Buy House in Bay Area, CA or Continue Saving?

[CRG]

Hello all -

I recently found this site through an article published in the New Yorker and I'm hooked. Great stuff.

My wife and I are contemplating a home purchase in the Bay Area, where home prices are pretty absurd. In the area we're looking, a decent 3 bedroom/2 bath home will run between $850 and $1 million. We have three small children and are on a single (decent) income. Purchasing a home would essentially mean stopping our retirement savings and utilizing most of our money market funds for the down payment. I should mention that my employer has offered to kick in $100k toward the down payment through some sort of retention contract. In essence, a percentage of the employer loan would be forgiven with each year of employment over a 10-year period.

Anyhow, this is a tough decision for us and I'm not sure how to proceed. I'm worried that the market won't continue to grow as it has, and I also don't like the thought of stopping our retirement savings. I'm looking for advice/opinions on the best avenue for us. I like the idea of being mobile through renting, and I should also mention that our rent payment is about 50% of the market rate.

Thanks!

[Jakerado]

You left out one critical piece of information: Why do you want to buy?

If it's for financial reasons, it makes no sense and don't do it. (Being familiar with the area already I don't need to go into details about how much your rent is vs mortgage payments, etc ;)

[trashmanz]

I'd need to know more information to make an informed recommendation. 

1) Do you have to live in the area you are looking at?  There are cheaper places in the Bay area, not sure where you work and how close you are to other transportation options other than car.
2) Is the 50% below market rent sustainable?  That much below market may mean the situation could be corrected at some point in the future.  Or if you decide to move?
3) Hows work?  Enjoyable?  Conceivable to stay for such a long time?

[CRG]

You left out one critical piece of information: Why do you want to buy?

If it's for financial reasons, it makes no sense and don't do it. (Being familiar with the area already I don't need to go into details about how much your rent is vs mortgage payments, etc ;)

Thanks for your reply.

Yes, I suppose the primary driver would be financial. I'm curious why you advise against this.

[trashmanz]

Personally I think the RE market in the Bay Area seems unsustainable.  Most people cannot realistically afford to live here, it seems poised for a correction of some sort.  But the 100K money as a downpayment is attractive if you really love your work and the fine print is reasonable.  I wonder if they would contribute money for a duplex where you could live in one and rent the other side?

[CRG]

I'd need to know more information to make an informed recommendation. 

1) Do you have to live in the area you are looking at?  There are cheaper places in the Bay area, not sure where you work and how close you are to other transportation options other than car.
2) Is the 50% below market rent sustainable?  That much below market may mean the situation could be corrected at some point in the future.  Or if you decide to move?
3) Kids?
4) Hows work?  Enjoyable?  Conceivable to stay for such a long time?

I work and live on the coast side and would like to stay in this area. My employer pays for my vehicle and fuel, so no worries there. Still, I'd like to avoid a nightmare commute. I'm assuming the rental rate is sustainable, at least for now. I say this because our landlord recently increased the rate by $100/month and was very apologetic about it. I don't see her increasing it substantially in the near future. As I mentioned in the original post, we have three children - ages 9, 6 and 3. I do enjoy work, but there have been some org changes recently that have me wondering about the future. I've been with the company for 13 years and recently received a substantial promotion.

[trashmanz]

10 year employment already vested for you, or you need to work another 10 years to start the percentage decrease on the 100K?

[CRG]

10 year employment already vested for you, or you need to work another 10 years to start the percentage decrease on the 100K?

Would need to work another 10 years.

[trashmanz]

Plan on staying in the bay area for the long term?  With or without this current job?

[CRG]

Plan on staying in the bay area for the long term?  With or without this current job?

I would need to leave the Bay Area if not for this job, since the field is highly specialized and there are essentially no alternate employers within a reasonable distance.

[Jakerado]

You left out one critical piece of information: Why do you want to buy?

If it's for financial reasons, it makes no sense and don't do it. (Being familiar with the area already I don't need to go into details about how much your rent is vs mortgage payments, etc ;)

Thanks for your reply.

Yes, I suppose the primary driver would be financial. I'm curious why you advise against this.

Rent vs buy calculators in the bay area *always* point towards rent. A ~10% discount doesn't really make up the difference. I'm figuring market rents are ~4k for what you're looking at, and you're paying 50% of that, or 2k. A 700k house (the low end of your range minus 100k from your employer) would end up costing you ~140k(opportunity cost) + 3.7% of the balance in interest costs. If you left that 140k in the stock market and got 8% returns over the next 10 years you'd have around 300k at the end of it. If you look at your rent payments you'd end up spending ~240k over the same 10 years, and you'd come out with a profit of 60k, instead of losing 3.7% of the interest. Now, there are fancier calculators out there, but this just makes no financial sense even in the "let's do a quick back of the envelope calculation" sense.(yes rents rise, so you wouldn't actually get 60k, but pick a number, say 2% increase/year to match property tax and do the math yourself) Of course, if your rents are 4k / month, now we need to start getting into real maths and start thinking about how long you're going to stick around and such. I'm discounting appreciation 100% because I'm assuming you're not going to gamble on appreciation with your primary residence.

50% under market rent is sustainable in the medium because of prop 13 capping the property tax increase. Landlords that don't want to mess around with finding new tenants after you've established yourself as a responsible one are not going to kick you out or be unreasonable because their fixed costs haven't gone up. Sure, they could eventually correct unless you're rent controlled, but that's why I said medium term :).

[trashmanz]

Plan on staying in the bay area for the long term?  With or without this current job?

I would need to leave the Bay Area if not for this job, since the field is highly specialized and there are essentially no alternate employers within a reasonable distance.

The worse case scenario is pretty bad then.  If your job goes away after you have paid savings into a downpayment as a housing crash occurs, you may be forced to sell at a loss to move to a new area.  A lot of potentially downside to chase the 100K downpayment incentive. 

[CRG]

Thanks to trashmanz and Jakerado for the helpful replies. Some of the info you've presented seems obvious now, but it's hard to think rationally when faced with a seemingly tough decision.

I'll need to analyze Jakerado's most recent reply a bit more (I'm tired), but it seems to make sense.

[dailycycle]

I was in a similar situation and kept renting until the landlord decided to sell.  Then bought the house from him.  Mortgage + insurance + tax payment was unsurprisingly a lot more than rent.  For a few months I thought maybe we had made a mistake.  Now the house has risen in value quite a lot in just a few years.  Meanwhile rent has gone up a lot, while our payment stays the same.  So, it has been better to buy in our case. 

If you mess around with rent vs. buy calculators, the predictions depend so much on how the stock market will perform vs. housing vs. rent inflation: things which are very hard to predict, especially in the bay area.  With the increasing influence of foreign buyers and the expansion of large tech companies all over the bay area, perhaps the price increases are sustainable.  Don't bank on them increasing as they have been, though! 

With kids that age, if the place you currently are suits you and your schooling situation is good, you can't be faulted for riding out the current situation. 

[CRG]

I was in a similar situation and kept renting until the landlord decided to sell.  Then bought the house from him.  Mortgage + insurance + tax payment was unsurprisingly a lot more than rent.  For a few months I thought maybe we had made a mistake.  Now the house has risen in value quite a lot in just a few years.  Meanwhile rent has gone up a lot, while our payment stays the same.  So, it has been better to buy in our case. 

If you mess around with rent vs. buy calculators, the predictions depend so much on how the stock market will perform vs. housing vs. rent inflation: things which are very hard to predict, especially in the bay area.  With the increasing influence of foreign buyers and the expansion of large tech companies all over the bay area, perhaps the price increases are sustainable.  Don't bank on them increasing as they have been, though! 

With kids that age, if the place you currently are suits you and your schooling situation is good, you can't be faulted for riding out the current situation.

Thanks - this is helpful.

Looks like we will continue renting given all of the variables discussed. As it turns out, this aligns with my gut feeling anyhow, so probably best. Now I need to decide how to invest the $80k we have sitting at Vanguard in a money market. It's been there for 10 years doing nothing.

[jkitiara]

Posting to follow any further developments. I'm in the same spot myself (without the $100k employer boost) but with a market rate (i.e. very high) rent and a harmless but tiresomely crazy landlady I'd like to stop having to deal with.

But the numbers don't make sense, so I'm staying put for now.

[CRG]

Posting to follow any further developments. I'm in the same spot myself (without the $100k employer boost) but with a market rate (i.e. very high) rent and a harmless but tiresomely crazy landlady I'd like to stop having to deal with.

But the numbers don't make sense, so I'm staying put for now.

We're in a 2,000 sq. ft. house in a nice area of Pacifica and our rent is $2,200, which is an absolute steal. I've decided to stay a renter for now, as buying simply doesn't make sense, even considering the $100k from my employer. Perhaps the market will shift, at which time I may entertain the $100k boost.

Best of luck to you!

[protossZerg]

We moved to the bay area about 2 years ago.  After researching the crazy housing market here, we decided to take the cash we would have used as a down payment and bought 3 homes in the Atlanta area and turned them into rentals.

We just feel the Bay area market cannot continue to support these prices *shrug*. For me, it was too much risk to buy a $1 million fixer upper in the area where we work.  The net rents from the three Atlanta homes cover the rent for our home in the Bay area. 

With that said, we still have aspirations to own a home here.  So we are saving up for that.  And if the market does go down, we will buy.  If home prices stay the same or continue to go up, we will continue to rent and buy more rental properties elsewhere.

[gardenarian]

The Bay Area is having another real estate bubble, and now is not a good time to buy. (Never mind what people say about it "always being a good time to invest in California real estate.")
If your rent is 50% of the going rate, I think you would be wise to invest/save that other 50% rather than going into debt for a house.
If you bought a house now, it would probably increase in value over the next 2-3 years, but there will be a downturn in the market some time after that. It would be horrible if your specialized job required you to sell when you were underwater.

I lived in San Francisco for over 20 years, bought and sold three houses, and made a crazy amount of money. We recently sold our primary residence and moved to Oregon. We probably could've made more profit had we waited another year, but we are FI and ready to get away from the noise and congestion.

[bliss88]

Along the same line of inquiry (not sure if best to start new thread):
If the ROI is insufficient for buying a home to live in in the Bay, what about buying a rental outside of the bay? Or outskirts of bay? Is Bay Area RE so overpriced that anywhere commutable to SF is overpriced?

I'm looking to buy a rental (that i Would not live in, b/c I don't want to commute more than 6-15 mi)

I'm age 38, single, work in Berkeley, can save maybe $30K/yr, rent in Richmond ($700/mo + all util./yard =&850
I have $76K cash, $40K in stocks, am about 40% en route to savings goal to enable me to live off $30K/yr as my 4% draw (so target retirement is 53-55, depending on market performance, savings rate changes, spending rate changes eg $30K/yr is based on a US (west coast) retirement spending rate.

Like the author of the original post, what to do do w our savings if not able to purchase Bay Area home? I am considering buying a duplex or condo or house in Sacramento, Reno Nevada because I've heard the tax advantages are better in Nevada, or communities outside of the bay area within 1 to 2 hour's drive. Any thoughts?

Goals w/a rental are tax savings, land/property appreciation, future rental income once house is paid off (15-yr mortgage plan).

[$200k]

OP, if you've signed up for Redfin alerts in your area, you'd see that 3/2 and 3/1 homes in OK condition can be had as low as $650K-$750K.  Some even go for $600K, but I've only seen 2-3 sold at that price in the 2-3 months I've been following intensely.  Conversely, I've seen very nice homes sold in Pacifica for $1M and I don't think those buyers are overpaying.

I'm in the same boat as you, relatively.  I'm on the sidelines waiting for the right opportunity. I'd bid on anything under $700K at this point.

[spud1987]

I made the decision to buy in the Bay Area. But our situation is somewhat different than yours. We were paying 2200/month for rent for a 2bd and would've had to get a 3bd soon (wife needs an office and baby on the way). Our home cost around 725k, which is "cheap" for a 3bd in the area (we are in the East Bay where prices are a little more reasonable than SF or South Bay). The NYTimes rent/buy calc, which is the best tool I found, said buying was a no brainer even with conservative assumptions. Our PITI is around 3200/month, 1000 of which goes towards principal. Once tax advantages are added in (our top federal rate is high at 33%, plus 10% CA) buying wins in a landslide.