patrick.net

if the price goes up steadily consistently then base price does not matter

Yup. The prices are waaaay too high.

Pretty much all the house price gains in the southbay since 1998 are based on regular people thinking that they can front-run a never-ending stream of stock option millionaires, and using cheap mortgage money to fuel the fire.

The problem is that the stream of stock option millionaires are down to a small trickle, and most of them don't want to live in Evergreen or any other wannabe kind of place anyway. In fact, there is hardly enough of them to keep even the fortress afloat at this point. So down it goes.

20% is the minimum downpayment. Anyone buying a house like that will have more than 20% to put down on it.

Keep in mind that if you must live in a larger home like this, then more often than not buying it is the only option. There aren't a whole lot of Single Family Homes available to rent, and home builders are certainly not going to lease. Rental properties are by vast majority, condos/apartments. Whomever is renting out these large SFRs, are either desparate and underwater, OR are well-off and have financed the property well enough to at least break even with the cost of rent. The more you put down, the more you take off the table from your savings and the less interest you pay, but also the less money you must pay every month and the more gains you collect from rent a month. So, do you want to keep your $ money upfront and try to beat the bank's interest rate or slowly collect that extra down payment back with rent profits?

FWIW, I think there are worse things in the world than locking in a 3.5%-for-life mortgage.

At some point this decade or next I'm sure every amortizing mortgage payment is going to be painful since USGOV debt will be on sale at 10%+ yields instead.

SF ace says

Let’s refine the math a little bit. Per loan cal
Principle = 940 to start and 1409 after 10 years

Interest = 3,075

Tax = 937

Insurance = 100
5,052

Income tax deduction (1,404) (3,075+937)*12*.35% (tax rate = 28% fed and 9.8% state of 7% net of fed deduction)

Maintenance 250

3,898

Less forced savings (940)

Cost= 2,958

What is the minimum income you think one should earn to afford this house as per your calculation? It looks like you are considering an amount > $373K per year

SF Ace,

We're not all elites living off a family dynasty trust, and we are not all dual-income two-director level in the household or dual-senior engineer in the household. Some of us have to work to pay our rents, mortgages, etc. If we're not workin in those Hip and Cool kinda tech jobs with those tax brackets, well then, with no income there's no deduction, and if we're reduced to flipping burgers or changing Depends, then with less income there's less deduction. It is a regressive tax policy that only really helps the well to do.

I live in one of those zip codes you're talking about, though not precisesly in those pricey neighborhoods. I can tell you that there's a whole lot of people, not everyone, but behind the veneer a whole lot more than there ought to be, living on the knife edge to maintain the housing you describe and also keep up appearances.

SF ace says

At that price, I sincerely think the minimum is around 200K, 10% 401K and have a take home pay of at least 10K each month. 5K for the house related expense and 5K for the rest and/or additional savings. I presume that for that size home, we are at least talking about family of 4.

200K net or gross? Family of 4 means 4 working adults, or 2 working adults and two kids?

Tax deduction and forced saving is valid for accounting's sake though, those two are kind of money you don't get before realization, and you must pay it first to get it back. Gosh, do I hate this kind of stuffs.

So I think general cost of $2958/mo makes sense accounting-wise and the cost will go close to that as time goes by though, it is not the real upfront cost you need to have at the end of month. $5052/mo is more likely at least for the first year. If you're a kind of guy like "Yeah, I can afford $3000/month for home", you need to think about it twice, otherwise you're already out of game.

Anyway, how much is SF's average income?

SF ace says

steady market watcher says

SF ace says

Let’s refine the math a little bit. Per loan cal
Principle = 940 to start and 1409 after 10 years

Interest = 3,075

Tax = 937

Insurance = 100
5,052

Income tax deduction (1,404) (3,075+937)*12*.35% (tax rate = 28% fed and 9.8% state of 7% net of fed deduction)

Maintenance 250

3,898

Less forced savings (940)

Cost= 2,958

What is the minimum income you think one should earn to afford this house as per your calculation? It looks like you are considering an amount > $373K per year

At that price, I sincerely think the minimum is around 200K, 10% 401K and have a take home pay of at least 10K each month. 5K for the house related expense and 5K for the rest and/or additional savings. I presume that for that size home, we are at least talking about family of 4.

With $200K annual income for family of 4, my math tells me that for a property that is worth $900K with a $720K mortgage at 5.125% and market rent at $3K per month,

Total taxable income is $152.4 K renting vs $98K owning
Federal income tax is $30.9K renting vs $16.9K owning. A saving of $14K by owning.
Housing costs are $36K renting vs approx. $60K owning before tax savings
With tax savings, housing costs are $36K renting vs $46K owning, still favoring renting by $10K with $180K cash in hand extra if you are renting, that if safely invested ( inflation adjusted bonds, etc.) in these times of money printing induced inflation can easily outpace the gain in home appreciation

If annual income is $125K for a family of 4, which is more likely the average income for at least a single tech income earner household in the Bay Area

Federal taxable income is $81.9K renting vs $34.9K owning
Federal income tax is $12.8k renting vs $4.3K owning. A saving of $8.5K per year in taxes by owning.
Total housing cost remains $36K renting vs $60K owning before taxes
Total housing costs after taxes are $36K renting vs $52K owning, a saving of $16K per year renting - that is the Alaska cruise + European jaunt I was referring to plus the $180K that I can invest in far better things than a dumb house that appreciates at a much lesser rate.

Where is the value unless you are buying outright with cash ? As Patrick has pointed out, there is an element of weak emotional intelligence and desperation that is causing a lot of otherwise intelligent and smart people to believe that borrowing money to buy is better than making a rental payment that is more sensible.

Another thing to note from the above examples is that the tax laws heavily subsidize the higher wage earner over the lower wage earner if both are buying the same house. The guy who earns more saves $6K more( $46K vs $52K in the examples above) than the guy who earns a third less to buy the same house. It also does not matter what the house is worth, $400K , $600K or $1M - in each case, the guy earning more gets to save more on housing costs.

If this is not favoring the rich, what else is ?

"Forced Savings" in a mortgage is hardly any kind of real savings. Your under the assumption using your home as a piggy bank-ATM machine which lately has been proven false.

A real savings is one you can tap into highly liquid cash account unfeathered. Else your going to the bank for another loan, if they give you one, and sinking yourself deeper into debt.

What people refer to "forced savings" over the past few years is what us accountants call .. goodwill, additional amount over fair value of purchase. Much of it went to the homesellers pocket. Your payment for many years goes to interest and less to principle.

It is amazing how the realtors/lenders have managed to slip this in the publics mind! Either you have the descipline to save or you dont!

I have followed many of you for years on this forum and have appriciated the insight on issues like this. My wife and I found this forum as we saw this comming back in 2003 and were searching for info to tell us we were not crazy, saved our money, sold high and now rent.
As I read about the "experts" that deliver information to the consumer I had to laugh at a headline today "Economists surprised as new-home sales fall to lowest level in nearly 50 years" This site has concluded this for years. I have seen so many posts in the last few years that start with "Economists Surprised" that I Googled just a few for fun. This is why reading forums like this are part of a good common sense research exercise. For fun a few hightlights:
- Economists surprised as new-home sales fall to lowest level in nearly 50 years
- Economists surprised by plunge in U.S. home sales -…
- Canada August GDP slips 0.1%: Economists surprised again - FP Posted
- Economists surprised by increase in initial jobless claims - Related ...
- Economists surprised consumers aren't superhuman
- Economist Paul Krugman on being surprised by the spread of the downturn
- Economists React: ‘Back to the Drawing Board’ on Retail Sales
On and on and on

Thanks
Joe

thomas.wong1986 says

“Forced Savings” in a mortgage is hardly any kind of real savings. Your under the assumption using your home as a piggy bank-ATM machine which lately has been proven false.

I disagree with this. Paying off the mortgage of the house you plan on retiring into is exactly equivalent to retirement savings.

Prop 13 makes it a no-brainer, and Prop 58 kindly makes it a tax-free transfer to your kids, giving them an income property to profit from with a very low basis.

SF ace says

Steady great analysis, but our great state of ca has income tax too so we need to add In the effect of state income tax. Also there is about 11k in forced savings. After 30 years no more mortgage, so instead of going to Europe now, you’ll be going around the world 30 years later.

Assuming you have a mortgage on a home in CA, how do you go about calculating your Federal and State income taxes ?

For itemizing deductions for Federal income tax, other than mortgage interest and property tax and other pre-taxed deductions like 401K, medicare, SS & SDI, do you include state income tax too ? How do you calculate the state income tax in this scenario ?

For itemizing deductions for state income tax, other than 401K, medicare, SS & SDI what are the other items you can deduct ? Is it only mortgage interest and insurance ?

As Troy said, forced savings doesn't necessarily mean having cash when retirement comes along, it means a reduction in living expenses. While renters might be paying far more in 30 years, you will have no rent. Taxes and/or maintenance will still be there, but the major cost will be removed.

"discipline to save" -- Some people don't have this. For those people, gaining equity in a house, that they can't touch is the best way for them to save.

Secondly, half the quotes are ridiculing people for believing the experts. Those people who have the discipline to save, you forgot to add an important caveat to that, which pretty much nullifies everyone -- "They must never invest in anything that will wipe them out, and must have experience with finding good investment vehicles to put their money in. They must be able to fully understand the markets they're investing in, and must essentially calculate out all of their investment risks, while dodging "investment experts". Who do you believe? Who is right and who is wrong? Most people can't do this. They might have an ability to save, but the chances of not screwing it up royally in 30 years is pretty minimal. A house might never appreciate, it might depreciate, but at the end of the course, the rental payment is gone from their living expenses.

^ It is true that the 3X rule is only good for the middle middle class and below, and also strongly depends on INTEREST RATES. A $1600/mo housing outgo will buy you a $220,000 house at 5% but only a $180,000 house at 8%.

As for how a $180K dual income works, lemme try:

$180,000
Less $16,000 FICA/MC
Less $33,000 401K

AGI = $147,000
Less 4 exemptions $14,600
Less $60,000 deduction for interest, PMI, property tax

Federal Income Tax $10,500
State Income Tax $5000 (?)

Takehome pay: $115,500, ~$10,000 per month

PITI: $6600
Other Monthly Expense $400

Total housing cost $7000/mo.

Discretionary income before food and utilities: $3000/mo

As I say so often, that's the beauty of real estate. . . It is the source and the sink of all our wealth.

Troy says

thomas.wong1986 says

“Forced Savings” in a mortgage is hardly any kind of real savings. Your under the assumption using your home as a piggy bank-ATM machine which lately has been proven false.

I disagree with this. Paying off the mortgage of the house you plan on retiring into is exactly equivalent to retirement savings.

I knew why thomas and Troy feels different way.

Forced saving is tricky one, and freaking deceiving word.
It said it is "saving" but in reality it is more like an "equity".
It can be a saving in some way, and you're gonna get it some day, but not today and not helping pay your bills unless it is realized. Actually 401K is perfect example of forced saving. It is saving, but you don't take it out to pay for McDonalds burger.

So, considering this kind of money for analysis is feasible or not? Yes and no.

If you're doing ASSET analysis for accounting's sake, add this kind of money. It makes sense.

If you're doing COST analysys for your montly bill, don't even think about doing it. Taking about your upfront cost and your money in the future does not help you buying anything today.

@seaside
"If you’re doing COST analysys for your montly bill, don’t even think about doing it. Taking about your upfront cost and your money in the future does not help you buying anything today."

I'm not sure if that is entirely true. If you want to put away X dollars a year for retirement, you could probably reduce your 401K contributions and/or other savings, by saying "I'm saving via equity in the house, therefore I can drop my savings rate in other areas"

That line of thinking would make housing more affordable. Hopefully they don't fully drain all other sources of savings to achieve this, but it's possible to shift the savings from 401K/IRA/personal savings to house equity.

seaside says

If you’re doing COST analysys for your montly bill

I agree but the mistake I made in 2000-2001 was comparing my rent to PITI.

prinicipal repayment is money you're repaying now not to have to pay 30 years from now, but it's not a dead-weight cost like rent is.