How on earth do people afford to buy in SF? (rant) (renting, insurance)

[beb0p]

Originally Posted by Larry Siegel

>Working, saving, and investing is pretty much how me and my friends did it.

Good post, but it should be acknowledged that it's harder right now, in the post-crash financial environment, to get started in home ownership than it is in more normal times. You really do have to have a 20% down payment, and lenders will check to see if any of it is borrowed.

When I bought my first house, in 1985, I was able to do so with 5% down, making the mortgage non-conforming. It's perfectly reasonable to be able to do that, especially in a high-cost area. I paid the original mortgage off with a conforming mortgage and then paid the next one off outright.

That is what the nonconforming or subprime mortgage market is for. After a while, if government regulations don't get in the way, young people with good credit and a track record of steadily rising incomes will be able to do that again.

Agreed.

Also should point out that FHA, where down payment can be as low as 3.5%, is a viable option for many first-time home buyers - for people with high income but not a lot of savings. I read an article that two friends bought a 2-unit building for over $900k but only had to pay like 5% down payment.

[bmw335xi]

Originally Posted by beb0p

Agreed.

Also should point out that FHA, where down payment can be as low as 3.5%, is a viable option for many first-time home buyers - for people with high income but not a lot of savings. I read an article that two friends bought a 2-unit building for over $900k but only had to pay like 5% down payment.

The problem with FHA on an expensive property is your PMI will be enormous.

[beb0p]

Originally Posted by bmw335xi

The problem with FHA on an expensive property is your PMI will be enormous.

Using the above scenario and assuming a 0.5% PMI, it comes out to roughly $550 a month for PMI. Split between two people and it's roughly $275 each person. Enormous? Maybe. A deal breaker? No.

[DocGoldstein]

It's all about disciplined, if you can save the 20% (big IF in this "buy the newest iPad, Galaxy, nokia, Blackberry every 6 months" society), and you're credit isn't shot to shreds, it's fairly easy to buy a home in most parts of the Bay Area where the total cost would be around what the place would rent for (notable exceptions: Lamorinda, Palo Alto, Cupertino, San Mateo, etc). But take Walnut Creek, I see properties pop up at rental parity all the time with a 20% down 80/20 LTV loan.

If you're a disciplined saver, and have a normal SF Bay Area white collar career, it's not THAT hard to find something at rental parity.

[JrsyGal]

Originally Posted by beb0p

As I've said in a different thread on a similar subject - people can afford these homes because - let's consider the following scenario:

A married couple in their 30s, no kids or have a toddler, and have been working and saving for ten or more years. They should have around $200k in combined savings and combined make about $150k annually. They can afford a house somewhere in the $750k to $850k reasonably comfortably and in the $900k range if they stretch - they have enough down payment and they can afford the roughly $3,000/mo mortgage (their take home is approx $8,000). If they rent out the in-law unit in the garage for $1,000 a month (many do that in SF) it can trim the mortgage to only $2,000 a month. Likely less than what they pay for a comparable rental.

I've been thinking about these numbers since reading this yesterday, and I'm having a hard time getting things to add up. As a young couple starting out in their 20s, it's unlikely they would have been bringing in $150k annually, and would have had things like student loans to contend with. Even for the most disciplined saver, I think it would be a big stretch to save $200k over 10 years.

Now, they go to look for a house. Even with a $200k down payment, I don't see how they can afford a house in the $750k range. The mortgage might be $3,000/mo, but what about property taxes and insurance? I imagine that would be another $1,000/mo, causing their monthly housing expenditure to eat up half of their take-home pay.

Of course nothing is impossible, but I don't see that scenario as being realistic for most people. We're considering a move from NJ and are trying to figure out how to make it work. We've got two kids in middle school to think about, so it's looking more and more like renting is our only possibility.

[sliverbox]

I spent YEARS thinking about the housing situation here. Here were a few of my conclusions:

A: Don't try to make sense out of median incomes and home prices. A great number of people in the Bay Area who own are older and bought a long time ago. None of them would be able to afford their own homes if they wanted to now. A lot of those same people have lower income jobs too, which isn't a problem because their homes were so much cheaper. As a result their lower incomes are combined with the higher incomes of some of the more recent arrivals.

B: The window for getting into housing in the Bay Area is usually a frustratingly small one. There was, I say, about a 2 year window after the crash where if you had money, you could get into something reasonably. We bought last year and I am fairly certain we would be locked out as of now. Money got cheap again, and that has predictably caused more people to get in which drives competition and prices upwards. The East Bay city I live in apparently has gone up in price over 10% in a year.

C: Its possible to not only save enough for a down payment for a house here, but also save enough in retirement and emergency cash as also. But you will probably need an upper level income. I'd say at least 150k per couple. But even so, I'd say that with that income, I wouldn't go over 550k. We paid about 520k for our house and there is no way I'd feel comfortable with a 750k home: That would start to really eat away way too much of the monthly nut. But the key here is FRUGALITY. As mentioned, our cars are ancient, high-mileage things. We live the same way as we did when we had low income jobs. Again- its the 'little stuff'-aka, eating out, gadgets, and stuff like that which makes savings mysteriously disappear.

D: Price differentiation between places like Silicon Valley, San Francisco, and places like the East Bay and outlying environs is INSANE. As in our ordinary house would easily be well over a million dollars in either SF or SV. That's a huge difference. To me it seems that SF is at this point totally out of reach to all except for the truly wealthy. Its a playground for the rich. Good riddance anyway.

[bmw335xi]

Originally Posted by beb0p

As I've said in a different thread on a similar subject - people can afford these homes because - let's consider the following scenario:

A married couple in their 30s, no kids or have a toddler, and have been working and saving for ten or more years. They should have around $200k in combined savings and combined make about $150k annually. They can afford a house somewhere in the $750k to $850k reasonably comfortably and in the $900k range if they stretch - they have enough down payment and they can afford the roughly $3,000/mo mortgage (their take home is approx $8,000). If they rent out the in-law unit in the garage for $1,000 a month (many do that in SF) it can trim the mortgage to only $2,000 a month. Likely less than what they pay for a comparable rental.

I'd say the couple above is pretty typical of SF buyers. Yes, there are also trust-fund babies and investment group in the market but the couple above can reasonably compete in the market and sometimes get the offer accepted.

$900k wouldn't be possible in this scenario, even if they used their entire combined savings to avoid PMI.

$900k -> $100k down payment -> $800k loan amount 3.5% -> $1k property tax = $4,500

This is already a DTI of 56%, which wouldn't qualify for a loan. You still would have to add monthly credit card bills, auto loans, PMI etc, which would make your DTI even worse.

A $650k loan under these circumstances would be really pushing it. If the borrowers have car loans and/or credit debt, they would most likely have no chance obtaining a loan.

[Ultrarunner]

Just a comment on borrowing...

Interest is certainly rock bottom... the problem is actually getting the rate.

Not a single person I know that has refied or attempted has a good experience to relate.

Even my seasoned professional mortgage broker friend says lenders are incredibly difficult... even those with outstanding credit are jumping through the hoops.

When I bought my first home with a mortgage years ago... prices were severely depressed because interest rates were as much as 15%.... I was lucky at 13.5% because it was an adjustable.

As rates declined, property values increased and my adjustable adjusted downward each year...

It was kind of a win/win.... friends that thought I was crazy for buying with such a high mortgage interest later said I was smart or lucky to get in when I did...

2011-12 will be looked at as another golden window of opportunity...

[sliverbox]

We had no issue getting our rate, which was around 3.4%. That said... we both had nearly pristine credit. As in around 800. Having stellar credit is about the only way to get rates like these. The downside of low rates is that money becomes cheap and therefor that drives up housing prices as people's spending power increases as a result.

Credit makes no sense to me. I've never owned a credit card. Yet I had very good "credit", which I thought meant that you had a credit history.

[Ultrarunner]

Originally Posted by sliverbox

We had no issue getting our rate, which was around 3.4%. That said... we both had nearly pristine credit. As in around 800. Having stellar credit is about the only way to get rates like these. The downside of low rates is that money becomes cheap and therefor that drives up housing prices as people's spending power increases as a result.

Credit makes no sense to me. I've never owned a credit card. Yet I had very good "credit", which I thought meant that you had a credit history.

I was locked in 30 year fixed at 3.125 with a minus .125 point with my existing lender on my home... they dragged their feet all through the Holidays, appraisal came in ridiculously low so I offered to pay down the balance to arrive at the magical 60% loan to value...

Four days after my rate lock expired the lender said they can now do the loan but instead of a -.125 point it would be a full point or cost me $3,000

I went from having nothing but good to say based on the last 8 years to thinking they use the old bait and switch... just like so many others.

Your right... Credit makes no sense to me... even an 834 and they still play games...

Told them to call me if they change their mind...