Median home prices in San Jose metro are 628K. How do people afford it? (Santa Clara: for sale, renting)

[mysticaltyger]

Originally Posted by Snort

I just picked up The Millionaire Next Door and that may have been from one of your recommendations in the Finance forum. If I remember right, the suggestion is that one shouldn't spend more than twice one's gross annual income on a home. Well, for most of us, that just ends the dream of owning a home. I'm actually okay with that because I'd rather live on a nice comfortable boat. There are several downsides to this plan, but you can find decent boats for under 100K with most home comforts aboard and live in a great location with great sunsets.

I didn't recommend "Millionaire Next Door" but it is a good book. Personally, I liked The Difference better.

http://www.amazon.com/Difference-Any...0222028&sr=8-3

The mortgage being 2x income is what is recommended in Millionaire... I think since interest rates are so low, you can go a little over that, but still not anywhere near 5x or 6x that...probably 3x to 3.5x gross income at the most.

I'm glad the boat thing is working out for you. I had a friend who did that and he loved it. Personally, I think taking care of a boat is a royal Pain in the A**, so it wouldn't be for me. I love apartment living, myself, as long as I can keep rent to 20% of my gross income (which I am, just barely).

[esmith143]

Originally Posted by Snort

If I remember right, the suggestion is that one shouldn't spend more than twice one's gross annual income on a home.

This is a great idea - in theory. In practice, buying a house below your budget means that your children go to a sub-par school. And it's cheaper to buy a good house in a slightly more expensive neighborhood than to spend $20,000 per year, per child in after-tax money on a private school.

This article mentions home prices for the San Jose metro area are 628K. How can people afford this with unemployment over 11% ? Are people taking out crazy loans again?

Who says that you're supposed to live in a house? There are lots and lots of apartments all over the place.

Even on $110k income (way above San Jose's median), $600k is 6 times income, which is well over recommended borrowing amounts. All for a shack

San Jose house prices are slightly below average for the Silicon Valley. The median house is closer to 500k. Monthly mortgage payment on 500k, assuming 20% down and todays rates, comes out to $1950 to $2000. Median rent for a 3-bedroom in San Jose is $2200.

If it's okay to spend $2200 to rent a 3-bedroom house, why isn't it okay to buy it and pay $1950 per month?

If it's not okay, what is the rule regarding rent to gross income ratio, and how come is it violated? Clearly crazy loans are not a factor.

[mysticaltyger]

Originally Posted by esmith143

If it's okay to spend $2200 to rent a 3-bedroom house, why isn't it okay to buy it and pay $1950 per month?

If it's not okay, what is the rule regarding rent to gross income ratio, and how come is it violated? Clearly crazy loans are not a factor.

The rent to gross income recommendation is 1/3 of your gross income to rent as a MAXIMUM. However, that's pretty much a prescription for payday to payday living and/or going ever further in debt.

For those who want to accumulate wealth, the recommendation is 20% of gross income or less...although I think for a lot of people 25% of gross could still be comfortable if they didn't have any other debt payments.

Also, in your $1950 per month comparision, you conveniently neglect the cost of property taxes and maintenance. Those costs can easily average out to more than the rent of $2200 a month for renting a house.

BTW, I DO agree with you. A lot of people are probably spending way too much on rent. My landlord allows peoples' incomes to be as low as 2.5x their rent. I think that's nuts!

[mysticaltyger]

Originally Posted by esmith143

This is a great idea - in theory. In practice, buying a house below your budget means that your children go to a sub-par school. And it's cheaper to buy a good house in a slightly more expensive neighborhood than to spend $20,000 per year, per child in after-tax money on a private school.

I think there are other solutions.

1. Don't have kids.

2. Home school them.

3. Earn a good income in an expensive area and save your butt off by renting/sharing a small place, then move to a cheaper area where you can make a huge down payment or pay cash...then you'll be able to afford kids.

Problem is, most people are really bad at planning, which is why so many live payday to payday or go ever further in debt.

[Heidi60]

Our "home" is a condo but a real house is just a dream for us in this area. I look forward to selling and moving to someplace where the prices and taxes aren't so high. Also, many people here rent out rooms or double up with family members. That isn't for me so we are just glad out condo isn't underwater and hope to sell it in the spring.

[Snort]

Originally Posted by mysticaltyger

I didn't recommend "Millionaire Next Door" but it is a good book. Personally, I liked The Difference better.

Amazon.com: The Difference: How Anyone Can Prosper in Even The Toughest Times (9780307407146): Jean Chatzky: Books

The mortgage being 2x income is what is recommended in Millionaire... I think since interest rates are so low, you can go a little over that, but still not anywhere near 5x or 6x that...probably 3x to 3.5x gross income at the most.

I'm glad the boat thing is working out for you. I had a friend who did that and he loved it. Personally, I think taking care of a boat is a royal Pain in the A**, so it wouldn't be for me. I love apartment living, myself, as long as I can keep rent to 20% of my gross income (which I am, just barely).

That's right. I did see your recommendation for that book and picked that one up too.
That's great that you can keep your living expenses down to that level!

[jbunniii]

My plan is to keep saving until I can afford to buy a nice house for cash elsewhere (maybe Portland or Denver or Seattle) with a couple years' living expenses left over as a savings buffer. This will afford a much better lifestyle than is possible in Silicon Valley, while requiring only a fraction of the income.

[mysticaltyger]

Originally Posted by Snort

That's right. I did see your recommendation for that book and picked that one up too.!

Since I'm always recommending books on CD forums, it's nice to hear someone actually gets the books I recommend. I'm flattered

Originally Posted by Snort

That's great that you can keep your living expenses down to that level!

Well, so far....but I do worry about the future....I work in the public sector, and I do worry that I'll be facing a sharp pay cut come next July, plus they can always raise the rent any time, since I think the apartment vacancy rate is dropping. But it's working for now. Fortunately, I don't have any other debt payments

[mysticaltyger]

Originally Posted by jbunniii

My plan is to keep saving until I can afford to buy a nice house for cash elsewhere (maybe Portland or Denver or Seattle) with a couple years' living expenses left over as a savings buffer. This will afford a much better lifestyle than is possible in Silicon Valley, while requiring only a fraction of the income.

Yeah, that's what I was getting at. Most people just don't do that kind of stuff, unforuntately. They just think "I want a house" or "I'm XXX age, I should have a house by now" and they go out and buy one whether they can afford it or not.

[StandingRoomOnly]

For a 600k house, 20% down...mortgage would be 480k...at 5.2% 30 year....payment would be around 2600 a month. Take home after taxes from a 110k salary would be about 2500-2600 every 2 weeks. So the mortgage would be roughly a little less than half of monthly take home pay. For someone who is able to save for and willing to put down 120k on a mortgage, they should have the saving-sense to live within their means (of course not everyone does) and at least 20k-40k extra saved besides. $2600 extra to live on a month is doable for a 2-4 person family who has no outstanding debts besides their mortgage...it may not allow for a high amount of savings every month, but it is doable...even with prop taxes, and extra living expenses... and also assuming there is income growth and bonuses definitely help.

A 600k house is no longer a "shack" since prices have dipped by quite a bit. Granted you aren't likely to buy in the "best-of-the-best" school districts, but it is not the ghetto either.