patrick.net

Theo, I am completely in the same situation as you. I'm also in San Francisco, age 29, and have about the same income as you. Troy is right. I had about $110k at age 26. I have close to $250k now.

What I've been doing is slowly shopping for homes. You should make low ball offers on short sales and hope for a bank to allow it. I am offering in the 400k range. Even 500k is okay as long as the home is 2 stories. We will renovate an in-law unit that will cover more than half the mortgage. Just be patient and do not rush it. I will also bring my folks with me once I get my property. The existing house we live in can be rented out for additional income that will help me in case I want to retire at age 30 ;)

I'm 27 and I wouldn't do it. My husband and I pull in what I consider to be a lot of money combined, and I would not buy a house in this area. We made that mistake by buying 4 years ago and have learned from it. We are faced with the idea of foreclosure, deed in lieu, or renting at an 18k loss every month with no write offs all because we bought in the wrong market and the home we purchased was way to small for our needs. I will never buy a home until it meets Patrick's rules of buying listed on his blog. It also must be an ideal home where I would want to live for a minimum of 15 years. That to me means it needs to be large enough for a family, the schools need to be good, and the home must be in a nice community. At 500k you probably won't find much unless you look in parts of San Jose, and I'm doubtful that home would meet my rule. Don't let your parents push you into anything you are uncomfortable with. They are older and housing was not this wacky when they bought (I'm assuming they did in the 80s). I think it's very admirable of your parents to want to help you buy, but they will also be potentially hurt if you buy in this market. Think about this... if young people can't afford to buy homes for their families without parental support, than home prices will have to come down. I only know a few people who are so fortunate where their parents are helping with a hefty down payment. Don't move to the east bay either, very hot and long commutes.

Good luck! I hope you rent for a while :).

Theo,

I also wanted to add one more thing. You aren't married yet. If you do plan on marriage your wife may not like where you live, and if you can't move she may be stuck their too. Wait until you make more money, home prices drop significantly, and if you do plan on marriage (and I know you can't predict the future) wait until you meet her to buy. She will also most likely help afford a bigger home, unless as others have mentioned she plans to be a stay at home mother.

One other thing. Do you want to stay in Ca for the rest of your life? I would love to live here forever, but fear the state is doomed. My husband and I may move away when we have children that are school aged.

Oh man. Don't do it. Many of my in-laws have the same immigrant mentality and are getting burned left and right because "rent is throwing money away" while it is a point of pride to own a house. They still think it's a good time to trade up to more expensive houses while keeping the underwater one to rent for a loss, because the prices have to come back up, no?

If it doesn't tick off your parents too much, get out of the house and live with a roommate for a few years - live a little and focus on your career, fun, and dating. Living with your parents in your twenties would make anyone want to buy a house.

Theo -- At 26, you've only recently become conscious on certain levels. You're still developing as a person in the most basic sense. I would strongly suggest moving out and spreading your wings a little rather than seeking out a giant pit to throw your money into so early on. If that cash is really burning a hole in your jeans, then at least do something more interesting with it. There are so many other vastly more interesting wastes of your time and money of which you could be availing yourself than a big chubby mortgage.

That said, everyone's different, and if a house in the peninsula is truly the pièce de résistance in your pursuit of happiness then my advice would be to do it right and continue to save. You seem quite disciplined in that department, which is rare at any age. I don't know what your lifestyle consists of, but try living beneath your means for a while -- I mean, live as spartan as you can possibly stand for at least another year, but ideally longer.

It's a small enough sacrifice, all things considered, and your savings will grow dramatically combined with whatever salary raises you might enjoy in the meantime. Adding to your purchase power is the likelihood that interest rates will have also risen during this time, which is what you want to see in order for prices to actually resume correcting in your area. Troy makes an interesting argument in some of his posts for the Fed taking rates even lower, but the Fed has hiked rates sharply in the past, and there's a lot more room for them to go in that direction than there is in the opposite. Whatever happens, and however you choose to go, being in a hurry seems unnecessary at best.

Your parents clearly want what is best for you, but don't be a proxy for your parent's ambitions. Check out Elia Kazan's the Arrangement to see the direction that can go in.

Wow...Theo....I was just trying to make my requisite 3 comments in order to post my newbie questions when I stumbled on this post. While I agree with the advice offered to you (although I must disclose I did not read it all), I am now fearful to post my own inquiry. Blunt is an understatement.

@ condo

"One other thing. Do you want to stay in Ca for the rest of your life? I would love to live here forever, but fear the state is doomed."

The sad thing is I cannot picture leaving the state even though I wish I never grew up here (that way I would never have all these connections; It kills me when I look at house prices around the country I could have a 800 mortgage for a mansion). All my friends, family, and soul is in California. I will eventually make more money; I am very ambitious and will start studying for my CFA. I am making entry-level money. Also yeah I expect home prices to go down a little but I cannot see homes on the Peninsula ever selling for under 500k unless we go into a total depression. People make too much money, the weather is too nice, and the neighborhoods are nice; no matter what Real Estate rules say this part of the bay area won't follow them (at least I believe so).

@Dicky

Yeah, I agree it is a little motivating to get out of here; however my parents work 7 days a week (they own a restaurant in San Francisco) and they really have no rules for me. They are really relaxed and treat me like an adult and most of the time I am just home by myself. I do want to save a year or two more worth of salary before considering either buying or renting (haha I don't want to be a 30 year old living at home eww turn off? lol)

@Austin

Yeah basically your post summed up the conclusions I have come to. I do want to live in the Peninsula I love the neighborhood I was raised here and resided here my whole life. The houses are nice and the area is nice. The thinking is that this area will never be this low again (there isn't any property in the Peninsula under 450k even after this 30ish% decrease and a 4.5% and low property taxes make my parents (and me in some ways) think that this opportunity might not come by any time soon (even though reading through basically all these threads and comments and forums and blogs that the Real Estate market isn't going anywhere soon).

More Info:

While I understand it will be hard and am no longer in a rush I will have a roomate or two. I figure my mortgage to be somewhere around 2500 (with property taxes). I make about 3000 after taxes a month. Rent cost around 800-950 here so with 2 roomates or even 1 it is very possible for me to do it. Obviously I couldn't live on my own.

This part of the Bay Area is very valuable just because new homes aren't built here. The neighborhoods are middle, upper-middle class. The weather is nice and the commute is very good. While it was effected by the bubble (which area wasn't?) The prices haven't exactly crashed.

Hi Theo,

I'm very glad that you have thought about this and will have roommates to help cover costs. I still think housing will go down even in the peninsula. People made a lot of money during the dot-com boom, but no one our age did, because they were still in college. Now young people have to work very hard, and are pulling in low salaries compared to older generations when they were in their twenties. What I am saying is that our generation will be buying more homes within the next decade, but will not be able to afford that much in a mortgage. The older baby boomers in that area will be retiring soon and will be looking to move into smaller places, which will put a lot more inventory on the market. If the young cannot afford to buy the homes, who will? Therefore, I believe that home prices will have to come down even in affluent areas.

The good thing about your situation, if you do buy now, is that even if you do take a hard loss in the next year or two, and hang onto it for at least a decade, you will probably be able to sell for at least the price you purchased it for.

I also wanted to state the hidden cost of home ownership:
1) HOA--- do not buy if you will be in an HOA. Terrible waist of money and you can't write that off.
2) If you buy an older home, you will be faced with issues such as plumbing, termites, old roofs that need to be replaced, and not to mention the cost of cosmetic repairs. Those things cost $$$. Already this year, we will be hiring someone to replace a screen window and will need to hire a plumber to fix the sink in our bathroom. As a renter you are not responsible for such items.
3) Annual property taxes, usually in the mid thousands. Also not a write off.

In addition to that I have thought about another item you may want to consider. If you decide to go back to school after your CFA you will need to find a school close to your home, limiting your options. In addition, you will need to be able to afford your home and your tuition. My husband wants to get his Masters, but can't since he needs to be able to pay the mortgage every month. Student loans will not cover the costs of home ownership.

I think that whatever decision you make will be the right one because you have considered all of the possible scenarios. You just need to realize the limitations it may cause you down the line. Good luck, whatever you decide to do.

Theo,

get roommates to help you defray the monthly cost in the early years after you've bought the place. It's how my partner and I were able to get our place when we were your age and not be stressed about making the next payment.

Theo says

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).

There you go, just follow your instincts. The fact you called it a piece of shit and dont want to spend half a million on it tells you right there at least what NOT to do.

You are young and may need to move to where the jobs are some day. If you own, will you be able to sell, or will you be stuck like so many house owners?

Theo,

If you know where you want to live then you've got the most important piece of the puzzle. I'd keep your eye out, but prices aren't going up. Higher rates will HELP you by pushing the price lower, so don't let someone convince you otherwise.

I can see you less than excited for your options @ 500k, but be realistic when it comes to a starter house. I'm 40, and my wife's co-workers have kids in their 20s looking for the same luxury as their parent's home, and end putting off kids and job opportunities to become a slave to too much house. I hope you're not expeciting your parent's house, because you don't want to BE your parents, do you?

You said "we" in the first post. Who is the other 1/2? Is this going to be your house or "our" house? One thing I'm absolutely certain about is if its not "our" house (as in her house) it ain't gonna work. Don't waste your time on a practice house like I did, twice!