patrick.net

Buying a home with a barely affordable mortgage is like jumping out of a plane with a barely functional parachute.

Yes, it would be hard off single income, but I'm just thinking if I could afford it on my single income if my wife didn't work, and the answer is yes, barely. The down payment would consume a bit less than a half of my liquid assets, but the remainder would cover living expenses for at least three years if neither of us worked, which is a bit of a safety buffer.

I'm looking at the lower end of that, 1.2M. I can get a 4.5% 30yr fixed loan for $960,000 with $240,000 down. Monthly payment would be ~$4850. Property tax would be ~$1300/month, and insurance probably another $200/month, costing me ~$6350/month. The $1300/month in property tax, and in the first year, ~3500 everage per month in interest is tax deductible, saving me approximately $1300/month in income taxes.

The place I'm considering bidding on would rent for ~$4500 where it is. To buy it, I'd be paying an extra $550/month in insurance and payment difference. However, over time, the income tax deduction would come down, so my net payment would be higher.

It's not exactly break even, but I'm willing to pay extra to own a place versus renting.

myob says

saving me approximately $1300/month in income taxes.

No it doesn't, it's $1300 a month less you'll be taxed on.
Depending on your tax bracket, 17% to 24% of that $1300 is what you saved, about $221 a month will be your tax savings.

That works out to $2600 a year, not even half of one month's mortgage payment.

No, I understand that. Interest paid is tax deductible (~3500/month average in first year), property tax is income tax deductible, for a total of $4800, which works out to a ~1300 deduction for me.

myob says

The place I'm considering bidding on would rent for ~$4500 where it is. To buy it, I'd be paying an extra $550/month in insurance and payment difference. However, over time, the income tax deduction would come down, so my net payment would be higher.

It's not exactly break even, but I'm willing to pay extra to own a place versus renting.

Don't forget to pull out the principal repayment as well.

Myob: are you a "local"? If so, which HS? If not, how long have you been here, where did you come from, why did you come?

Just asking.

What's an HS? Yes, I'm local. I've been a renter for a very long time, but my rental place is too small given my growing family, and I'll absolutely be needing something bigger within two years or so.

By definition, I am the demand, I am a buyer :)

high school

SFace says

The income tax benefit in the hypotheical situation is about right 1.3K a month or 16K annualized. (I saved approximately 200K in income tax over the past 12 years so I know the nuance)

...
Tax benefit (1,300)

Property tax 1,300

The tax "benefit" in the above calculation is exactly 0.

myob says

When would you buy?

I'm in FL, not CA, so my criteria would be different than yours, but... when prices are $100/sq.ft. or lower.

You mean like Officer Dan White?

Well, this housing bear has now become a falling-knife catcher. You sellers should be sending me thank you notes for propping up housing prices :)

I don't view my new house as any sort of investment, just an absurdly expensive cost of living expense in an absurdly expensive area, and I'm assuming I'll lose all of my $250k downpayment if I have to sell in the next ten years or so.

Friend, which local HS (high school) did you attend?

I did not attend a local high school. I came here after college for work. I misunderstood your question. I thought you were asking if I was moving into the area.

Friend, your post asked. "What would you do?". I could not respond without knowing the perspective. Sounds like you don't have roots here. How long have you "been local"?

About 20 years.

myob says

When would you buy?

You dont wait for someone to define the price for you as some time in the future.

You should be able to define the price yourself.

so your question should be ... How much would you pay for this home, at any given time all based on standard ration of price to income (3.5x), inflation, rental, and long term trends. Read up on Robert Shiller and you get the idea what how much you should pay.

Yes, i would say, most home in above areas would be more around $150/sq ft given inflation from 1998 to 2011. They were around $100-110/sq ft before the bubble pre-98..

myob says

Given these requirements, I'm looking at $1.2M-$1.5M "starter" homes outside of some of the more affluent downtowns, like Mountain View, or Menlo Park, or perhaps Redwood City, but that's a bit of a commute, but I'm basically looking in the area between Sunnyvale and Redwood City.

Ever find it odd that post 1998, home prices doubled and doubled again, and many in the areas above have yet to correct. Ever see such price inflation in decades past ? This makes your $1.5M really worth down to $450-550K.

Personally, I would not buy or rent in a region that had these options unless there was some absolutely superior difference maker in quality of life in the area to justify the price tag. From that perspective, neither south bay nor peninsula are worth it to me.

My apt was built in 1959,
I would buy then, when the American dream was still alive and not anemic from fascist mosquitoes.

Well with 20 years you ought to be informed enough not to be a Cool-Aid Drinker. It also means in another 20 yrs you will be retired. Maybe sooner with so many Marissa-type hipsters calling the shots on how to staff organizations. This is not such a great place to retire in. And you are closer to retirement than you are to starting out (even if you don't think so - remember the region is becoming all about the Marissa types). If you can afford all that PITI payment then you can afford the market rents for the ever-shortening time horizon you have working in your high wage occupation. And in that case, the down payment wad you mentioned will be a big help with the college expenses.

Yeah, that was my thought process too. I've seen the tech industry bring tremendous wealth to this area, and that's made some areas very expensive. People who say that buyers should have bought 20 years ago are being silly, since people need housing today too, and their choices are to pay enormous amounts of money to the bank, enormous amounts of money to the landlord, or leave the area.

If you don't have roots here, I predict you won't want to stay here, much less in that expensive house, when you're retired. Unless your kids "settle down" here. Unless you can defray their cost to "settle down here", good luck with that.

So if you're closer to retirement (maybe even forced into it by the Marissa types) than to starting out, the purchase doesn't really pencil out, does it? Unless you drink the Cool Aid that you'll make it all up on the appreciation.

I try to be optimistic in that one day I'll have enough money to pay off any mortgage I might have, so in that regard, purchasing at a high interest rate means lower principle, which means less to pay off.

But as for getting that magical lump sum... I haven't figured that part out yet.

B.A.C.A.H. says

Maybe sooner with so many Marissa-type hipsters calling the shots on how to staff organizations.

B.A.C.A.H. says

remember the region is becoming all about the Marissa types

B.A.C.A.H. says

So if you're closer to retirement (maybe even forced into it by the Marissa types

WORD ! No greater truth have been spoken.

myob says

Yeah, that was my thought process too. I've seen the tech industry bring tremendous wealth to this area, and that's made some areas very expensive.

Yes we had wealth from economic growth, good incomes, innovation, etc as was the case in decades past as the globe began buying up tech products. We didnt see instant millionaires in mass numbers. But dont confuse the tech stock bubble of late 90s or even some of the inflated tech stock prices as the norm. They are not, thats more media hype.

My recommendation has always been:

-> Wait until a time that looks like the peak of the bubble
-> pay 30% above asking
-> Take a job in a risky startup that pays you 100% in stock
-> Borrow money from your family and friends to pay for your mortgage

A year later, once you are about to foreclose, pls call me. I'll take the burden of home ownership out of your back by buying your foreclosed property :-)

Jokes aside. This was a very nice thread. I'm sort of in the same camp and I feel like, if I ever buy something, I am pretty much setting myself up for failure.

However. There are parts of the world in which a 60 year old townhouse with an HOA with a bad design can cost 1.5M. Maybe the sillicon valley will become such a place one day. So, if you buy, you may end up making money.

I hear from more and more people that the SV is becoming a crowded city-like metropolitan area. That it's becoming an extension to SF. So your bet could pay off.

But if not, no worries, i'll be there to take the burden out of you :-)

FunnyBayAreaBuyer says

I hear from more and more people that the SV is becoming a crowded city-like metropolitan area. That it's becoming an extension to SF. So your bet could pay off.

before you know it.. we will start using term "boroughs" to describe these extension.

you east coast people just crack me up !

The boom years of SV ended years ago around 2003 when corporations ended their decade plus period of technology purchases. Besides we employ over 80-85% of our people in other metros outside of California.