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    Can I afford to buy a house?

    Hi all,

    We (family of 3) are living in a very high cost of living area. We currently pay 2250 for a 2bd/2.5ba townhouse. This townhouse will probably go for high 500's if it were to go on the market today (also has a HOA of 269 if you own it). We just signed a 3 year contract so we have another 3 years to save and think about how viable buying a house is.

    The current rent is equivalent of a 400k@5% 30 year fixed mortgage + property tax + 4000 annual maintenance - tax deduction(25% tax bracket).

    Single family homes are very expensive. They start at 700's (at least). Even a 3bd condo starts around 600's... We are planning to have our second child sometime this year so we will probably be looking at a 3 bedroom place in the future.

    If we go by the 3 times your income rule, it will roughly be a 340k mortgage (420k house minus 20% down). So if a put down an insane amount of DP (400k) then we can buy a 740k house...

    So what do guys think we should do? Do you think saving enough money for a huge downpayment is the way to go? Or should we keep renting? I know someone will say move to a cheaper state but we don't like that option

    We will appreciate your inputs. Here is our current financial status. Let me know if you need more detail.

    -------Cash flow per month:--------------
    *These numbers are averages from 2006-2010.

    Income:
    Net Pay after maxing 401k- 7700
    (Gross - 140k)

    Expense:
    Living Expense - 4200
    (Rent - 2250)
    (Other - 1950)
    Long term savings - 1691
    (401k - 1375) *pretax so not included
    (Roth IRA - 833)
    (529 plan - 100)
    (Taxable Retirement - 758)
    Short term savings - 1809
    (Car - 433)
    (House DP - 1376)

    *currently working on a plan to reduce living expense by enforcing a strict budget
    ---------------------

    -------Balance Sheet--------------
    *Financial Snapshot as of 1/12/2011

    Asset:
    Taxable Account - 298k
    (401k - 240k)
    (Roth IRA - 58k)
    Non-Taxable - 227k
    (Mutual fund - 122k)
    (Saving - 105k)
    529 - 4k
    Car Fund - 5k

    Liability:
    No mortgage or debt
    ---------------------

    Thank you for your help.

    #2
    What could you buy with a 234k downpayment and still have an affordable mortgage payment of no more than 32% of your take home pay? That is the money you could save in 4 years if you stop all of your investments for that time period.
    Don't touch the 401k.
    Last edited by littleroc02us; 01-13-2011, 07:01 AM.

    Comment


      #3
      You guys are doing incredibly well! I'm jealous and I think we do a pretty good job. You have a total of 41.8% of your gross income going to savings between retirement (25.4%) and non-retirement (16.4%). Your living expenses are just 36% of income. And you are debt-free. You should be giving advice, not asking for it.

      I think you're situation is one of those that breaks the rules and standards. If you keep saving at the rate you've been saving and keep your lifestyle as cheap as it has been, I think you guys could swing one of those insanely priced Bay area homes.

      A couple of suggestions: Cut back on retirement savings. If you cut back to 15%, that would free up an additional $1,200/month for the house fund. The one thing I'd consider increasing is the college fund, especially if you have a 2nd child. $100/month is better than nothing but it really won't go too far even in 18 years.
      Steve

      * Despite the high cost of living, it remains very popular.
      * Why should I pay for my daughter's education when she already knows everything?
      * There are no shortcuts to anywhere worth going.

      Comment


        #4
        Originally posted by yellow heel View Post
        If we go by the 3 times your income rule, it will roughly be a 340k mortgage (420k house minus 20% down). So if a put down an insane amount of DP (400k) then we can buy a 740k house...
        From my understanding, it is not 3 times income = mortgage amount; it is 3 times income = market value of the home.

        In your case, that's a home worth no more than $420k - and the less mortgage the better.

        If you make $140k, there's no way I could feel comfortable seeing you get into a $700k home.


        And if "well you can't find a decent home around here for that price" - well then, you shouldn't buy a home around there at the prices they're selling.

        Comment


          #5
          Thanks for response guys!

          littleroc02us- can you tell me how you ended up with the 234k?

          disneysteve- thank you for your kind words. I appreciate your input. I constantly have a battle in my head with your point of view and jpg7n16's point of view. If you truly think I can do it, can you put some numbers to your suggestion? I am not sure buying a house is the "answer" but I will need a lot of convincing that I can afford (hence this post).

          jpg7n16- Yes, you are the exact other end of spectrum as disneysteve. Can you also put some numbers to this statement?
          "If you make $140k, there's no way I could feel comfortable seeing you get into a $700k home."
          As a devil's advocate, if I can save up a DP of 500k (not saying I can or should) and buy the house outright can I afford it?

          I really need to weight the pro's and con's and make a decision. I appreciate all you inputs and these are exactly the stuff I am looking to hear.

          Thanks again.

          Comment


            #6
            Originally posted by jpg7n16 View Post
            From my understanding, it is not 3 times income = mortgage amount; it is 3 times income = market value of the home.
            True. I meant to say that, too.
            Steve

            * Despite the high cost of living, it remains very popular.
            * Why should I pay for my daughter's education when she already knows everything?
            * There are no shortcuts to anywhere worth going.

            Comment


              #7
              [QUOTE=yellow heel;281162

              littleroc02us- can you tell me how you ended up with the 234k?



              Thanks again.[/QUOTE]

              Sorry I included your long term savings twice. Here is the new math.

              $1691 Longterm savings (stop saving for retirement and use for DP)
              $1276 House
              ----------------
              $3067 saving for house for 5 years = $184,020 for down payment.
              6 years = $220k
              7 years =$257k

              *Can you limit your other expenses? There is a lot of money being used there. Things like going out, coffee shops, etc....

              Comment


                #8
                I'd take the opposite view. But I concur with DisneySteve, I'm jealous too

                I wouldn't even recommend buying a home where you at, but continue to "rent" instead. Continue to save what you are doing...you are doing MORE than what majority of Americans are currently doing when it comes to their personal finance. Imagine if you continue doing this for the next 20 years and you retire early and buy a home at that time CASH. Live anywhere you want.

                You would lose out on mortgage deductions but with your current saving rate trump this tax benefit.

                The biggest problem I have is where you live now. Going there for me and my family is about having "fun". But owing a home and actually living thre is a completely different animal. That's just my bias i guess.

                If somehow you can live outside the Bay Area, moved due to job, or decided to commmute rather to/from City i'd say go for it.

                Owing a home is overrated in pure financial sense. It cost way too much to maintain, and the property taxes alone CRAZY! If I could go back in 2002 whether to own one, we probably won't hindsight 20/20.

                Just my two cents.
                Got debt?
                www.mo-moneyman.com

                Comment


                  #9
                  Don't take my post as an outright endorsement of buying a 700K home. Everyone knows I'm usually the one spouting the rules of thumb, 3X income and 28% of income. But I realize there are exceptions to the rules and this might be one of them. I'll look over the numbers more carefully later and see what I come up with. 700K might still be out of reach but not by as much as the standards would suggest. In the meantime, keep living lean and socking away money in savings.
                  Steve

                  * Despite the high cost of living, it remains very popular.
                  * Why should I pay for my daughter's education when she already knows everything?
                  * There are no shortcuts to anywhere worth going.

                  Comment


                    #10
                    Originally posted by yellow heel View Post
                    jpg7n16- Yes, you are the exact other end of spectrum as disneysteve.
                    The more I read DisneySteve's posts, the more I realize that we think a lot alike.

                    Can you also put some numbers to this statement?
                    "If you make $140k, there's no way I could feel comfortable seeing you get into a $700k home."
                    I'm not sure what you mean. $700k/140k = 5.0x

                    When the max is suggested at 3.0x. 5x/3x = 1.667 so your housing would be 67% higher than suggested.

                    Stated another way, you'd be tying up an additional 2 years of salary in your primary residence, when it could have been invested in other income generating assets.

                    As a devil's advocate, if I can save up a DP of 500k (not saying I can or should) and buy the house outright can I afford it?
                    That depends on how you define afford.

                    af·ford   Afford | Define Afford at Dictionary.com

                    –verb (used with object)
                    1. to be able to do, manage, or bear without serious consequence or adverse effect: The country can't afford another drought.
                    2. to be able to meet the expense of; have or be able to spare the price of: Can we afford a trip to Europe this year? The city can easily afford to repair the street.
                    3. to be able to give or spare: He can't afford the loss of a day
                    If 'afford' means #1 - that's debatable. Could you manage? Probably. Would you avoid serious consequence or adverse effect? This part is debatable. Since it is a High cost of living area, prices are by definition: high. Meaning that they are more likely to fall, than to rise. So if you invest $500k in a home that is priced too high, and it falls to a reasonable value for that home of say $400k, you lose a lot of value. The more you have invested in too highly priced real estate, the more you have to lose. So how much of your net worth can you 'afford' to tie up in real estate that is priced too high?

                    If 'afford' means #2 - then yes you could. If you have $500k available, and it costs $500k you can 'afford' it.

                    If 'afford' means #3 - that's debatable again. You'd be taking $500k ($80k more than the max suggested) and investing in real estate. Can you 'afford' to remove $80k from other investments with more growth potential?


                    So I get what you're saying about how you can 'afford' a $700k home. (meaning: you have the cash available each month to make the required payments on any loan needed to cover the difference in available cash and purchase price) But the question shouldn't be 'can I afford it?' There are several things in life I have the money to buy that are not in my best interest. Just because you have $500k available, and a home you like costs $500k, does not mean you should spend $500k on a home.


                    -------------------------------------

                    If you were talking about a rental property, or a foreclosure, or some other form of investment property - the numbers change. There is no rule of thumb for a max - it's all about rate of return on invested capital.

                    I don't think your primary residence qualifies as an investment property. Especially if you already know they are priced too high.

                    No one wants to buy a stock that is priced too high, but several people want to buy homes that are. I don't understand that mindset.

                    Comment


                      #11
                      What is your priority? Retiring at age X? Paying for X% of kids' college? Living in a house you own? Traveling the world? Amassing a ton of money to leave to your children?

                      Follow your priorities. Make sure that you are meeting your top goals first. If you are fine living in a house instead of owning a house then don't worry about it. This really is a matter of priorities.

                      Alternatively if you want to think of a home as an "investment", you can consider it as a git to your children (when they sell it after you and your spouse die). Here is a decent rent vs buy calculator:

                      Should I Rent or Buy A Home? - Financial Calculators from CalcXML

                      I usually assume that rent and home appreciation will equal inflation.

                      Comment


                        #12
                        JPG makes a couple of very good points.

                        1. There is a difference between CAN and SHOULD.
                        2. There is an opportunity cost to buying a very expensive home because you then lock up that money in an illiquid asset with limited growth potential.

                        I still plan to run some numbers and see if my initial response was actually reasonable.
                        Steve

                        * Despite the high cost of living, it remains very popular.
                        * Why should I pay for my daughter's education when she already knows everything?
                        * There are no shortcuts to anywhere worth going.

                        Comment


                          #13
                          littleroc02us - Yes, we are looking to cut our expense. We have been tracking our expense to the penny for the last 5 years. We are hoping that we will cut our expense this year by 500 per month at most if all goes well.

                          tripods68 - Yes, living here and visiting here are completely different situations. I have been here for more than 10 years so I may be used it by now. But as you have suggested, we may consider looking for a cheaper place to rent as long as it will not compromise safety and schooling for my family. Unfortunately safe neighborhood and good school does almost always correlates to higher price RE wise.

                          disneysteve - don't worry, I will not act on any single post. I just want to get consider all the options to make sure I am making the best choice available. Please let us know if you come up with a model that sounds reasonable. In the meantime, we will keep on doing what we have been doing

                          jpg7n16 - I agree this is debatable. Personally, I think if you have enough cash flow left over for living and saving for retirement after paying the PITI, and whatever maintenance is needed, then you will be fine. Suppose you pay cash for a 700k house, all you have to do is pay for tax, insurance and maintenance. Not saying I will do this but theoretically speaking. I believe in these extreme cases, the 3x income rule could be bent. But then agin, I will feel very uncomfortable tying most of my cash to the house.

                          snshijuptr - Good quesion. I don't think I have ever put this priority into writing. Although I thought I had it figured out in my head. Lets find out... Wow this is taking longer than I thought. I will post it up later. Thanks for the question.

                          Comment


                            #14
                            Lets try this again!

                            Ok. Lets try this again. Its been 2.5yrs and my 3yr lease is going to expire end of this year. As far as my expense goes not much as changed. We just kept our heads down and kept saving.

                            We are currently starting to look at what houses are on the market. We saw 600k townhouse 3br/2ba with $500 hoa fee. Do you guys think this out of reach?

                            Should we just keep renting? It looks like similar size place that we are renting right now is going for 3k now so we are getting worried whether they are going to jack up the rent...

                            Here is my updated balance sheet:

                            -------Balance Sheet--------------
                            *Financial Snapshot as of 8/8/2013

                            Asset:
                            Taxable Deffered Account - 455k
                            (401k - 355k)
                            (Roth IRA - 100k)
                            Taxable - 300k
                            (Mutual fund - 200k)
                            (Saving - 100k)
                            529 - 13k
                            Car Fund - 23k

                            Liability:
                            No mortgage or debt
                            ---------------------

                            Thanks again!

                            Comment


                              #15
                              look out of the bay area and commute in, if your willing to commute 70 miles there are still homes for $150K
                              retired in 2009 at the age of 39 with less than 300K total net worth

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