How much house can we afford?

[Leo]

Few years ago, I posted a question if we can afford to buy a house. Thanks for all the advice that I got from this forum, my wife and I were able to save cash for a down payment.

Our current net worth is 425k. 200k cash. 200k in retirement. 25K value of our SUV. We have no debt and with perfect credit score.

We are earning close to 190K because my wife just switched to part-time to prepare for the baby. I'm at 170k but I expect to increase my salary to 190k-200k in the next couple of years.

I know the housing market is really insane right now and we are willing to wait til next year but we are thinking of "testing the water", get pre-approved and see what's out here in LA this coming summer.

I heard rules like we can afford a house 4x of our income or mortgage should be around 28% of your take home.

We have the down payment for 750k house and assuming we can buy a house for that price range, it will be around 28% of our take home with the current low interest rates.

We are not even sure if we can buy our dream home with 750-800k price range especially if we want to be closer like an hour away from my job. Fortunately, my industry is now transitioning to either fully remote or hybrid approach where we just need to work 2-3x a week in the office.

I maxed my 401k and after all our expenses including rent of $2,400 and putting down $1000/month to IRA ($500 each), we have about $4000 left to go to savings. Of course a baby or two would change our budget especially saving for college.

Can we afford more than 750k? Or does pushing it more would make us "house poor"?

[kork13]

The general rule of thumb I've heard/used is actually lower, to buy no more than 3x your income (top-end around $550k-$600k for your numbers), and <25% of your income on a 15-yr fixed mortgage with a >20% downpayment. But depending on the market (HCOLA like CA for example), that may or may not be totally feasible & still get you what you're after. However, a strong DP definitely helps. Realistically, you have the cash for at least a 20% DP, and if you can keep your mortgage at 28% of your income, you'd probably be okay. Of course, that probably doesn't account for the taxes, insurance, utilities, maintenance/repair, etc. that also come along with a high-value home. I think that's where you'd find yourself in trouble, spending >40% of your income on housing.

I won't say you can't afford it... Because you probably could make it work just fine, given how aggressively you've been saving -- that money could be reallocated toward your home expenses. But with the numbers you've got, you're definitely going to be stretching the budget to make it work. You'll be sitting very house-heavy, with only a limited amount of cash & investments outside of your house. Not necessarily a BAD idea, but you should be cautious.

[james.hendrickson]

Hey Leo, good to see your postings again man!

[Singuy]

So the housing market is still crazy in LA? I heard people were leaving California.

[Jluke]

What monthly payment can you afford for the mortgage (principal and interest) plus property taxes and insurance?

you are paying $2400 for rent and have $4000 left over. $6400. How much higher than $2400 can you go towards PITI and still have money for utilities, savings, etc.

what does that reverse look tell you that you can afford?

of your 200k cash is that also the emergency fund?

[Nutria]

So the housing market is still crazy in LA? I heard people were leaving California.

Some people are, but it's a really big state.

[Leo]

What monthly payment can you afford for the mortgage (principal and interest) plus property taxes and insurance?

you are paying $2400 for rent and have $4000 left over. $6400. How much higher than $2400 can you go towards PITI and still have money for utilities, savings, etc.

what does that reverse look tell you that you can afford?

of your 200k cash is that also the emergency fund?

1. Yes, currently we have $4000 left over every month but because of the pandemic, we are not traveling or taking any vacation, also I don't spend much on gas since I am not commuting to work which might change in the future. Plus we want to start budgeting expenses for the baby and saving for college.

Assuming we add this on the budget
$500 - baby expenses
$500 - college savings
$1000 - travel/vacation
$200 - gas

that leaves us $1,800. If we want to save at least $1000 per month in addition to my 401k and both of our IRAs, then we have about $800 to put to that $2400.

So I guess our magic number is around $3,200 for PITI? (which is around 1/3 of our take home).

2. Current break down of our 200k cash:
150k for down payment
15k emergency fund (roughly 3 months of expenses)
35k - maybe for closing costs and furniture for new home

[bjl584]

I've heard to not exceed 25% of take home as well. But, 28 or 25, it's all pretty close.

What will 750K get you in CA?
You could get a lot for that where I live, even in this market.

The numbers look like you can afford it, just be careful of the unexpected stuff that pops up with owning a new home.
And yes, another kid or two will change the numbers

[Singuy]

Some people are, but it's a really big state.

Wasn't there news recently that for the first time ever CA lost more people than they gained? That's actually a pretty seismic shift. NYC real estate tanked by 20%. I didn't think CA would be part of this housing spike.

[ua_guy]

Wasn't there news recently that for the first time ever CA lost more people than they gained? That's actually a pretty seismic shift. NYC real estate tanked by 20%. I didn't think CA would be part of this housing spike.

That may be the case, but demand for houses and more space is still up after the pandemic, even if the state of CA is seeing a net emigration. Lots of people moving out of more crowded areas like SFO in high-rise and multi-family units to single-family residences with garages, more bedrooms, and yards.

[Nutria]

Wasn't there news recently that for the first time ever CA lost more people than they gained?

Yes, but not enough to cause the housing market to collapse.

That's actually a pretty seismic shift.

Politically, but not regards to real estate, since there's still a lot of smaller cities which urban (and inner-suburb) Californians can move to.

NYC real estate tanked by 20%.

1. When?
2. NYC is also pretty big. Did prices collapse in all the boroughs, or just Manhattan?

[Singuy]

That may be the case, but demand for houses and more space is still up after the pandemic, even if the state of CA is seeing a net emigration. Lots of people moving out of more crowded areas like SFO in high-rise and multi-family units to single-family residences with garages, more bedrooms, and yards.

This makes sense.

[Singuy]

Yes, but not enough to cause the housing market to collapse.



Politically, but not regards to real estate, since there's still a lot of smaller cities which urban (and inner-suburb) Californians can move to.



1. When?
2. NYC is also pretty big. Did prices collapse in all the boroughs, or just Manhattan?

I didn't say collapse. I was surprised real estate spiked like everywhere else. I thought it would remain more neutral.

[Leo]

So the housing market is still crazy in LA? I heard people were leaving California.

Yeah it is really crazy right now. Just based on my research online and talking to some friends and family relatives who are in the buying process, prices here in LA is all time high and there are bidding wars, and I've heard stories of houses going way over the asking price and the market is still going up.

Even with some people moving out of state, the demand is still pretty high and there is no supply. Also low interest rates and people wanting more space like ua_guy said are also factors that drive the insanity right now. I am guessing add investors snatching properties left and right into the mix, and competition from people with family money or tech people with stock options.

I hope it cools down but who knows. Maybe when we go back to normal, we'll see higher interest rates, or higher supply due to maybe people who delayed selling because of the pandemic or eviction moratorium ending. I don't know, just maybe.

What will 750K get you in CA?
You could get a lot for that where I live, even in this market.

Probably just a regular 3 bedroom in the suburb, hopefully 1hr away from LA. Unfortunately, SoCal is our home and we have family and friends here. We really want to stay 30mins away from LA and have 4 bedrooms to have a home office space but looks like that is just a dream and we need to lower our expectations.

[Nutria]

I didn't say collapse.

You said, "real estate tanked by 20%." What's the difference between tank and collapse?