patrick.net

swebb says

With rates so low it doesn't make sense to put 20% down right now.

Disagree. I see this being parroted a lot.

JodyChunder says

hrhjuliet says

How does a couple make $200,000 a year? My goodness, what do they do for a living?

It's the quantum leap before hitting a brick wall for most professionals. My daughter is an engineer and doubled and tripled her salary inside of seven years and then...BLAM! Nothing the last five years. She's probably topped-out and can look forward to COL raises if she's lucky from here on out. If she spits out a kid, she's doomed.

The other thing is, the cities where this kind of remuneration can most often be found tend to have high costs of living and taxes which cancel out the better part of the gains - but perception is powerful.

Perfectly put. Engineers have a useful working life of about 25 years, in general, before they become prime candidates for replacement by energetic young grads that will work for less. Most make a dash for the management camp way before then, which isn't really any more secure as far as I can tell since there is a lot of competition among ageing / obsoleting former engineers for those positions. You have to be REALLY good at engineering and make your way into a principal engineering position (basically an internal consultant), or run your own consultancy if you want to stay technical and employed into middle-age. There aren't too many people with that sort of drive and tenacity though.

hrhjuliet says

How does a couple make $200,000 a year? My goodness, what do they do for a living?

hint... one of them is a realtor! 1 out of 50 CA residence holds a Real Estate License.

bmwman91 says

management .... isn't really any more secure as far as I can tell since there is a lot of competition among ageing / obsoleting former engineers for those positions.

Yep. And the situation brings out the worst in some people. Oh what fun in Silicon Valley!

B.A.C.A.H. says

Yep. And the situation brings out the worst in some people. Oh what fun in Silicon Valley!

Good fun, indeed. Life here is simple, really. Work more to earn more to buy shit that you don't need because everyone else does! It's ALL about individuality here, as long as you are individual just like everyone else. That's all there is to it! We like to call it the new NEW paradigm for happiness. It isn't about actually BEING happy, but doing what everyone says to do based on projected future happiness! Just keep working harder and you'll hit the happiness-payoff when it is initially offered to the public!

Depends on what’s important. For example if you save $60k towards the down payment, but nothing in retirement - then what? Is your money in savings at less than 1%? Is it in stocks hoping for a high return? Not to mention closing costs, plus a cushion for emergencies. You can't sink every last dime into a house (or at least, its not advisable).

As for me I'm not in Bay area (obviously) and I've been saving for ten years (but in reality the past five years have been the bulk of the effort. I put 15% off the top to the 401(k), fully fund the IRA, and keep the savings in a basic no frills account (earning next to zero, but its "safe"). I FINALY have enough for downpayment, plus closing, plus fix-ups, plus cushion... It wasn't easy, but I wasn't living on Roman noodles either.

And yes I'm an engineer, gainfully employed, with wife and kid.

bmwman91 says

Engineers have a useful working life of about 25 years, in general, before they become prime candidates for replacement by energetic young grads that will work for less

It's a lot less than 25 years these days!

JodyChunder says

She's probably topped-out and can look forward to COL raises if she's lucky from here on out. If she spits out a kid, she's doomed. Sorry to say most people think everything only ever goes in one direction forever.

Well put. Yes, my husband is an engineer and what you are saying rings true. Not to mention he works for the City and they cut everyone in the City by 15%. Cut their benefits in half and took away their retirement. You may want to know how they took away their retirement...well, they threatened bankruptcy, like many other cities did. Better to take a deal with a city threatening bankruptcy and not risk losing everything. And becoming a mom was financial suicide in this area. The loss of my full- time income was a very sobering experience. I thought I'd go right back to work, for many reasons; I love my work and we needed the money. The reality is that when the two of us looked into those babies eyes for the first time we decided one of us is staying home, we are not letting strangers raise our children, no matter what five star rating they have. And I am sorry if this is uncomfortable for some readers, I know there are a lot of single parents that have to utilize a daycare, I'm not in any way saying that it makes us better parents, I'm just agreeing with JodyChunder JodyChunder says

Sorry to say most people think everything only ever goes in one direction forever.

We couldn't have anticipated a city job (supposedly secure) threatening bankruptcy, and we could have never anticipated the overwhelming love we felt for our child that lead us to make decisions we thought we'd NEVER make about our jobs and savings.

bmwman91 says

Good fun, indeed. Life here is simple, really. Work more to earn more to buy shit that you don't need because everyone else does! It's ALL about individuality here, as long as you are individual just like everyone else.

I nominate this for "quote of the week."

Patrick, can we start a "quote of the week" nomination system or something?

hrhjuliet says

I thought I'd go right back to work, for many reasons; I love my work and we needed the money. The reality is that when the two of us looked into those babies eyes for the first time we decided one of us is staying home

My wife and I did the same thing and she has a PhD in chemical engineering with a specialty in Li-ion batteries. So we took a major income reduction and the subsequent budgeting has not been easy. Easier than alternatives, though. I think I'm just lazy not to figure out the whole day-care, nanny thing, but also have not envied friends working it that way. I just couldn't see doing it. I'm really happy our son got her full-time for his first year. It's bad enough how little he sees me.

I can save around 50-60K/yr, but I'll be damned if any of it is going into an overpriced pile of rotting wood in the BA. Get your own money and stay away from mine you greedy sellers!

bmwman91 says

Perfectly put. Engineers have a useful working life of about 25 years, in general, before they become prime candidates for replacement by energetic young grads that will work for less.

Completely depends on the setting. If it's a company that is always on the ball updating their hardware/software, then sure. If it's manufacturing that still uses hardware/software from the 80's and 90's, then no. Infact, they will beg older engineers to come out of retirement.

The bay area is always on the up and up so you would see the elderly getting replaced there, but venture to the midwest and it's a whole new ballgame.

As for you guys claiming engineers banking 140k+, no wonder they're all getting fired! Engineers in the midwest start at 50-70k, and work up to 100k. Reasonable salaries mean some job security.

Welcome back, Taz.

Where have you been? ;-)

StoutFiles says

If it's manufacturing that still uses hardware/software from the 80's and 90's, then no. Infact, they will beg older engineers to come out of retirement.

I think there's some truth to that. I work in "old school" industry, and the ancient software they use here drives me nuts. And that's if the data is digital at all! Much of it is in old musty records still caked with mud from the Flood of '72. Thank you hurricane Agnes.

Of course down payment depends highly on the amount of house you are looking to buy. We are in the 150-160 range and we save about 30-35 per year for a down payment after all of our other retirement savings. The down payment is separate from our emergency fund. At one time I was maxing the 401k + roth (especially when the market was low in 2009) but we decreased it to focus on our down payment more for a short time more recently. Our budget is pretty close to the frugal couple above, we don't have any debt, including not wasting money on car payments or leases, but we have enough freedom to enjoy going out to dinner and occasional vacations.

We are close to having our down payment goal, but I refuse to spend a significant amount of hard earned savings on a glorified, $500k fixer upper shack, especially when my competition is all using easy money with the artificially low interest rates and low down payment requirements with FHA loans. Everything right now is punishing the saver. The max I would be willing to spend is probably 3x one of our incomes, because I don't want to be tied down to both of us working just to make the mortgage.

Michael D says

Everything right now is punishing the saver.

Absolutely, and ...FunTime says

So we took a major income reduction and the subsequent budgeting has not been easy.

FunTime says

I'm really happy our son got her full-time for his first year. It's bad enough how little he sees me.

.... and punishing parents who want to have a parent at home.

Basically this system punishes the saver, the hard working family, the person who wants to own a home, not an investment, the person who wants to raise their own child and the person who puts away for their own retirement and education and doesn't expect the government to do it for them.

Interesting groups to punish.

hrhjuliet says

Basically this system punishes the saver, the hard working family, the person who wants to own a home, not an investment, the person who wants to raise their own child

Absolutely. The Republicans like to talk about "family values" but they've destroyed the traditional family economically: both parents have to work just to make ends meet.

hrhjuliet says

Basically this system punishes the saver

It's only punishment by the social system, though, right? I enjoy the benefits of my choices. I think it's silly that people are so caught up by ownership. Unless you love doing house projects, architecture enough to spend all your money and time outside of work, the benefits of ownership just don't come anywhere close to balancing the detriments. Thre are no financial benefits unless you struggle to save but find it easy to make your shelter cost a priority or buying is so inexpensive that all the additional costs are a wash with renting something similar. I doubt that happens anywhere. I'd want a mortgage payment half of the rental price so that making it just so or repairing it was an all cash prospect. Some of my friends doing projects on their houses in the Bay Area are borrowing further to do it. I think that's common even today after all the HELOC chaos.

FunTime says

Some of my friends doing projects on their houses in the Bay Area are borrowing further to do it. I think that's common even today after all the HELOC chaos.

Probably true. After all, if you spend most of your income on the mortgage payment, how much is left over to fix the plumbing and dry rot?

freak80 says

Welcome back, Taz.

Where have you been? ;-)

Traveling again. Also, took time away from the social sites, just to make sure I wasn't addicted. Verdict: really didn't miss it much.

Also, I'm enjoying my overpriced house that I rent for a steal. Also doing some improvements to it. I plan on staying there for at least a few years. Got a 2yr lease signed. Life is good!

FunTime says

It's only punishment by the social system, though, right? I enjoy the benefits of my choices. I think it's silly that people are so caught up by ownership.

There is more to punishing the saver than just home ownership. ZIRP is affecting a lot more.

JodyChunder says

Disagree. I see this being parroted a lot.

I have thought it through -- not just parroting.

The reason I think it would make sense for me is that I have other places to use my money, and the interest rate is pretty low. Taking into account tax advantage, the effective interest rate is even lower.

A few examples of how I would otherwise use my down payment money:

1. Instead of $60k for a 20% down payment, use only $30k for 10%. That leaves enough money to max out a 401K and 2 IRAs. This is an opportunity missed if you don't use it, and the benefits of tax deferred growth are too big to ignore.

2. Same scenario, but keep the $30k for an additional cushion. Getting laid off, having a major home repair (etc) could really put the squeeze on you if you have too much capital tied up in your house. For the 4% interest it makes sense to keep some cash on hand to hedge your bets.

Also if you have any other outstanding loans that are at a higher rate you might consider paying them off instead of putting down a bigger chunk of money.

Obviously it's your choice, but I would think long and hard about how I was going to use the 20% I saved up...I think there are better ways to put it to use than laying down the full DP..

-s

I don't live in the BA, but I love how much money I can save now that I no longer have to rent. Say you're taking home $3k per month, and that's split among rent, expenses, and savings, all at $1k each: once you buy, your capacity to save doubles. (Well, almost. Add property taxes and maintenance to your expenses.) More than double if you're not living the frugal life described with those numbers.

I'm lucky enough to live in a condo with low maintenance and low property taxes, and my monthly expenses are so low. I want to hang on to this place for decades in case I need to live in it again some day.

Where I live there is no 401k, so for me it's an academic discussion, but I've long thought that the first step toward a safe retirement is to have a home to live in when you're old. With that in mind, I like the idea of saving frantically to buy your first starter home while you're still young, then paying it off, while keeping in your field of vision the idea of living in it again when you retire. That's much better peace of mind than entrusting the fruits of your labor to the whims of fund managers.

I'm still quite wary about the supposed advantages of deferring taxes. Who knows how obscenely high tax rates will be, and how little your money will have grown, and how much value inflation will have taken from it, when the time comes to retire? You might be better off paying the taxes now while they're still "reasonable". In an era of near-zero interest rates on savings, hugh government deficits, and a Fed leader who openly advocates inflation and the destruction of everyone's purchasing power, I like the home acquisition strategy a lot more.

Someone got a good deal on a condo. I just looked at a two bedroom two bathroom foreclosure condo the other day, it was only like 70k, great deal. However, just the taxes and HOA dues alone came to $175 less than I pay for my rent which includes everything except my phone and ISP, and those taxes and HOA will go up, guaranteed. I'm saving far more renting than owning anything. If just some people are able to save 30-50k per year quite easily I can see where the 30% cash buyers are starting to come from. It won't be long before we are a nation of renters. If I could find a really, really small place with low property taxes, I would consider buying, but then I would have to leave the city and my city job to find something like that.

I know one thing for sure saving for two full years like a freak to dumpp it all on a depreciating asset with a mortgage debt on top of it is sheer INSANITY in my book.

Apparently a lot.

I just got an e-mail last night that I was outbid (by $80,000) by a couple who had a FORECLOSURE in 2009 on their record for a fixer REO.

As a dog returns to its vomit, so a fool repeats his folly. — Proverbs 26:11

I could get annoyed, or irritated, but on a home that is $500,000+, to bid it all the way past $600,000 just seems insane (comparable sales for FULLY done homes around $570,000). With all the free loan money, who cares anyway? Even someone all-cash like myself gets blown out of the water in the face of nearly $100,000 more leverage.

The punishment for walking away is negligible. I've seen it with my own eyes. People with foreclosures on their records are getting loans for $600,000+ homes. I just wonder what the end game is to this.

Call it Crazy says

You could just up your offers to $700,000. Come on, don't be a cheapskate!! :)

Overpaying on a home by $200,000? This idea is intriguing. No possible downside right?

RentingForHalfTheCost says

I can save around 50-60K/yr, but I'll be damned if any of it is going into an overpriced pile of rotting wood in the BA. Get your own money and stay away from mine you greedy sellers!

I could save 50-60k a year if i moved into my parents basement and lived the life of a hermit eating ramen too...

Goran_K says

As a dog returns to its vomit, so a fool repeats his folly. — Proverbs 26:11

Precisely why bankruptcy laws and laws and prosecutions of those who commited financial FRAUD need to be far more severe.

Down payment and interest has never been lower. The problem is not neither of those, and while a lot of it has to do with it being hard to get a loan these days. At least the requirements are more strict. You don't even need a lot of money in the bank. It only takes about 4 to 5K to buy a house now.

The problem is people want what they can't have. They still want to live in neighborhoods that "location, location, location" dictates the rules. If these are the houses you're bidding on. Then you're perception of the market is, that nothing has changed in 7 or 8 years for the most part. There's just a lot of pressure for such a little stock.
There's more people buying a hose with their emotions, instead of reality.

There's hundreds of thousand of houses out there that don't have competition, would be qualified people, just aren't bidding on them. So investors are scooping them up for cheap. The irony is, when the other lot get exhausted and give up on the posh and swanky part of town, they sometimes end up renting the very same houses they could have bought months even a few years ago.

Call it Crazy says

Maybe that's what they should be doing... buying a "hose" then attaching it to their exhaust pipe and inserting it into the window of the car.....

I see you also subscribe to Raw's newsletter.

Goran_K says

I just got an e-mail last night that I was outbid (by $80,000) by a couple who had a FORECLOSURE in 2009 on their record for a fixer REO.

Didn't we have this discussion before? The ones that got foreclosed or short sold in 2009 would be eligible to buy in 2012. The ones that got foreclosed or short sold in 2010 will be eligible to buy for 2013, and so on.

Squatting for 2-4 years should give people enough money to buy a couple of new cars and put 0.5%-3.5% down payment on a house.

Can they buy again with a little down payment and squat again for another 2-4 years while they save some real cash this time? Who knows? The system is there for people to abuse. All legal with minimal consequences.

E-man says

The system is there for people to abuse. All legal with minimal consequences.

Completely agree. I've experienced it first hand. Short selling or getting foreclosed on for not paying your mortgage is one of the easiest things to do these days and the penalties are minimal at best.

Goran_K says

Completely agree. I've experienced it first hand. Short selling or getting foreclosed on for not paying your mortgage is one of the easiest things to do these days and the penalties are minimal at best.

These people have muscle memory for the over-the-barrel position -- think yoga for financial masochists. The going canard is that there are rewards for such folly. There is not.

Going with the herd isn't very sound advice.

JodyChunder says

These people have muscle memory for the over-the-barrel position -- think yoga for financial masochists. The going canard is that there are rewards for such folly. There is not.

Going with the herd isn't very sound advice.

I don't know Jody. I used to think the same way. But now, I see people with foreclosures on their credit, getting $600k large from banks, and I think, how is this system not rewarding their folly?

Goran_K says

I don't know Jody. I used to think the same way. But now, I see people with foreclosures on their credit, getting $600k large from banks, and I think, how is this system not rewarding their folly?

I think you've gotta zoom out, past the present and the insidious marketing of "new normals." If past is prologue, then I don't think things can go in that direction forever without some deleterious effects to the health of the retail speculator.

Patrick started this site because he is in the bay area. The houses are grossly overpriced there. I cannot imagine wanting to live there as anything but a renter. My extra money would go toward buying in an affordable area worthy of retirement living. I would rent it out until I could move there permanently.

California is full of people who work as hard as they can to buy shit that they can't yet afford with money they don't have to impress people they don't like. It's the rat race, and it makes us all into servitors of The Machine.

Putting 3.5% down is a loser's strategy. If I were to abuse the system, I would buy a homepath house. I don't care if I overpay for it. I will ask for 6% credit. 3% for the down payment and 3% for closing costs. Basically, no skin in the game at all. Well, you know the rest of the story.

If Solyndra can do it, so can we. As far as I know, no one has been arrested for this over $500M scam. :)