Median home prices in San Jose metro are 628K. How do people afford it? (to rent, loan)

[jbunniii]

Originally Posted by seain dublin

Just because someone makes six figures doesn't mean you buy a house that is more than three or four times your annual income.

I agree that it's a stupid thing to do. I would have hoped that a condition of all the taxpayer-funded bailouts would be that no more risky lending of this sort would be allowed. Unfortunately that does not seem to be the case. As far as I know, even today FHA will lend up to $729k with only 3.5% down, and I don't think they require a $200k income or sterling credit to make that loan. As a result, most of these loans will eventually fail. We're nowhere near the end of the mortgage mess. How can we be, if bad loans are still being made?

[telecomprovisioner]

Originally Posted by jbunniii

even today FHA will lend up to $729k with only 3.5% down, and I don't think they require a $200k income or sterling credit to make that loan. As a result, most of these loans will eventually fail. We're nowhere near the end of the mortgage mess. How can we be, if bad loans are still being made?

No, they aren't lending money like that anymore.
Of course different story if borrower's income is very high, with a credit score 800 or above.

[jbunniii]

Originally Posted by telecomprovisioner

No, they aren't lending money like that anymore.
Of course different story if borrower's income is very high, with a credit score 800 or above.

Here are the loan limits, per county:

https://entp.hud.gov/idapp/html/hicost1.cfm

The limit in the Bay Area counties is $729,750.

Credit requirements:

FHA Policy Changes You Should Know About

"New FHA borrowers must have a minimum credit score of 580 to qualify for the FHA’s most favorable down payment plan, currently at 3.5%. Borrowers with credit scores of less than a 580 FICO score will be required to put at least 10% down. It’s important to understand that having a credit score of less than 580 does NOT disqualify applicants from getting an FHA loan, but the down payment requirements are stricter under the announced guidelines."

A credit score of 580 is deep into subprime territory. Anything below 700 is pretty dodgy. In my opinion, subprime lending never actually went away; it was simply nationalized by the government.

How much income is needed?

FHA Requirements: Debt Guidelines

"MORTGAGE PAYMENT EXPENSE TO EFFECTIVE INCOME

Add up the total mortgage payment (principal and interest, escrow deposits for taxes, hazard insurance, mortgage insurance premium, homeowners' dues, etc.). Then, take that amount and divide it by the gross monthly income. The maximum ratio to qualify is 29%."

So the hypothetical $110k per year earner qualifies for a mortgage if the monthly payment does not exceed $2658/month.

[gizmo980]

Originally Posted by SportyandMisty

Personally, if I had worked in a job/profession that does not carry high compensation, I wouldn't have relocated to Silicon Valley.

What if they were born and raised here? You talk like everyone in Silicon Valley is a "transplant," and that just isn't true... many many folks are FROM here, and have no hopes of ever owning a home locally. I've lived here on & off since I was 6 years old (I'm now 34), and have been a renter for the last 17 years. I have no desire to own a home at this time, for a variety of reasons - financial costs, burden of maintaining the home, not being able to move easily, etc.

Maybe one day I'll finally settle down and buy a place, but unless I have kids & a husband at that time, it's unlikely I'd want anything bigger than a townhouse... which will still probably cost me a bundle, especially if I stay here in San Francisco.

[80skeys]

Maybe not the right thread, but I have a question: does it actually make financial sense to borrow money to buy a house? I mean, over the 20 or 30 years you hold the loan, you're paying, what, 2-3x the cost of the house? Why do so many people feel like they need to do this?

[StandingRoomOnly]

Originally Posted by 80skeys

Maybe not the right thread, but I have a question: does it actually make financial sense to borrow money to buy a house? I mean, over the 20 or 30 years you hold the loan, you're paying, what, 2-3x the cost of the house? Why do so many people feel like they need to do this?

At the end of your 30 year period for that 628k house (with 20% down) you will have paid over 1.2 million total for your home (interest+principle)...Interest would be close to 500k...loan amount would be about 500k. For those who can do it, it makes more financial sense to go with the 15 year loan! You will have saved 300k in interest by taking on 15 year loan instead of the 30 year. It is a good way to have something of financial value for you when you do decide to move or retire...just going from rental to rental isn't the lifestyle everyone wants... Sometimes "saving" buy buying a house is a good investment. Granted, with the housing downturn not everyone is going to make-out with good investments in housing.

[jbunniii]

Originally Posted by 80skeys

Maybe not the right thread, but I have a question: does it actually make financial sense to borrow money to buy a house? I mean, over the 20 or 30 years you hold the loan, you're paying, what, 2-3x the cost of the house? Why do so many people feel like they need to do this?

If the interest rate is low enough that you believe you can earn more by investing it elsewhere, that would be one justification. Of course there's no guarantee of achieving this - if there were, no one would lend you money at that rate, they would invest it in the guaranteed higher return investment.

If you don't have enough cash to buy without a mortgage, then it comes down to a lot of parameters, but a major one (besides whether you can afford it or not) is how much will the mortgage payments cost compared with renting. At some times in history, it has been cheaper to buy than to rent. Right now that is nowhere near the case, unless you bring a huge downpayment to the table, and then you have all that money tied up, which would not be the case if you rented.

[gone down south]

Originally Posted by 80skeys

Maybe not the right thread, but I have a question: does it actually make financial sense to borrow money to buy a house? I mean, over the 20 or 30 years you hold the loan, you're paying, what, 2-3x the cost of the house? Why do so many people feel like they need to do this?

The one factor you're overlooking is that you need to subtract the amount of rent you would have paid over those 20-30 years from the final cost of the house. That's money would be lost, while housing costs translate into equity later one.

Your negatives are : cost of house at purchase PLUS real estate taxes PLUS mortgage interest paid.

Your positives are : price received at sale of house PLUS tax breaks for homeowners PLUS rent you would have been paying to someone else.

In the long term, real estate always appreciates in value over time (recent years not-withstanding.) As long as you don't overpay in the first place and are able to sell at a higher level later, you'll break even or come out ahead.

[SportyandMisty]

Originally Posted by 80skeys

Maybe not the right thread, but I have a question: does it actually make financial sense to borrow money to buy a house? I mean, over the 20 or 30 years you hold the loan, you're paying, what, 2-3x the cost of the house? Why do so many people feel like they need to do this?

From an economic perspective, there is a big advantage to owning the home in which you live. Contrary to popular belief, it really isn't the deductibility of mortgage interest. Instead, the benefit is tax-free income in the amount of the fair market rental of the property.

Let me explain by way of a thought experiment.

Let's say there are two identical houses side by side on a street. You own one and live in it. I live the other & live in it. Now imagine our respective IRS Form 1040s and CA Form 540s. Each of us has income, each of us has some deductions, and each of us has a tax obligation. Let's call this "CASE A."

Stay with me...

Now imagine the following scenario which I'll call "CASE B". You own your house but you don't live in it -- you rent it to me. I own my house but I don't live in it -- I rent it to you. This is a silly scenario, I know, but stay with me. Because these houses are identical and next to each other, they have identical fair market rental rates. So I rent you my house for $X and you rent me your house for $Y and X=Y. With me? Now imagine our respective IRS Form 1040s and CA Form 540s. Each of us has income from our jobs, but each of us has additional income in the form of the fair market rental. That is, your adjusted gross income is from all of your normal sources plus $Y. You have a few incremental deductions associated with rental property. The same is true for me: I have my normal income plus $X.

Now imagine dropping down to the line item on our tax forms for total taxes due. Each of us will pay income tax on the extra income of $X (minus some expenses).

Now let's get back to reality. With CASE A, here's what is really happening: you own your house & you pay yourself the fair market rent of $Y to live in the house you own. That phantom income is not taxed.

So by living in the house you own, you receive tax-free income of 12*Y.

This is a bit of an obscure argument, and in large part an academic argument, but it is good enough to get you an A on your econ final.

[mysticaltyger]

Originally Posted by 80skeys

Maybe not the right thread, but I have a question: does it actually make financial sense to borrow money to buy a house? I mean, over the 20 or 30 years you hold the loan, you're paying, what, 2-3x the cost of the house? Why do so many people feel like they need to do this?

It's a good point. However, renting comes with its own costs. I personally come down on the side of renting. I am the first to agree that home ownership is somewhat overrated. But that doesn't mean it's the wrong choice for most people. It's just this mentality of "If the bank gives me a loan, I can afford it" that I detest.

Ultimately, it's more of a lifestyle choice than anything. People who rent tend to live in smaller living speaces, with lower utility bills, and I think sometimes people forget to factor that in. People who own their own homes tend to accumulate more wealth than renters. I think there's some kind of psychological benefit to home ownership that you don't get with renting, provided you can really afford to own the home. Maybe it's that with home ownership, you're forced to commit to something, and that can translate into other behaviors (like saving for retirement). With renting, you don't have to commit, and that can spill over to other financial behaviors in a not so good way.