Can we afford a house in 2 years?

[Leo]

We are currently enjoying our childless life in the city but we'd like to buy a house, settle in the suburb and start a family before we turn 30 in 2020.

We are earning 150k income pre-tax. Our current take home is around 8k monthly after taxes and my 401k contribution, wife no 401k. We are still contributing max to our IRAs and I started contributing max to my 401k last year.

We increased our net worth from 60k to 125k last year 2017. We believe we can double it to 250k in 2 years. Excluding IRA and 401k, we can save around 30k cash per year if we really make an effort.

Here's the breakdown of our net worth
Cash: 7.5k
Emergency Fund: 15k
ALL Retirement Accounts: 67k
Two vehicle: 35.5k

We are debt free, have excellent credit score and our job security is not a concern.

BUT housing market here in SoCal are so expensive. I was just looking around and for example, even a decent 3 bedroom house in Northridge (a suburb 25+ mile / 1+ hour commute from Los Angeles) is around 650-700k.

I know most people will say that we should put 20% down payment to avoid PMI. I listen to Dave Ramsey and he even said only do a 15 year mortgage. That being said, let say we want a 700k house, in theory we need to save 140k. That's a lot of money and will take us forever to save that much.

Let say we want a cheaper house for 650k. Realistically, we can save 10% down payment in 2-3 years. If that is the case and we do a 30-year fixed with 4% interest rate, payment will be around $3,400 including taxes, insurance, and PMI. That's probably manageable with our take home but not with 15-year fixed. 15-year fixed is around $5,000 - wow that's more than half of our take home.

so my question is, what's wrong in this picture? Are we doing something wrong? What can we do to put ourselves in a better position to be able to buy a house in the future?

[bjl584]

You're not doing anything wrong. You are living in a crazy expensive housing market. Your theoretical $140K down payment would buy you a decent house for cash where I live.

Rules of thumb are not set in stone. It looks like you are in a financial position to put down less than 20% on a 30 year note and suck up the PMI until you can refi at some point in the future. If that doesn't sound appealing, you're other option is to keep renting, keep saving, or relocate to a cheaper area.

[MonkeyMama]

Living in California myself, I'd say that Dave's rules are unreasonable (for this market). I personally wouldn't do a 15-year mortgage, because of the higher cost of housing.

Being unwilling to put less than 20% down and to have such a huge mortgage, we personally started with a condo so that we could earn equity towards a house. Is what more financially conservative people do in those situations ~ condos or townhomes. (In our case, we gave up and moved to a cheaper city, but that was our original plan and is what many of our family and friends did).

As an aside, I just had a PM from a forum member about my experience with high cost of housing (seven figure real estate). The reality is I doubt I know anyone with more than a $300k or $400k mortgage in the Bay Area. They bought their single family homes with significant amounts (hundreds of thousands of dollars) of condo/townhome equity.

[disneysteve]

We are earning 150k income pre-tax.

let say we want a 700k house

so my question is, what's wrong in this picture?

You're not doing anything wrong. You are living in a crazy expensive housing market.

Rules of thumb are not set in stone.

You definitely aren't doing anything wrong. The problem is the market, not you.

So what's wrong with the picture is that the recommendation is to spend 2-3 times your income for your home. You make 150K so that puts you in the market for a house up to 450K, except those houses don't exist where you live.

Brian is correct that rules of thumb aren't absolutes, but they exist for a reason. Sure, you can spend 4-5 times your income on a house, but that's going to throw off the rest of your finances for the next 30 years. It will impact your ability to save for retirement. It will impact your ability to save for college for the kids. It will impact every aspect of your financial life.

I don't know how people do it.

[rennigade]

You'll be house poor if you purchase a $650k+ home. Just keep renting and saving for retirement.

Maybe think about moving out of the area? Not sure where you family lives but if you have little ties to your current location and can find work elsewhere where its a LCOL area...thats your best bet.

With a home purchase there are a lot of expenses. I knew all the added costs of owning a home but it didnt hit home until we started paying those bills. We're not in the house yet and the temperature is set to 60 degrees and our utility bill is already at $175 for 12 days into the billing cycle. If we were living there that bill would be $200+ already. As it stands now the electric bill is going to be over $400 for the month.

OP...have you even looked at what property taxes costs in your area? Those can be outrageous depending on where you live. Take new jersey residents for example...its mind blowing to see how much they pay.

[snafu]

Happy New Year

Coincidentally, I've family living in [1994] earthquake zone, NorthRidge. 1st keep in mind the combined cost and frustration of a double, daily commute. 2nd, lots of people raise family's in a condo. Townhouse style usually includes some outdoor play space and yard work is looked after. 3rd option is to buy a fixer upper from 1990's, if you are willing to do the majority of up dates, upgrades yourself, cash flowing by segment. You Tube, a few videos combined with DIY friendly products has made this a realistic option for a large segment of those buying their 1st home.

While it's critical to take advantage of any matching retirement contributions from employers, another option is to reduce retirement contributions, saving every dime possible for downpayment. Once moved and settled, increase retirement contributions.

This presumes DW is aboard, buying a home is the over riding goal; spending to be predicated on need more than 'want' in order to build that downpayment. With stable employment, based on your personal experiences $ 1K, easily accessed cash EF for life's annoying challenges [new tire, tooth ache etc] is generally adequate. In case of job loss, 3 months of truly basic expense is mentioned by DR. If you list your monthly expenses, I'm sure we can find some frugal bits to eliminate temporarily, to move you towards your goal.

The issue with expensive PMI is that some contracts demand it be tied to the mortgage for the entire term. Careful reading to understand terminology of 20% equity contracts. I also mention the importance of understanding that a mortgage operates quite differently from a personal loan like the familiar car loan.

The interest is piled on first. They pile on property taxes, home owner's insurance, PMI [if applicable], legal fees, registration fees, transfer fees, key fees, security, brokerage, HOA [if applicable] and others to be argued so that while the monthly payment seems acceptable, very few dollars go to the actual loan!

[Gailete]

Perhaps in the reports I saw, I overlooked something about those fires that were going on near LA. I was under the impression that a lot of houses and businesses burned down. Seems a lot of folks are going to be scrambling for property for the next while, since unless they want a mobile home (NOTHING wrong with them by the way), rebuilding a home can take months. May not seem to impact buying into two years from now, but if the builders are spending their time getting people back into their homes, then I would think a lot of new construction won't be going on, especially since those types of homes are built on spec, and rebuilding for a burned out family is a sure sale. But it has been a long time since I lived out that way. California seems to be wall to wall houses and people. Hard to believe that when we moved we were paying $90/month for a 4BR,1BA house on 1.25 acres in the San Bernardino area! But that was long ago.

Before thinking about a house, you two need to really decide what your goals are in life. Lots of money in the bank, a financially secure lifestyle, children that know and get to spend time with parents, mom or dad staying home with the kids and the other parent working, etc. If you both have to commute an hour plus each way every day to a 8-9 hours job, that means you will not see your kids hardly at all, other than night time feedings maybe. You will almost need a live in nanny with those sorts of hours. For most upper class folks, kids cost a lot of money from before they were born as you will have to decorate a nursery/bedroom for each. Outfit with furniture, car seats, strollers, clothes, baby bottles, disposables, since you certainly aren't going to save money by washing them yourselves in limited time you have. It would be tragic that about all you see of your kids is the dirty/wet diapers they produce when they are already asleep when you get home at night.

The lifestyle you seem to be proposing is like a hamster on a wheel. The faster and longer he goes, he doesn't end up anywhere. You two would be working your tails off mostly to support a house that may not even be your dream house. I'm pretty certain that there are plenty of people in So. CA that don't make $150K/year. Where do those folks find decent, safe housing? Where do they live to raise their children. And one of the other posters was correct that it doesn't kill a child to grow up in a small townhouse or condo, especially if it means more face time with mom and dad. Expenses on everything will be less, including wear and tear on cars (something when looking at my assets I would count as they are never worth what you think and putting all the extra miles on them with long commutes will eat us their value). Used to be after WWII GIs came home and lived with their families in 800-1000 sq ft ranch homes and that included 2-3 kids. We survived. At one point while my dad was going to college we lived in 2 ROOMS and they had their 4th kid there. Don't ask me how they did it, but sometimes you become stronger when you have to work a bit harder for what you want.

Out here in my area we have the occasional million dollar or multi-million dollar house go up for sale in our area, but most of the 'nice' houses are in the $250-400K range, but you can still find a 3BR 2BA house anywhere in the area for less than $150K. Before my husband and I got together, we were friends and he looked over a house that I was about to buy, for $60K! Huge back yard, one and only one excellent school system in our town. A great starter (or in my case finisher) home. Not a huge house, but room for kids while you save your money to move on up. Lots of snow as well here. Not saying anyone would want to move here, but you can save and live more cheaply and then have enough to pick up stakes and move somewhere you might want to be in a place that you can afford. I guess that is why I mention that your two really need to discuss your goals and dreams. Both of your goals and dreams are valid and to have a happy marriage, you have to figure out how to bring those about in a way that you both would be happy. I seriously doubt that paying so much for a house is going to make you happy in the long run. Money trouble being one of the leading causes of divorce.

keep us posted.

[LivingAlmostLarge]

I've BTDT. Like MM I don't think 15 year mortgages apply to places like CA where RE is crazy expensive. We started like MM in a tiny condo and moved up using equity we built to buy more expensive homes. That's the only way to really do it conservatively in expensive HCOLA.

You will be house poor making $150k and $650-700k house. We made that much and bought for $575k a townhouse and put down 20% and still it felt tight. But we were saving 2 IRAs, 401k maximum and ESPP 10% to boot. But those were our parameter of what we could afford. That 20% DP came from our previous condo we bought. And at age 38 last year we bought our first SFH home. It took us 15 years after we bought in 2002 our 1st 500 sq ft 1 bedroom condo to buy a SFH with 20% DP. We had a solid EF and money in the bank after our second purchase.

So in the time of the 15 year time frame we put down what most people would consider a paid for home $300k. I'd like to think we're pretty financially conservative. It's just putting it into perspective.

That you can't always get the $700k home first time out unless you are willing to wait. I do feel sad my kids didn't get a yard until we rented 2 years ago but by making the choices we did we were more financially secure that having stretched and waited until let's say 30 and bought a $700k home.

[Gailete]

@Living - what does SFH mean. I'm sure it is something obvious, but I have no clue.

[Jluke]

SFH is single family home

[Gailete]

SFH is single family home

Well that makes sense

[Leo]

I was just looking back and you can't really plan the future. I posted this almost 3 years ago and a lot has changed.

We are now earning $200k per year and our current net worth is about $350k, last year was $250k (We now have about $150k cash for a downpayment but we can wait for another year see how the housing market does post COVID).

Also, our job is now fully remote so we can buy a house anywhere but we still want to stay here somewhere in LA.

I guess my question is, if we decide to buy a house today, how much can we afford?

[disneysteve]

We are now earning $200k per year

I guess my question is, if we decide to buy a house today, how much can we afford?

the recommendation is to spend 2-3 times your income for your home. You make 150K so that puts you in the market for a house up to 450K

I'll give the same answer I gave originally: 2-3 times income. If you're now making 200K, that puts you up to 600K. You've already got more than a 20% down payment so you're all set. Now you just need to find a house in your price range. If that doesn't exist in LA, then it's time to look elsewhere.

[amarowsky]

I was just looking back and you can't really plan the future. I posted this almost 3 years ago and a lot has changed.

We are now earning $200k per year and our current net worth is about $350k, last year was $250k (We now have about $150k cash for a downpayment but we can wait for another year see how the housing market does post COVID).

Also, our job is now fully remote so we can buy a house anywhere but we still want to stay here somewhere in LA.

I guess my question is, if we decide to buy a house today, how much can we afford?

What is it that drives to you L.A.? (now that you can work remotely, as that was a barrier from moving away before).

Follow up question to ask yourself: Is there any other place that offers a reasonable substitute to the "X" factor that draws you to L.A.? Unless that place is New york or San Fran like, I'd imagine it's substantially cheaper.

2nd Follow up : Ever consider renting, and writing off all rent $$$ and passing off the expensive maintenance costs to the landlord? (conversely, you're still interested in getting property under you ownership and building equity. You could purchase a home to build equity in, and rent for income, in a much more affordable (and growth based) market.
---> Seems a LOT more likely that C.A. R.e. values will start to stagnate, or come down in the future w/ the trend of population decreasing there. If you buy in a R.E. in a growth city, you'll get all the equity benefits of appreciation of an asset + Pass off the very high tax & regulation cost to C.A. home ownership to the landlord, while you get the best benefit, living in the area you wish.

Food for thought..... Personally (probably means nothing to you) I wouldn't touch CA real estate w/ a 10 foot pole (same for flordia & Newyork, fwiw). But there are ton's of more realistic growth places. Where there is room for valuation growth.

Merely my opinion, speculation, and an idea to toss your way. Should you choose to accept it (huge write off, higher growth potential, more flexibility in where you can move, but you don't OWN the house you live in.... Just can write off the CRAZY costs!) & I'm not sure what the rental costs are in C.A., my assumption is they're lower than Ownership/Tax/Maintenance costs there, being an outlier state of the USA norms.

[amarowsky]

this is coming at the perspective of a R.E. investor though.... I'm not certain if you want to hold properties as an investment asset, or more as a personal consumption home residence. (*Sharply different perspectives in some areas) .

If your not interested in R.E. as investment asset, then I apologize for injecting my interest with an assumption!