Should I pull the plug and buy in a VHCOL area?

[Stranded2x]

Folks, what would you do in in our situation?

40M, moved my family (wife and two toddlers) to a VHCOL in California 1.5 years ago. We're all feeling the pain of renting ($4500/month), whether it be from not having outdoor space for the kids to cramped living quarters. On the plus side, the area we're in currently has great walkability, museums, etc, but safety is starting to become a huge problem with the homelessness/crime around us.

My wife and I have been actively looking to buy a house in suburbia for the last year (requirements: good schools so we don't pay private school tuition, safety, and walkability). Amazingly, we found what we think is the perfect home for us. Other than a 30-45 minute commute for me (which is not end of the world especially with California traffic), it has everything we want. But it's 1.6 million.

Finances: 350k cash, no debt, 300k retirement, yearly income approx 430K.

We've factored the pros (dream house, great location, stability for the kids) and the cons (deplete all our cash savings, slow our ability to save, mortgage >2x income, buying at the peak(?) of a hot real estate market) and are leaning towards doing it--but I would like to ask the seasoned investors here if you would pull the plug or continue renting?

PS- for those who may instinctively say get a smaller house/cheaper house and renovate, etc--in my area there are ton of developers who snatch up the fixer-uppers to flip them into >1.5 million houses. Trust me, there just isn't anything decent in our comfort range that won't force us to significantly sacrifice on either commute, safety, or space and we've looked for >1 year.

[AlexxT]

If your job is stable, and you plan on staying, buy it.   1 1/2 years is less than I would normally recommend from a job stability standpoint.

My personal experience is that buying the house will not hurt your net worth in the long run, because the house will appreciate at about 3-5% a year, sometimes more.  However, since  so much of your net worth will be tied up in the house, it will take longer for you to reach financial independence.

However, because home prices are so high here, it often makes more sense to rent from a strictly financial point of view.  Of course, owning gives you other advantages, but keep the math in mind.  If you own a house worth 1.5 million, vs renting at $5,000/ month, = $60,000 per year, your "rental dividend" is 4%.  When you subtract the cost of repairs and real estate taxes ( approximately $22,500 a year for your home, plus repairs at $1,000 to $2,000 per month ) you are saving at most $1,000 a month in net costs.  That is less than 1% that you're earning on your investment.  Of course, you will get the appreciation of the house in the plus column.  So the appreciation will balance out the lower rental dividend, but you're still better off financially with investing and renting.

 

Stranded2x wrote:

buying at the peak(?) of a hot real estate market)

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It's pretty much always the peak of the hot market here, except from 2008-10.   There are periodic small drops, mostly seasonal, but so far prices keep going up.  If you can afford it, don't worry too much.  Over time inflation will decrease the real cost of your mortgage payments.

But if you want a house, now is probably a good time to buy.  Seasonally, though, summer is peak buying season, so as not to interrupt the school year.   December and January are the times with the lowest prices, I believe, but also lower inventory.

With that in mind, I recommend stretching beyond all reason when buying a home in California.  I know that's not the standard advice here.

Can you be more specific about the geographic area you're buying?  1.6 million is pretty cheap in some areas.

[portlandia]

Are there SFH rentals in the better area? I would not feel comfortable with a mortgage that large, but you definitely need to get away from all the homelessness/crime.

 

https://www.nbcbayarea.com/news/local/Diseased-Streets-472430013.html

[Zaphod]

AlexxT wrote:

If your job is stable, and you plan on staying, buy it.   ! 1/2 years is less than I would normally recommend from a job stability standpoint.

My personal experience is that buying the house will not hurt your net worth in the long run, because the house will appreciate at about 3-5% a year, sometimes more.  However, since  so much of your net worth will be tied up in the house, it will take longer for you to reach financial independence.

However, because home prices are so high here, it often makes more sense to rent from a strictly financial point of view.  Of course, owning gives you other advantages, but keep the math in mind.  If you own a house worth 1.5 million, vs renting at $5,000/ month, = $60,000 per year, your “rental dividend” is 4%.  When you subtract the cost of repairs and real estate taxes ( approximately $22,500 a year for your home, plus repairs at $1,000 to $2,000 per month ) you are saving at most $1,000 a month in net costs.  That is less than 1% that you’re earning on your investment.  Of course, you will get the appreciation of the house in the plus column.  So the appreciation will balance out the lower rental dividend, but you’re still better off financially with investing and renting.

 

Stranded2x wrote:

buying at the peak(?) of a hot real estate market)

Click to expand…

It’s pretty much always the peak of the hot market here, except from 2008-10.   There are periodic small drops, mostly seasonal, but so far prices keep going up.  If you can afford it, don’t worry too much.  Over time inflation will decrease the real cost of your mortgage payments.

But if you want a house, now is probably a good time to buy.  Seasonally, though, summer is peak buying season, so as not to interrupt the school year.   December and January are the times with the lowest prices, I believe, but also lower inventory.

With that in mind, I recommend stretching beyond all reason when buying a home in California.  I know that’s not the standard advice here.

Can you be more specific about the geographic area you’re buying?  1.6 million is pretty cheap in some areas.

Click to expand...

Oddly enough there are lots of good reasons for that. You could argue supply issues, but lots of the reasons for it being a HCOLA is that there are lots of jobs and networking going on in these areas, ie opportunity. Often enough, it seems these effects can be powerful over time.

On the flip side there have been lots of "46% planning to get out of the Bay Area articles" about lately. Truth is you can never know for sure, only in 2012-13 was it obviously a great time to buy, and your ability was more dependent on when you graduated.

[AlexxT]

Zaphod wrote:

there have been lots of “46% planning to get out of the Bay Area articles” about lately.

Click to expand...

Eh.  I have been reading those articles since I got here 25 years ago.  Everyone wants to leave because their house is worth so much, but they stay because of the same reasons they bought their expensive house 10 , 20, or 30 years earlier.  Maybe someday people really will leave in significant numbers, but it hasn't happened yet.  "Rumors of my death have been greatly exaggerated".

Anyway, those fluff articles are what journalists write when they need to fill space.  Pay no mind.

[Peds]

1.3MM mortgage is 3x your income (roughly). That's fine. Do you have 20% down, and cash to maintain an EF?

 

[MPMD]

So if you were to drop a bunch of cash on it you'd be at 3x. With no other debt that isn't the end of the world but it's still a lot, absolute max of what any regular on this site is going to tell you is consistent with most of our financial goals.

Your housing cost is going to go up, are you sure you'll be ok from a cash flow standpoint? $4500/mo is about a $750k house on a 30 year, you'd be looking at more like $6100/mo just for P+I.

I would personally have acute gastritis from the combo of 3x and a 40 min commute, but I know that this is probably considered a pretty sweet setup in VHCOLA areas in CA.

[VagabondMD]

I honestly have trouble wrapping my mind around the scenario. It certainly is feasible but far from fiscally optimal. I do not see a great option, other than moving to another area of the country, which is obviously impractical for other reasons.

Stories like this make me grateful that I can live a satisfactory lifestyle in flyover country while still achieving early financial independence.

[KPInvestor]

I feel that I can related to you as I also live in a VHCOL (probably in the same area or somewhere very close).  Being in a similar situation, I would ask how much your monthly expenses are (excluding housing) and also how much you put away into retirement funds every year.  Also is the 430K combined from you and wife or just you?  If just you, does your wife plan to go to work, thus increasing your take home?  Do you or your wife have a pension?

 

In my personal opinion, you may be able to easily afford this house if you had a nice pension, your other monthly expenses are low, your wife is currently not working but planning to in the near future.

 

[AnjaliFIT]

There are a lot of good points here...my husband and I are in a VHCOL in SoCal so I feel your pain. When I look at home affordability for people in VHCOL areas we focus on how much of your current level of savings gets eaten up by the new home purchase (principal, interest, property tax and insurance).  If you are aiming for $1.6M and put 20% down and assume you get a mortgage rate of 4.5% then your principal and interest payments are about $6,500 which is already $2k over your current rent cost.  Then layer on property tax and homeowner's insurance and see what you potentially have leftover for savings.  You will get (some) tax savings on the home mortgage interest (loan up to $750k).  If it is really tight then I would assess what you may have to sacrifice to be in a home i.e., cut down on travel costs, eating out, etc.  It is not an all or nothing exercise but rather what you may trade off to be in a home now - maybe you don't reach financial independence as early, maybe you both have to continue to work full time for awhile, maybe you don't take an expensive trip every year and instead do it every other year, etc. Whatever the case may be its okay as long as you and your wife are aware (which it seems like you are) what the trades offs are and can adjust accordingly.

[Bmac]

I think you really mean, "Pull the trigger." But given the ridiculous real estate prices in your VHCOL area, maybe your would actually be better off financially "pulling the plug" and moving to a MCOL opr LCOL area. (Freudian slip, perhaps?)

You might check out the blog post from POF this past weekend regarding "geographic arbitrage." (Quotations for AR's benefit).

[Hatton]

You could buy the house.  You have a net worth of $650k at 40.  This seems low to me.  How is your spending?  I would not buy it in your situation.  You will grow to hate the house and the long commute I fear.  If you moved you could buy a 10000 sq foot new home here or a 4500-6000sq ft house and a lake house.  All with a 5 minute commute.  I throw in the geographic arbitrage stuff because it is real.  You actually do not have to pay 3X your salary to live in a nice house.

[Dreamgiver]

2 years ago I bought an 850k home and our income is about 700k in a MCOL. Property taxes are 7k and state income tax is 5%, so much cheaper than Cali. No way I'd spend what you are thinking about based on your income. Some days I think we overdid it. You will be a slave to your job, any, and I mean any issues at work and you will be spending nights awake worrying about things. No reason to place yourself and your family in that position. Walk away, you will be glad you did. I also agree that your retirement savings are low for your age and buying this home is only going to make them grow slower.

[fatlittlepig]

what are your expenses. you don't have much saved given your age and your income.

without knowing more information, i would say no.

 

[CordMcNally]

From a personal standpoint, no. With that said, I would never live in a VHCOL for the housing reason alone. Your income to mortgage actually isn't all that terrible for a VHCOL but, man, you're going to be betting a large portion of your future on your house.