patrick.net

we should get a house right now due to the 4.5% rate

Thing is, low rates mean high prices unless and until the macro economy turns and actual wage inflation returns.

If and when that happens, rates will start moving up, quite likely negating the wage earners' additional home purchasing power, so prices will stay at current levels. The 4.5% interest rates are nice but it's better to buy when rates are high and refi when they go low.

I'd put only 3.5% down and just pay off the loan faster to save on the interest, but unfortunately the FHA will only want to see a total mortgage debt burden of around $1500/mo on your current salary. No $400,000 loans for that!

I'd continue renting and saving and wait to buy when you get married and have the second income to boost your ability to qualify for a bigger and better place.

If you've got $110,000 at age 26 you should have double that at age 30, no?

The system is in the process of adjusting from the go-go boom-bust of the previous decade. People in your situation 5 years ago could walk into WaMu, Countrywide, or Wachovia and walk out with a $700,000 loan no problem.

You'll note that these storefront lenders are no longer present in our communities, they all BLEW UP.

Unfortunately, in the process of blowing themselves up they enabled speculators to push real estate values well above previous lending limits. The safe & sane lending limits have returned but it takes time for the market to adjust to the new realities.

Complicating matters is Prop 13 and the Peninsula's lack of buildable new land. Everyone who bought from 1849 through 1999 or so is still sitting pretty and can rent out their place for much more than their mortgage payment. This limits supply, as does the lack of new building, meaning there are deeper wallets looking to buy nice houses than you and will outcompete you for the limited supply of family-friendly housing.

I live in Mt. View, am 20 years older than you, and make more than twice as much after taxes. I'm not buying anything yet. I'm moderately sure that there will be significant declines in Peninsula/SV housing coming, quite confident there is much more economic pain for CA coming, and don't want to live in a crappy house in one of the less pleasant areas. Yeah, the neighbors in my apt. building and esp. their screaming kids are annoying, but I'm paying only 7% more than I did 13 years ago when I moved out here.

I’m 26 years old, I live on the Peninsula in the Bay Area. Houses around here cost about 550 to 700k.

Right now, focus on your career. Watch as prices continue to decline. The same homes you are seeing actually were a fraction 10 years ago. The reason behind the 2-3x inflation is slowly reversing. It will take some time. Over the long run even in SF Bay Area, prices only went up at the rate of inflation.

When looking up property on Redfin or Zillow factor in inflation (30-35%) from prebubble historical prices (1997) to guage a bottom. The mediams were much lower then vs today.
$100K you saved will go a long way toward a deposit and savings.

You make $2800 after taxes? Your maximum out of pocket for piti should be $933/mo... That's a far cry from buying a place for $500k (with a loan amount of $400k, about $10k closing costs). You're out of your league.

Even though it's nice to respect your parents' wishes, don't be in too much of a hurry. Is your job secure? Is the location of your job secure, or are they going to pull up stakes and expect you to move? Are you in a relationship? Have or want to have kids? Not trying to be personal, just listing issues that may give you a different perspective later on.

Why is it important to have a house right now? If you believe prices will dip another 10%, wait. See Patrick's advice on home prices having to fall if interest rates rise because the principal of loans people can obtain will be lower. If you're not excited about a home, are you a fix-it person or a remodeler so you can make it more to your liking?

Lastly, we lived in Albany before, in a little dumpy 1910 home, and it was probably the happiest time of my life, except for things like an adequate paycheck, but as far as the city and the schools and the little shops on Solano, it was a really sweet place to live. The traffic is a pain if you're trying to commute, but we could see the Bridge from our front porch and...I'm getting kind of choked up thinking about it. It doesn't sound like you've found a place that makes you feel like it's HOME yet, and you're wise to take your time and keep saving. IMHO.

I’d continue renting and saving and wait to buy when you get married and have the second income to boost your ability to qualify for a bigger and better place.

If you’ve got $110,000 at age 26 you should have double that at age 30, no?

Well I have been living at home since I've been a kid. Even for college I commuted to SFSU. My dilemma is that in the next few years I do want to move out and get my life going. I make decent money.

My parents own property and helped me pre-approve for a loan. So that is not the issue.

the issue is do I want to buy a 500k house here on the Peninsula (there aren't many options; mainly South San Francisco (eww); Shoreview (San Mateo but it's landfill); or Redwood City.

I cannot afford a house above 520k. Even with a roomate. I just am worried whether I should just sit tight or strike while I can otherwise I will need to look in the East Bay.

elliemae says

You make $2800 after taxes? Your maximum out of pocket for piti should be $933/mo… That’s a far cry from buying a place for $500k (with a loan amount of $400k, about $10k closing costs). You’re out of your league.

Well Like I said my parents have a lot of property they own and have been running a retaurant for 30 years. So they have helped me out with the loans. I'm already pre-approved.

Hi Theo,

I would save more money and wait until you can get into a property you feel comfortable with. The options you currently have available don't appeal to you and so don't rush it. You also want to have an emergency fund in case you lose your job or you are injured. Life happens and it's important to prepare as best as possible. You are still young and can buy a house later on.

Maybe you can rent a place so that you have your own life. Maybe that is why you are feeling like you need to buy something.

How annoying are your parents? Times have changed, kids are returning home, there's no shame in living at home, and if your parents are well-behaved (not hovering and are able to respect your desire for independence) it's a good deal. Your life is already "going," you have a degree, a career, and a nice chunk of savings; but I know what you mean.

I was going to say an older house takes a lot of work with all the mold mitigation and shoring up the foundation and ancient plumbing and who knows what you might find, but then newer homes can be an expensive proposition too. You said your parents have helped you out; can they help you out more?

I'd vote for sitting tight and continue saving and researching.

Since your parents own property, why don't you follow in their footsteps (free consultants) and buy a small multi-unit property that is cash flow positive. You can move into one of the apartments while you wait for the SFH market to 'equalize'.

How annoying are your parents? Times have changed, kids are returning home, there’s no shame in living at home,

My parents are just fine they don't annoy me. But they are about 60 years old and nearing retirement. They cashed out their life insurance so they can help me with a down payment. Their logic is that the housing market has bottomed out and that rates are low so now is "the time to buy" they say. While I do agree with them; I still feel that houses around here aren't worth half a million dollars. It still makes me laugh that you have to pay half a million dollars for some piece of shit home here in the Peninsula (I guess it's even more funny that people were paying 620-640k for the same stuff 4 years ago).

I'm not in a rush I was just seeking advice for what other people think (especially people that live in the Peninsula).

EbGuy;

Yeah, that is a good suggestion; it's just the loan i was pre-approved for requires that I live in the house. I don't know if I qualify for anything other than that.

Theo says

elliemae says

You make $2800 after taxes? Your maximum out of pocket for piti should be $933/mo… That’s a far cry from buying a place for $500k (with a loan amount of $400k, about $10k closing costs). You’re out of your league.

Well Like I said my parents have a lot of property they own and have been running a retaurant for 30 years. So they have helped me out with the loans. I’m already pre-approved.

Pre-approved isn't the issue - it seems to me that you're biting off a huge chunk and one teeny thing going wrong can put you in a bind.

For instance, roomies. There are some wonderful ones out there - I've had some of those. But I had some of the other types, too. But you can't count on them always being there, nor can you count on them paying on time, sharing your lifestyle/values... and respecting your investment. Good friends don't always translate into good roommates, either.

And you said, "loans..." more than one? Since you are asking for advice, mine is to buy when you have one - and only one - loan at the lowest available rate - if you can't pay cash outright.
Have a low payment you can meet even in the worst of circumstances.

Above all, buy the place that you want and like. You'll likely be there awhile, and it's the one place in the world where you can do whatever the hell you want to and are always welcome. There's this author, Richard Russo, who (in the book "Empire Falls") was discussing a character who felt alone and unfulfilled. He asks, "Who, after all, at the end of the day, returns to his heart's home?"

I know I sound like a total geek when I say that should be a priority.

elliemae;

Thanks for the advice. I have 1 loan 400k pre-approved. While I know I will be cutting it close my parents can help me out right now with bills and other things until they retire (2 or 3 years). by then I should be in a marriage? and making more money in my career. But you are correct.

Theo.

I think you're doing better than most guys in your age. But not prepared enough to afford 500K home. Your income can not support 400K loan. Even if you can get it anyway, your monthly mortgage will be close to 2000/mo. After that and other cost like utilities, insurances and taxes, your entire income goes to house. Of course, your parents can help you buy home, but how long do you think they can help you after retirement? That's your house and it is you to pay the mortgage. You need to earn at least 5000/mo net to afford a house like that. Period. Till then, keep saving.

“It still makes me laugh that you have to pay half a million dollars for some piece of shit home here in the Peninsula.”

You definitely don’t make decent money (it's decent for your age perhaps), that is a starting salary or secretary salary, which will not get it done in the peninsula. You can make whatever claim you want when you can buy a SFH without parental assistance and roommate chipping in and the responsibility of saving/paying living expense not under the parent’s roof. As far as I’m concerned, you’re just living off your parents (parents covered your downpayments, parent helped you qualified for loan, and parents covered your expenses thus far) and not qualified to make such brash comments.

Theo says

While I know I will be cutting it close my parents can help me out right now with bills and other things until they retire (2 or 3 years). by then I should be in a marriage? and making more money in my career.

Buy what you can afford on your salary alone, now. Parents are great - and if they are willing & able to help you out forever, that's cool - but assuming you'll be married in a few years (and that he/she will be able to make sufficient $ to pay his/her bills and contribute to the house payment) is a stretch. What if you marry someone who doesn't like the house - could you rent it for enough to cover the payment? You don't know what you'll be making in three years, either - it might be the same, or less, as you're making now.

According to http://www.mortgagecalculator.org/, a 30 year fixed at 4.5% of $400k is $2547 per month, not including insurance and assuming taxes are 1.25% and assuming no HOA fees. I don't know the tax rate there... But your net income of $2800 can't support this.

You've asked our opinion - we don't think it's a smart decision to buy.

If you’ve got $110,000 at age 26 you should have double that at age 30, no?

How can he save another $110k on a take-home pay of $2800 in just four years? Even living with his parents and having all his expenses covered, that would require a level of pauperism that wouldn't be worth enduring.

Theo, I have to say I recommend staying in your parents' house for a little while longer. You're looking at houses that cost many years' salary, and it's not like you're throwing money away renting while you look for a house. Keep living cheaply until housing gets cheaper.

elliemae says

But your net income of $2800 can’t support this.

I show a total outgo of $2436/mo on this. One roomie paying $1000/mo makes it eminently doable.

The problem is there's nothing for $500,000 I'd want to buy. $500k is enough to get you into EPA, no more.

My god, you're insane if you buy a house.

For a $500k house, you need to be making $150k a year or else you're seriously stretching yourself.

Not to mention, if housing prices go down 20% in that area (which I think there's a good chance), you're out your entire down payment.

How much can you rent that $500k house for? If it's $3000 a month or less, you should definitely rent...and that's more than you make a month after tax!

Not to sound like a dickhead or anything, but it sounds like buying that house may be the worst mistake of your life...a mistake many people have already made.

Ptipking222 says

but it sounds like buying that house may be the worst mistake of your life…a mistake many people have already made

I kinda disagree. You have to look at the future on this and not just react to recent events.

4.5% interest rate is pretty low, and there's every chance that it will go even lower. With $100,000 DP refing down in this case would be pretty easy and allow you to convert a 30-year mortgage to 15-year for the same monthly payment. Not bad!

Prices are high because rents are high. Paying $500K for a house that rents for $3000 would be an cash-positive deal at these interest rates.

And if gasoline prices go up, the fortress areas will be price-protected somewhat as the periphery gets slaughtered.

But there is an element of gambling involved. Should the state and/or local economy head south again, say goodbye to $100,000. Dude's only 26, so it's not much of a life savings, really.

But I don't think rents are going to head much more lower. The PTB simply have got to "turn the machines back on" ie inflate inflate inflate. Chances are buying now will work out.

Theo:

Whoa. Let's take a step back for a second. Here's some quotes from your own posts:

"I’m 26 years old"

"I’m not in a rush" (Could have fooled me)

While I know I will be cutting it close my parents can help me out right now with bills and other things until they retire (2 or 3 years). by then I should be in a marriage?

________

Dude, dude... my advice to you is go have a beer and relax a little. No, wait... relax A LOT.

You asked so I'll give my 2 cents: screw getting a piece of shit on the peninsula or anywhere else right now, and stop uber-grand-master planning your life at age 26!! Go travel to awesome places, and chase your job opportunities/any girls you get enamored with. BTW, the girl of your dreams may well hate the house you wind up getting. And all YOU will be able to do then is put $ into fixing the POS to keep it operable. No fun. And she'll dump you.

If your parents are so supportive that they will cash in their own securities (down to their freaking life insurance policy) to help you buy a $500K home that even YOU think will drop by at least 10%, (that's HALF of your saved/life insurance cash-in down-payment).... then God bless you and kiss the ground: Cherish your wonderfully supportive parents that not many folks get to enjoy, and tell them to NOT DO THAT. Relish your flexibility and lack of a financial burden around your neck.

I doubt any this will make any difference, you seem pretty set and who the hell am I, but whatever. But please do think about this - from my somewhat older perspective, it is excellent advice:

"Life is what happens to you while you're busy making other plans." - John Lennon

SF ace says

As far as I’m concerned, you’re just living off your parents (parents covered your downpayments, parent helped you qualified for loan, and parents covered your expenses thus far) and not qualified to make such brash comments.

So unless you have the income to buy a $500k+ house without assistance, you're not qualified to comment on the housing market? I don't get it. The guy's been upfront about his situation. If you want to bag on someone who thinks they're the shit because they can't separate parental assistance from their own sense of accomplishment then go right ahead, but personally I think the fact that you can't have a midlevel job and own a house on the peninsula says something in and of itself.

To the original poster, I don't think it matters that you can come to the table with a hefty down payment. The debt load you're looking at taking on just sounds too high relative to your income. Since you've been living with your parents your whole life and no doubt saving a bundle, move out. Find some roommates on Craigslist. Get used to what it feels like to pay for rent, utilities, food, etc. every month. Then decide how much debt you really feel comfortable taking on, and whether you're comfortable with needing to take on a roommate in order to cover the mortgage.

This isn't a knock against you, but I've stayed with my parents on occasion (summers, shortly after college etc.) and know a few people who stayed at home after college to save up, and your opinion of what constitutes a reasonable cashflow changes dramatically when you're dishing out for rent, utilities, food, etc.

Troy says

I show a total outgo of $2436/mo on this. One roomie paying $1000/mo makes it eminently doable.

As long as the roomie stays put, is a happy addition to the household, and there's no car payment, upkeep or remodel issues, and there are no other bills. And as long as the roomie pays on time. IMHO it's not a good fit.

These parents sound wonderful and, if it's not too much trouble, I'd like them to adopt me.

Theo, you bring home just about as much as I do. I am buying a house here in the Inland Empire (Sounds grand eh?) for $165,000. 180K was my max that I wanted to spend simply because I don't want to spend every penny I make on a house when I would rather use it to live a great life. My payments are 1,089 a month for everything. Just 100 bucks more than my single bedroom apartment and 200 less than what a comparable house rents for. The only reason I bought now was because I could comfortable afford the mortgage while still enjoying life.

I realize you want to stay put but there is nothing that says you have to buy now. Nothing says that you will be unhappy renting a place on your own either. No one here can tell you what the market will do with any degree of accuracy but we can tell you that to us, you are not financially set up to buy a house on the peninsula.

IMHO don't do it yet. Even with a roomate you would only have about 1300 a month for all the bills and fun. One night out chasing ladies you will easily drop $200. Living on your own costs $ (especially in your 20s), and the cash goes fast.