all the great feedback on this thread. When everyone is rushing to buy homes you stop and wonder if one is missing something here!
SDLinguist wrote:
Tue Aug 14, 2018 7:58 am
I have come to the conclusion that everybody is pretty much spending everything they make and saving nothing for retirement. If my wife and I stopped saving anything we too could spend 5k a month on housing but why would we do that?
I think people are brainwashed into thinking that having a home is the primary way to build wealth when the reality is that the stock market has significantly outperformed personal investment in a home. I do like home ownership but only as a small part of one's portfolio, 2X annual for low cost areas and 3X annual for high cost is reasonable in my view. However, like it has been stated in these posts I think a lot of people are viewing homes as their sole retirement plan which I think could be a really dangerous plan. I know several people who took 401k loans or entirely liquidated their 401ks to pay for the downpayment, to me that is just insanity. 401k loans are outright dangerous since you incur severe penalties if you lose your job and can't repay it and liquidating is just crazy losing precious tax deferred space forever.

Altough many may not agree with all he says I do like this particular Dave Ramsey video:
https://www.youtube.com/watch?v=MjzM5WpWk4E
The 401k loans are crazy. A co-worker was so excited to buy a condo in inland SD county for 350k. She and her husband combine north of 200k a year almost guaranteed. She was telling us how great a 401k loan is because otherwise they would not have had the money for the 5% down they did and how great it is to only pay 5% down because you have to save less.

This was a year ago. Now they are looking to buy another condo to rent out, doing the same thing a second time. Then they would be doubly leveraged.

Rent income will be less than the mortgage she says but that's ok because appreciation makes up for it. Idk how appreciation pays the bills other than a HELOC...
Sounds like my co-worker back in 2007! Asking me why I wasn't buying property because you can buy with $0 money down and they don't really check your income! And then she wanted to introduce me to her husband, who was a mortgage broker!

We're back to 2007 again. IN 5 years, there's going to be more stories about how those evil banks are taking advantage of people and forcing them to buy houses they can't afford. Cycle repeats

stocknoob4111
Posts: 326
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Re: Housing affordability - what is your take?

Post by stocknoob4111 » Thu Sep 13, 2018 7:45 pm


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