Should I buy or wait to purchase a single family home in the bay area?

[bornInFlorida]

I am planning to purchase a single family home in the San Francisco bay area (east bay). I am currently renting a house paying about $4000 per month. A single family home in the current market will cost me about $1.2 – $1.3 million. I am planning to live in the same location for the next 20+ years due to family reasons. I have used the NY Times rent calculator and according to the calculations it doesn’t make much difference if I rent or purchase.

My question is, should I make the home purchase soon or should I wait? I am asking from a market timing perspective. I am currently holding about $350K cash in savings all of which I wanted to put towards the home (some as an emergency fund). I don’t feel great about holding too much cash as it is not working for me.

It is not uncommon to hear that we are in a bubble with respect to stocks and housing market. However, at the same time, I do hear some people say that certain real estate markets (Australia, Vancouver) haven’t gone down in prices in 15+ years despite people saying there is a bubble. I am not sure Bay Area would fall in the same.

Appreciate any insight you can provide.

[jamesbond007]

I am planning to purchase a single family home in the San Francisco bay area (east bay). I am currently renting a house paying about $4000 per month. A single family home in the current market will cost me about $1.2 – $1.3 million. I am planning to live in the same location for the next 20+ years due to family reasons. I have used the NY Times rent calculator and according to the calculations it doesn’t make much difference if I rent or purchase.

My question is, should I make the home purchase soon or should I wait? I am asking from a market timing perspective. I am currently holding about $350K cash in savings all of which I wanted to put towards the home (some as an emergency fund). I don’t feel great about holding too much cash as it is not working for me.

It is not uncommon to hear that we are in a bubble with respect to stocks and housing market. However, at the same time, I do hear some people say that certain real estate markets (Australia, Vancouver) haven’t gone down in prices in 15+ years despite people saying there is a bubble. I am not sure Bay Area would fall in the same.

Appreciate any insight you can provide.

Mortgage rates are still low and if you are already paying $4000 rent, then might be worth buying. East Bay (Fremont) is the only decent affordable area left here. Decent to great schools, good commute options etc. But, did you look at ways you could save more money by buying a smaller house? You know there are single family homes that are on the market in Fremont right now for $750K ish? Or are you set on sending $1.2M? But the main question is, why are paying $4000 rent? Are living in the city?

[affordablehousing]

Looking at making the same purchase and am curious how this works out. We were thinking that for the bay area, housing price escalation has been partly contributed to by high salaries from tech, lack of housing inventory, and outside investment. We are resolving spending $1M on a crappy house partly by figuring we don't work in tech, so if tech falls, and housing prices fall, at least we'll still be uncorrelated with our jobs (not in tech and pretty unrelated). That said, things are always cyclical, and the best reason to get a house is you need a place to live. If renting isn't fun, then buy a house. As previous folks said, you could always limit your downside by buying a cheaper house in Fremont, Hayward, San Leandro, etc.

[ysette9]

We just bought a house on the Peninsula after being on the sidelines for the past 5 years, so we went through many of the same discussion points as you bring up.

First, I think the NYT's rent vs. buy calculator is a great place to start. When we ran our numbers, the break-even point was around 10 years. If you are planning on staying 20+ years, then I think it really comes down in favor of buying. Then question then is when exactly?

I don't think I can time the housing market at all. When we first started looking, my husband thought things were too expensive. You can look up for yourself what Peninsula housing prices have done over the past 5 years. We both make healthy professional salaries and I calculated that despite our wage increases, the housing price increases outpaced us, pricing us out of several cities we were interested in. For us, we decided to buy primarily on personal factors such as finding an area we liked, getting comfortable with a purchase price, and figuring out things like work and school for our kid when she does get old enough. Around these forums they always advise people against trying to time the stock market. Personally I apply the same logic to the housing market; I just am not smart enough to know.

Where do you work? If you work, as many people do, on the Peninsula side of the bay, there is nothing you could do to convince me to spend $1.2M on a house in Fremont. If you work in the East Bay then that is another story. For reference, we got lucky and bought a small house on the Peninsula for a shade over $1M. My husband tried to convince me to consider houses on the other side of the bridge, but I see the backup on 101 every day with the line of cars trying to go east over the bridge, and there was no way I was going to put myself in that position.

[Another Reader]

In 2006, my neighbor's house was worth $1.1MM.  In 2011, it sold as a short sale for $785k.  Today, the same model a couple of streets over is on the market for $1.35MM.  The real estate market is cyclical, albeit distorted in the Bay Area because of supply constraints.  Prices have gone down and will again in my opinion.  Draw your own conclusion.

[partgypsy]

I don't know your local market conditions. But yes housing is cyclical. But it would be difficult to know when it will go down. In 6 months, 1 year, 5 years? Are you willing to sit out for say 7 more years till you hit a downcycle, or would you rather be in a house? Myself if I wanted to be in a house, I don't want to wait around an indefinite amount of time. Instead keep ears and eyes out to look out for something that will work for you in your budget. Regardless of wanting to buy now it still might take months of looking to find the deal you like. And when you do find it, act fast.

[jamesbond007]

Either people are not just selling houses or the Chinese investors are dumping cash on houses in the Bay Area right now. The market is crazy. We thought with the rate increases over the past 8 months maybe it will cool off a bit but, no change. It is probably the bump in summer market that is keeping things crazy. I don't know. 20 years is a long time so if you are 100% sure, then probably worth buying.

[jamesbond007]

We just bought a house on the Peninsula after being on the sidelines for the past 5 years, so we went through many of the same discussion points as you bring up.

First, I think the NYT's rent vs. buy calculator is a great place to start. When we ran our numbers, the break-even point was around 10 years. If you are planning on staying 20+ years, then I think it really comes down in favor of buying. Then question then is when exactly?

I don't think I can time the housing market at all. When we first started looking, my husband thought things were too expensive. You can look up for yourself what Peninsula housing prices have done over the past 5 years. We both make healthy professional salaries and I calculated that despite our wage increases, the housing price increases outpaced us, pricing us out of several cities we were interested in. For us, we decided to buy primarily on personal factors such as finding an area we liked, getting comfortable with a purchase price, and figuring out things like work and school for our kid when she does get old enough. Around these forums they always advise people against trying to time the stock market. Personally I apply the same logic to the housing market; I just am not smart enough to know.

Where do you work? If you work, as many people do, on the Peninsula side of the bay, there is nothing you could do to convince me to spend $1.2M on a house in Fremont. If you work in the East Bay then that is another story. For reference, we got lucky and bought a small house on the Peninsula for a shade over $1M. My husband tried to convince me to consider houses on the other side of the bridge, but I see the backup on 101 every day with the line of cars trying to go east over the bridge, and there was no way I was going to put myself in that position.

I don't necessarily agree with your assessment of the other side of the bridge. I have been living in Fremont for about 2 years now after living in Sunnyvale, San Jose, Palo Alto for over 10 years. Fremont is a great place to live and raise a family. Granted YMMV but, IMO, in the Bay Area commute shouldn't be the reason you spend money. There is no guarantee that you will work in the same company forever. Let's say you get a better job in Oakland, will you not take it? What I look at is, how well the city is connected to other cities in terms of bike trails, bike paths, public transport, etc. Fremont fits the bill perfectly. Take Bart to SF. ACE train to San Jose/Santa Clara. Dumbarton Express to across the bridge to Palo Alto. Bart is expanding to San Jose too. tons of options. Scoop carpool app let's you carpool for peanuts.

To the OP, lots of options these days unless you live in Pleasanton and and beyond & work in Palo Alto, you are not screwed.

[ysette9]

You're right about the potential for the job to switch. I realize I got caught up in thinking of my situation where I have worked for the same employer for my entire career, but certainly that isn't standard around here. Speaking in broad generalities though, the jobs seems to be more located on the Peninsula/south bay area than the south east bay area. Certainly the traffic patterns I observe every day indicate that more people live in the east and then commute to the west. Traffic isn't the only reason to make a decision on what to buy and where to live, but I think it should be a significant factor.

I've lived in San Jose twice now while commuting to Palo Alto and/or Sunnyvale. The quality of my life vastly improved when I moved north and reduced my commute. I even reduced my standard of living to make that happen and still got a net gain. Other people will prioritize other things in life, and that is fine, but this forum does harp pretty strongly on the benefits of reducing your commute for all sorts of reasons.

[MoonLiteNite]

Well if you are planning on buying a house because you plan on living there, then go for it.
But if the idea is to treat it as an investment, i would hold off and try to "time the market", there may or may not be a bubble, and it may or may not pop soon, but if there is a bubble, and it does pop soon, you will be in a world of hurt if you are buying as an investment right now

[dragoncar]

If you can wait 10 years, then I suspect you can get a deal during a downturn.  Bay area has had quite a few tech boom/bust cycles (I say 10 years not as a prediction but to illustrate that it could be soon, much later, or things could just trend sideways for a long time... nobody can predict this).  But if you can't wait that long, I see no reason to delay if NYT calculator says it's a wash.*  I'd rather own my own place and have my price locked in than worry about the whims of the rental market.  It's really more a question of whether you are a "homeowner" type personality. 

Note that the NYT calculator can't account for early retirement, so it's possible you eventually lose the bonus effect of that sweet tax deduction.  In other words, lowering your tax bracket skews towards renting.  So if you FIRE in only 5 years, that's not accounted for.  Also, some powers that be want to get rid of the mortgage interest deduction.  No idea if that will take but consider it a risk in the calculation.

If you plan to FIRE soon, consider tolerating the additional traffic and living further out for less money.  I tolerated a 1-hr commute for a few years, but it saved me a million dollars so it was worth it, and now I'm in my hammock during rush hour.

[NorCalistache]

Overall I think there is an argument to buy. Unless the tax code changes, you will likely get to itemize and deduct the mortgage interest and property taxes. Also, the monthly principal reduction is a type of forced savings. Fixed-rate mortgages are relatively low.

Nobody has a crystal ball to forecast the future. You could go under water for a while if a deep tech downturn occurs. An earthquake can set you back too. Trump and Congress could eliminate the mortgage interest deduction or the deductability of property taxes. Or you could see continued price appreciation and wealth creation.

If you have to move to be closer to a new job, then you can rent the house and likely cover your mortgage, and continue to build wealth.

[ohmylookatthat]

if your time frame is really 20+ years then buy.  look at all the folks that bought in the 60s and 70s and still have the houses. i'm sure they are happy clams