San Francisco Affordability: Is C.A.R.’s New Reality Already Old?

That’s all fine and well except that the new debt to income guidelines (38%?) make 10% nearly impossible if buying in SF. For all us non-VPs that is.

Trip-
While I agree that debt to income ratios have gotten a little extreme these days, I don’t agree that $132k is too low for a $4420 payment. $132k is $11k a month, net. Mortgage interest deduction will get them ~$50k income off of taxes, so they probably pay, say. $2k a month in taxes.
That leaves them around $4600 a month. Living on $4600 a month is less than what most people live on before taxes and mortgage, and is most certainly doable within San Francisco. Granted, you could burn through that easily if you decided to live the 2-BMW san francisco lifestyle, but that would be a choice, not a necessity.

Totally with Trip on this one.
I find it hard to believe that 23% of households in SF can afford to buy a place. No doubt there is a lot of $ here, but still…

Yeah I think affordability is an interesting one.
I know the more conservative quote things like you should never have a mortgage of more then 3x income etc.
But I think the higher above the median you earn the higher your multiple can be. There are certain fixed or fixed-ish expenses that we all have regardless of income – bills, healthcare, we all need a weeks grocery shopping (although the more you earn the more you spend, I dont think its linear).
Plus I think 132k is very much the bottom end of home buyers income in SF. I know the median in SF is lower than this – but the median isnt buying houses with our rental %.

That leaves $2,180 for everything else, but you also get to deduct the interest and taxes. That gets you back a pretty good tax refund. It’s still not enough to drive around in a BMW but you get to own a home.
Rents are creeping and for a nice property you still have to pay $2,500+, so it’s expensive any way you slice it.

“But I think the higher above the median you earn the higher your multiple can be.”
Since the income tax is progressive, this is probably incorrect.

@ viewlover
yes $2,180 a month to service other debt (car, credit card, student loans), pay for groceries, save for a rainy day, pay out of pocket medical expenses, other transportation costs (muni, gas, ferry etc) pay for maintenance and upkeep of the home, and pay for other incidentals like clothing.
Even if you are DINK’s 2k left over for all other expenses can go pretty fast.
anon, has a very good point, if you assume a fixed rate mortgage but CAR’s own affordability index assumes an ARM. Considering that current mortgage interest rates are at historic lows the idea that your monthly payment is going to go up as your income goes up should be considered.
Finally, a young 20 something couple will likely see their incomes rise significantly but are also likely to want to have kids and start a family which is going to increase their other expenses as well.

Doubling of HH income in 5 years is not difficult for people who are motivated.
I agree with this if the income starts out at a low “starter income”. but doubling starter incomes isn’t going to buy you a house in SF.
I’d guess that most of the younger people who consider buying (as opposed to renting) in SF START at around $100k… and it is difficult to double that IMO. (it can be done, but it is difficult)
as example: I made around $185k or so once I started practicing. It would be VERY DIFFICULT for me to “just double” it to $370k.
A lot of my researchers started at $30k as post docs, and then their first jobs around $80k maybe. Doubling to $160k would be unlikely for most of them. (some can do it, most can’t)
I’d guess that in most fields it would be uncommon to DOUBLE salary quickly (unless we’re talking doubling from very low levels again, and that won’t buy you a home in SF)…
now my other half will double (and treble, quadruple, quintuple, etc) their income over the first few years… but that’s an anomaly IMO. And you don’t use outliers to justify median home prices IMO. instead, I’d use the median incomes for people in the buying pool (that 30% or whatever).
how many people on this blog had high starting salaries and then doubled them? (I’m not talking going from 30-60k… I’m talking from 130-260k)

my numbers did not take into account retirement savings, but I was assuming people in a household making $132k a year probably had good health care coverage through their employer(s).
Of course my numbers also ignore housing maintenance, which is probably about cancels that out, so I’d say go with badlydrawnbear’s numbers over mine.
Though, I think people buying a house should not have a significant credit card payment, as you’re better off renting and paying that down to zero before getting a mortgage (better credit rating, lower debt to income, etc). If they do, it’s going to count against the debt to income level anyway, so you can reduce the monthly payment they qualify for by the amount they are paying other debt. Basically, the linked article’s model is assuming NO other debt besides mortgage.

Yeah good point re the income tax Foolio.
But the higher the income tax the higher the mortgate tax deduction, also.

bdb,
Everyone who works in SF @ a company of 10 employees gets there health paid. So, that’s not everyone but a lot.

If we grant the dubious possibility of obtaining a 10% down loan at 5+% (I’m looking right now, incidentally, and my broker hasn’t given me an option anywhere near this), and if we grant that this leaves adequate money for a decent lifestyle, there is still the matter of how many SF families have the $70K+ waiting in their bank accounts to drop on a house. It takes a lot of diligent saving to come up with this amount of cash at the $130K income level, even assuming people are ignoring their 401(k)s/IRAs.

“Everyone who works in SF @ a company of 10 employees gets there health paid. So, that’s not everyone but a lot.”
I don’t know what industry you’re in but that is simply not true. You can buy into employer based insurance, but that does not mean that they necessarily cover 100% of the cost. I’m in tech and haven’t had 100% employer paid health care since 2002. Granted health care for one person only deducted about $100- $120/month out of my pre-tax income, but it’s enough to have an impact if you are on a tight budget.

“Everyone who works in SF @ a company of 10 employees gets there health paid. So, that’s not everyone but a lot.”
not to mention the people who have been changed from ’employees’ to ‘contractors’.
a lot of companies country-wide are chaning to a contractor-style system so they can avoid paying for benefits.

First of all, I agree that it would be difficult for a couple earning $130K to afford a $690K home. It’s doable, but it would mean a lot of sacrifices that might not be worth it IMHO. With that said, BDB left out the interest and property tax deductions from his calculation. On a couple in that income bracket on that home, you’d be looking at around $1200 in tax savings. Using back end ratios seems like a much better gauge for affordability to me, and in this example (assuming no other debt), that ratio would still be over 50%…which seems too high.
As for doubling income, I agree that it’s possible for young educated couples. For example, I know a lot of people in my company who’ve doubled their income from $70K to $140K in 5-7 years. Again, I wouldn’t really bank on that though. Finally – as for the discussions around the tax deductibility on $1M homes and doubling an income from $160 to $320, that’s irrelevant to a discussion on buying a FIRST home. I don’t think there is any question that MOST people earning $160K should be able to afford a home in SF if they want — either as a couple or by themselves.

Are you including State income tax in that calculation Satchel?
These numbers look very familiar to me because
this was almost exactly our scenario when we first bought our place, but we bought a two unit building, so we had rental income helping out. That was $1500/mo, plus we rented a room out in our flat for another $800/mo. This allowed us to max out our 401k and put aside something for savings.
We stopped going out and did cheap or free things on the weekends, but it never felt pinched. After a few raises, it has been easy. We did have to hold off having the first kid.
I am making something like 5X what I started at when I first graduated in 93 and got my first job working for the UC, but I guess I am one of those “low income” people you are talking about. I think most Engineer types double their starting income, but not too many doctors and lawyers.

one last point then a question.
the point:
the above assumptions don’t seem to include HOA. HOA can be quite a lot on a lot of these units! (400-800/mo).
===
The honest question:
is there anybody out there who makes around $130k/year (single or combined) who owns a house with a mortgage around $4400/month (PITI) before their deductions?
anybody want to give us an understanding of how tight or not-tight it is? do you feel you have lots of wiggle room? or do you feel house poor? do you feel like it’s easy to swing your payments, or is it a stretch?
because I think there are a lot of people who make $80k/year who assume that $130k/year is “richer” than it is, and a lot of us nervous-nellies who make way more than $130k/year who can’t fathom spending $4400/mo on a mortgage. I personally never made $130k/year household income so it’s conjecture for me how poor I’d feel at that income level.

Satchel,
I agree with you on not trusting some of the calcs you see on blogs, but I think you are excluding the state tax deduction. If you add that in, you should get very close to my $1200 number I believe.

NVJ,
I definitely am including state tax benefits. I am just guessing that the difference in the numbers I come up with versus your experience might have to do with “bracket creep”. The marginal brackets have gone higher over the years, which has the effect of lowering the value of tax deductions when comparing nominal income today versus nominal income pre-bracket creep.
Also, if you originally bought your place before 2003/4, you are probably thinking of the old rates. The Bush tax cuts were a huge boost to many of what we consider “middle class” although the wealthier did *even better*!
Not sure if you were referring to me, but I didn’t mean to imply that $130K is low. That’s a nice salary anywhere except on Wall Street/hedge funds (my experience) where $130K is less than the typical receptionist gets at one of the top hedge funds for instance (and that was in the mid-1990s – god knows what they are being paid today!). I just mant that $130K is VERY LOW considering $46K of deductible tax and interest payments. I mean, that’s almost 35% of gross income being siphoned off right into the pockets of the banks and state taxing authorities! And – for $690K we are talkin about a pretty modest house in an average neighborhood (say, Sunnyside, or far outer Sunset). No wonder the banks/Fed and states love credit inflation-driven bubbles!

CAR is a marketing entity. They are trying to convince people that they can afford homes with exotic mortgages, so that their business will run smooth. Thats it..
They might as well bring up negative-option-ARM with 0 down payment. Ofcourse adding quote “The range of mortgage products available to buyers as well as underwriting criteria has changed”…..
Now everyone can afford 1 million $ homes… Hooray…
This is ridiculous even after all the financial troubles we are going through right now….

Satchel:
I think he’s talking about me using the word “low”.
I will clarify that.
I don’t think $130k/year is low. On the contrary, $130k/year is in the top quintile in America, so it is anything BUT low. in fact, I believe someone posted data from the Chronicle that the top 5%-10% of San Franciscans have a median (or average?) income of around $200k. (rough estimate)
So I get irked when people claim that everybody in SF is “rich” and makes $200-500k/year… because they don’t. People OVERESTIMATE how much others make in SF, IMO.
but I do think $130k/year is low to be spending $700k for a house. insane actually. but I am very financially conservative.
==
and also: I’ve stated that I’ve never made $130k/year, and that is true… but it doesn’t mean I have a silver spoon or something. I grew up with nothing in the hood (‘loin projects) so I know what poor is.
But I started making $14/year for many years in the 1990’s living in San Francisco. Then I made around $32k/year as a resident. Then I jumped to $92k/year for a year. Then $185-220k/year shortly after that. so I never lived at the 130k/year level…

Satchel – I think the difference that I’m assuming that this person would pay state taxes on that $132K in income (which is deductible), so you would not use the standard deduction under either scenario. If you factor that in, we’d be very similar in our calculations. BTW, I also used Turbo Tax after your earlier email, and I still get around $1200 doing it this way. This is partially based on assumptions though, so let me know if I have any that are off.

satchel,
Why would you ( in your calculation) use standard deduction when the mortgage interest and taxes paid are in schedule A?

“$693,840 purchase price, 10% down, 5.69% financing (ARM), monthly payment of $4,420 (including taxes and insurance), and a household income of $132,550.”
Did CAR pull these numbers out of thin air? Or did they actually talk to any lenders that would actually approve this loan? In this market, I doubt any bank would write this loan. And, if there is one, I’d sure like to know who it is.

Yes, those tax numbers look about right to me Satchel. So this leaves you with $3200/month to live on (post tax), which is definitely doable but tight. You probably have to forgo any 401k contributions for a few years and hope that neither of you gets laid off.
x-SF-er, I agree that even for a couple making 65k each (for a total of 130k) it is a stretch to double your income quickly, though it will eventually do so by inflation, if nothing else. I see what you mean now about doubling your income and I agree. It is pretty easy to double your income coming out of college, but most home buyers in SF are further along in their careers than that and at a point where it is harder to double their income. A 4% raise each year will do it in 18 years though.

Is there a way to figure out what dollars in 1948 are in today’s value? A family member bought her SF home for $7000 in 1948. How much would that be today with inflation? She did it as a single woman with kids on a seamstress’s salary. Things sure have changed here is SF. No way this would happen today. What exactly caused SF to go from almost anyone could afford a home to the above figure which is way too generous at 23%? I know time changes things, but this seems so out of whack with what happened in the rest of the non-major metro areas of the United States. Thanks.

@ex-SFer:
Sure, if you use examples like $40k and $400k it is obviously easier to buy a house with $400k. However, I understood the comment to be focused more at the margins. That is, for every dollar you make above $130k or so, you can spend a little more of that dollar on housing. However, with marginal tax increases that occur right around that point and deduction phase-outs that kick in, I think it’s probably wrong to say that you should ease your multiple too much at these income levels.
@REPA: True, you get slight bit of additional taxes back from the interest deductions, but I do not think it’s a big enough number to make a difference at this level, and, in any case, it is probably offset by the loss/phase-out of other deductions.
Frankly, for tax purposes, there’s an argument that the worst income level to be at is between $130-$200k, for couples. You don’t make enough to feel wealthy, get creamed on the marginal rates, and lose many of the deductions available to the “middle-class.”

It’s amazing that you have a professional organization representing all realtors that’s so completely clueless about finances and the mortgage market.
As others have already written, it doesn’t matter if these are responsible ratios or not, no bank will lend using these numbers in today’s market.
Pathetic.

“A 4% raise each year will do it in 18 years though.”
wow, 18 years is a lot of ramen! 🙂
I agree, COLA adjustments do make things easier over time, and this was part of the reason why it made sense to “stretch” for a home a few decades ago. The problem is that the idea of “stretching” has really changed. our parents would fall down dead if someone suggested they buy a house at 5-6x annual salary in the 1980’s.
I also am wary because we are assuming a 4% COLA each year. with global wage arbitrage will we be able to get it? I’m biased because in my field (doctor) the answer is: certainly not. I’m continually paid less for more work. but that is obviously field-dependent, and I’m not sure what the trends in COLA are for jobs in general in the bay area.
that said: to give you 1 example that disproves all my theories: me. we bought our first house with a household income of around $160k, knowing that once we were done with all training and got our first “real jobs” our income would ramp up substantially. so I am proof that there are people who can buy and then later ramp up their incomes… but I think that our case is an exception, and not the general trend. and even so, we bought at 2x income knowing we’d grow into the mortgage, not 6-8x income! (currently our mortgage is 0.75x annual income)

Rillion:
thanks for the example.
Do you think you could swing the extra $400/month payment as per the example?
(you’re paying $3400/mo plus the extra 600/mo for the HELOC bringing you to $4000/mo… slightly less than the $4400/mo example).
so to me it sounds as though someone could swing it, but it would be a little tight.
very instructive, again thanks Rillion.

Another question for you Rillion. Since you’re paying IO, won’t you also have a balloon of principal to repay in 4 years on the 1st? That’s a cost that IO tends to gloss.

I find the comments about ‘free health care for employees at businesses with 10 (or 20) workers’ very mysterious. I’ve worked in SF for a large law firm and UCSF, and I paid my premiums every month. HR was at pains to point out I’m not paying the whole nut, but Sparky’s claim that “for most SF employees health is covered by the employer” isn’t true.

“It’s amazing that you have a professional organization representing all realtors that’s so completely clueless about finances and the mortgage market.”
NAR and CAR are not clueless. They’re just fraudsters. They know that these loans are not available, and they know that 5.69% is not attainable. They in fact know their assumptions are absurd. They don’t care.
As organizations, they are just hoping people pick up the “affordability has gone UP!” meme, which will dovetail nicely with the “now is a great time to buy”/”housing has bottomed”/”real estate is always a great investment” that their junior fraudsters (the NAR and CAR members – i.e, your Realtor (TM)) will be pushing.

“Let me know if that makes sense.”
Satchel, it does make sense. If I had read your original post, I would have caught it earlier also, so my apologies. I was incorrectly assuming that state taxes would be equal to the standard deduction without ever looking up the actual amount. Using the correct amounts, I get almost exactly to your number (i.e. – around a $1030 tax deduction).

Here’s a question.
If Fannie and Freddie get nationalized this Friday, what effect will it have on CAR’s affordability stats?

ex-SFer,
I think my partner and I are somewhat in this range: we bought an 850k place with 20% down and have a (fixed) loan balance at 6.675 (about a 670k loan balance if I recall correctly) and our annual income is about 165k (so more expensive place but marginally higher income). We have no other debt beyond the mortgage, use zipcar instead of owning a car (about twice a month is all we need and we get to rent the parking space out at 400 a month which almost covers the HOA) and save about 15% of our income. Since purchasing the place, we do go out to eat less frequently (2-3 times a week) and at cheaper places and our vacations have become less exotic including more visits to family and friends but it’s been an easy adjustment.

$1000 a month is significant. I/O loans do play into an out of sight, out of mind mentality. Maybe really sophisticated borrowers can use them wisely, I couldn’t.

badly drawn, I don’t understand your comment. Sure $2,180 a month left over is not rich, but is the hypothetical buyer better off renting at $2,500? Does that cover all costs and expenses and savings? Can the income earner at $132K live comfortably renting at $2,500 or more but is killed at $4,400 a month before deductions? Or are they likely to have to live in a studio in the Tenderloin at $1,200 in order to cover life’s expenses. Where is the balance to have a decent income and a decent place to live?
I hear all this whining about how it can’t be done or should’nt be done. I agree it’s difficult. But what are the alternatives? Prices don’t come down because of an analysis that suggests you can’t cover all of your other expenses comfortably.
The reality is that if you want to buy a house in SF and in many other places, most people have to make sacrifices, not my opinion, just a fact of life in SF. And if you want to live in SF you have to PAY one way or the other, renting is not always cheaper or a better alternative.
That’s all I’m saying. And yes, I don’t feel I can afford a car, but I do own a house, two actually.
It’s not for everyone, but it is what it is and it costs what it costs.
One other thing. You can claim up to 10 deductions without the IRS asking any questions. With a mortgage interest you still get money back, and your paychecks will be larger to help with the payments.

IMO the ‘out of sight, out of mind mentality’ is going bite a lot of the medium/high end over the next few years. Move that loan from $600k to $1M and suddenly the I/O recast payment jumps $1600/month. I won’t even go into Option ARM land…

Max2 : My advice is :
c. Continue to rent and monitor real estate market, buy when prices stabilize
In other words, the decision/timing to buy are based on evidence of the prospects of near-term appreciation. You don’t want to buy in a depreciating market for many reasons. Even if a property is affordable you should not buy it if you think the price will go down. If you had the chance to buy a house for $200K, well within your ability to afford, but thought the same house would sell for $150K next year, would you buy it because it was affordable ?
Affordability is a different issue and I think that the reason that it is so heavily discussed here is that the perception and realities of affordability has an influence on the RE market and can distort values.

So basically you are telling him to time the market, Milkshake?
Instead I advise that you sit down with a qualified financial planner or consultant. If your company has an affiliation with one, start there. Hopefully that will be free or at least cheap. Look at your own life plans. How long do you wish to stay in San Francisco — that’s a very pertinent question. If the planner suggests moving forward on a purchase I would be happy to interview with you to try to become your realtor.

@ view lover
My comment is that the CAR affordability calcs don’t reflect the real world, either the current state of the mortgage market or many potential first time buyers true out of pocket expenses, and are a little too much “happy sunshine” (10% down instead of the previous 20%, the use of ARMs instead of the previous Fixed Rate Mortgages).
The CAR’s calcs still reflect bubble thinking, that buyers can take bigger risks and stretch further then they think because if they get into any kind of trouble (divorce, medical emergency, layofff) that the apperciation and “everyone wants to live here” factor will save your ass.
If you think it’s all very realistic, great.
I would be more cautious and include things like the need to save for retirement and a rainy day fund before I went and spent 60 some percent of my net income on housing.
It’s just a difference in perspective and risk assessment, no biggie.

I can’t entertain that scenario. I don’t think it’s applicable because it does not make sense in this lending environment, for one thing. It’s twenty percent down for jumbos and a fixed rate right now, or the highway. And if you are predicting where I/O payments will jump to exactly — well sorry but you don’t know that, nor do I.

fluj – Yes absolutely I am recommending timing the market, especially in these conditions.
I know that sort of statement is heresy in financial advisory and RE advisory professions and I’ve heard and understand the arguments against timing the market.
If I had taken the advice to ignore market conditions not time the market I’d conservatively have 10-20% less assets.
… or maybe I’m just incredibly lucky.
One memorable case was in 1999 when my financial planner saw that I had pulled a lot of funds out of the stock market and was investing in lower volatility instruments. Despite my uneasiness with the inflated state of the tech market, he gave me the spiel of how it doesn’t matter for a young person like me to time the market when those funds would be invested for several decades. He advised to move about 90% of the portfolio into small and mid cap tech stocks. Advice which I ignored.
I no longer employ a financial planner.

Badly drawn, still my question is a rent or buy alternative. To me its expensive either way, 60% owning and deductions vs. 35-40% renting and no deductions. Neither provides for life’s emergencies and the historical “normal” expenses and savings, IMO. That was my intended point and really only point. I believe it is realistic as these are the costs of either renting or buying, I don’t believe they are sustainable without a major demographic shift. For all I know, maybe everyone is rich except me. I can’t figure it out.
As far as CAR, well they are just trying to sell houses and I may have been off topic as this thread really is about CAR’s ray of sunshine comments.

One more thing I forgot – we do expect our incomes to increase substantially in the next few years (although maybe not doubling). I’m the primary wage earner but the spouse’s career is just taking off. We considered that fact when we bought.

viewlover & bdb,
One important “cost” of owning a home is the illiquidity of the asset, and the possibility (and, at times IMO, the near certainty) of price declines. This needs to be factored in.
For instance, most people it seems are not buying their “final” property in SF. Many are expecting to “move up”, “build equity”, etc. Thus, there will be a sale in the next 3-5 years OR one needs to take the risk that rent prices will rise enough such that a purchase today will be cash flow positive in a few years. That’s been a losing bet for 5 years at least in most parts of SF from what I can tell. If the property is sold, it must have appreciated 7% just to cover transaction costs – to say nothing of the inconvenience of having to have a bunch of fools parading through your home in open houses every weekend and tuesday. If the price goes down – even 5% – after transaction costs, most people will be wiped out. And even worse, I’ll come on a blog and say they were “foolish”.
These are all costs that should be balanced against the potential upsides of owning property, both in terms of stability of living arrangement, inflation hedge, potential for appreciation, etc.
At these prices, in view of the enormous disparity I have found in renting v. buying (approx. $3K per month rent vs. $9K after tax cost all in for buying – NOT including any amortization of the eventual selling costs), it;s not a bet I would take. I would be literally PAYING to take the risk on what I believe is a bubble distorted asset price. I might even be willing to pay a *little* more in rent than to buy because I believe so strongly these assets are mispriced. But anyway, that’s how I look at it.

Excellent point Byron.

Satchel,
for what it’s worth they are not in the SEC finding and are listed as directors. Pluse the CEO all told made $2.75M last year in those same findings.

our parents would fall down dead if someone suggested they buy a house at 5-6x annual salary in the 1980’s.
That is why multiple of annual salary is a bad way to determine affordability: it is much smarter to calculate it on a cash flow basis. Financing is much cheaper today than it was in the 80’s. Locking in a $600k loan at 5.25% is a smart thing to do.
Why buy a lower end of the market place where you have to reduce going out, vacations, clothing, forgo a car, etc. Is having a piece of property that valuable to you?
That is always going to be true for new home buyers here. I have seen it happen to many of my friends: they live in a $4000/mo condo and have the high life and then look at what they can afford to buy for the same price and turn their nose up at it. Six years later, guess what? I have built up equity and my mortgage payment is lower than their condo rent. And they can buy even less for the price of rent.
It is always going to cost more to buy than rent in San Francisco and you are always going to have to take a bit of a hit to your spending to make it work, especially the first few years. Is that worth it to you? I don’t know, that is a question you have to ask yourself.
Nothing in this argument suggests that you have to buy this year, in fact I am sitting on the sidelines myself, but saying “I can live more cheaply renting” is not a good argument because it is always going to be true.

“Another question for you Rillion. Since you’re paying IO, won’t you also have a balloon of principal to repay in 4 years on the 1st? That’s a cost that IO tends to gloss.”
No balloon payment on this loan. I wouldn’t have taken it if it did. Also no prepayment penalty. It is IO for the first 10 years, fixed rate for the first 5 years, then it resets annually. After ten years it becomes an amortized 20 year loan. So if I don’t refi before 10 years then I’ll have to start paying principal on the 1st at that point.

max2:
i’ll take a crack at the problem posed by you. now, i think real estate in sf is over priced and due for a correction. the only question in my mind is if the correction takes place by actual near term price declines or over a longer period by slow declines or via inflation. so i would wait to see what happens with prices over nextr year or so and, if i did buy, be willing to live in the property for 10 years or so.
ok, so here’s how i look at the numbers. the current rent paid is $3000 per month. if you buy, there’s some tax savings but there are property taxes, maintenance costs, insurance, hoa etc. in my experience, the tax savings and the additional costs are roughly a wash. so, i would say if you keep your interest payments on the mortgage to $3000 a month, your budget doesn’t change. but, because you’re expecting substantial increases in salaries, and also because you have to be able to stay in the property for 10 years and your needs will grow, i would budget $4000 a month to make the interest payments on the mortgage or $48000 a year. that should allow you to borrow $800,000 at 6% for an interest only type mortgage. with your down payment of $150k, you can buy for $950k.
in this scenario, you’re taking on $1000 per month additional expense. it may be a strain until your next raise.
your mortgage paymentat $4000 pm is 46% of your after tax salary. it may make it difficult to get approved.
you will need 20% down, so you’re short on down payment.
$950k may not be enough to buy something comparable to your rental.
i do think you wouldn’t be doing anything crazy if you could make this happen. and, i do think that if this or something very close to it does not work for you, then you are better off renting. At that point buying does not make sense.
just my 2 cents 🙂

Mole Man,
We probably don’t disagree. Once the Fed is eliminated (or more likely blows up), the historic ratios will reassert themselves!
It’s a long discussion, and definitely too OT even for this blog and me to indulge, but I think you’ll find the inflation data (CPI or CPI-equivalent) interesting in the US pre- and post-Fed. If you look at it since 1800, you’ll see sustained deflation, which of course is the natural order of things as productivity improvement makes things cheaper in stable money (or real terms). The only wiggles are associated with major war (War of 1812 and Civil War), again as one would expect as productive resources are diverted. Take a look here (look at the index levels):
http://woodrow.mpls.frb.fed.us/Research/data/us/calc/hist1800.cfm
1800 – 1913 saw a cumulative deflation of >40% (index level 51 to 29).
Since the Fed, look at the numbers. Hmmm. And of course, asset inflation has been even greater. It’s tough to talk of historic ratios against this backdrop of hyperinflation.
Thanks for mentioning the Amsterdam data. 0% real return for hundreds of years if my memory is right. Makes sense. Real estate is a consumer good, not a productive asset. Probably land scarcity and increasing population just barely offsets the deflationary pressure. I haven’t really thought too deeply about the very long term that that Dutch data study deals in.

You know what, Spence-bot? A lot of people did a lot of thinking about this, did math, crunched numbers, etc.

I find that when I do the calculations for tax deductions at or around this price point / and income it turns out the amount you save in fed and state taxes ends up being about what you pay in property taxes and insurance (as evidenced above). Its easy then to decide if you can afford the mortgage payment — in my case, going from $1800 a month in rent to $3600…can I swing it? Before kids, yes. Now, probably not.
I’d also add that if our hypothetical working couple has a young child, they’ll need to budget at least $1000 / month for daycare.

Satchel, SFUSD got my daughter into West Portal (which I saw you had high on your lis), so I don’t think it’s all bad. I didn’t take so my spot went to someone else. Went private, and don’t pay as much as you quote (with some volunteer time)

We went private and it is roughly $20k/kid not including the recommended annual donation. Sure it’s not bad if you go the parochial route with the volunteer time included. I’m assuming that’s what Sparky is referring too. Parochial schools are the not the same as private. Almost all the private schools in San Francisco are in the $20k range unless you are referring to Synergy which is about $12.5k.

Remember you were buying at historically low interest rates, with easy lending and at the begining of perhaps the biggest housing boom for this country. I don’t think that is a fair comparison.
And at the time everyone said that the SF economy was in the tank, that we had just gone through the biggest run-up in home prices in SF history and that home prices were certain to fall in the wake of the Dot Com bust. I did the math and decided that I was better off locking in money at 5 1/4% in the long run.
The Wall Street Journal listed Noe Valley as the riskiest neighborhood in the West to buy, because it had just run up and was next to a marginal neighborhood.
I bought a duplex, not a condo, so it is not especially high end, in fact it is pretty modest. But the numbers sure did pencil out better with the rental income.
but in most of the country and the world it is cheaper to buy than to rent — that is why people buy and that is why landlords buy rental properties
Most landlords hold multi-unit buildings, which are a different animal entirely. A gold star if you can guess why most landlords don’t buy single family homes as rentals.
When we bought our place in 1999, from the first mortgage payment (30-year fixed at 6.87%, 20% down) we were paying quite a bit less than rent for a comparable place would be.
Funny, that is not how I remember it. I was looking at homes in Rockridge and Noe Valley right around them and the cheapest, most falling down 2 bedroom SFH was around $400k, while the equivalent rent for such a place was about $2000/mo. Remember, interest rates were around 8% then. Maybe it was different at a different price point or neighborhood.

There’s a few good parochial schools IMO (and from what I’ve heard). However, they are very strict with age cutoff dates, and if you have a precocious kid, you might have to wait until he or she is 6 before starting kindergarten. I graduated 8th grade at age 12, so waiting until 6 seems silly to me! Back east, it’s simply a question of asking to see the monsignor privately, and then asking how much the check has to be. SF doesn’t seem to be as advanced 🙂
Catholic schools will run you $6-9K, depending on the school, circumstances, etc. Jewish schools push up against private school prices – $15K min.
As an amateur economist, I definitely don’t like the idea of public schools. It allows serious price discrimination because the bulk of the market is “absorbed” by the state. Think about it. If the government gave everyone a Volkswagen, just how much do you think Mercedes could charge overwhat hey charge now? But what can one do. We have to take the market as it is, not as we woul like it to be.
Glad to hear your story sparky. West Portal School is pretty good from what I understand. But when we talked with the pricipal there, he told us his kids go to St. Cecilia. So, I’m guessing you made the right choice.
We didn’t go through the lottery.

I have a friend who’s sort of in this scenario: ~150K combined income, 5% down on a 700K peninsula condo bought in late 2005. Interest only on a 5% first mortgage and 3% second (company sponsored, 5/1) mortgage. The monthly cost of owning was probably about equal to renting with the low rates. I think they might have had some trouble refinancing in a few years, but I bet they would have been able to make it work out. Recently, however, my friend decided to change careers, move out of state, and take a substantial (combined 1/2 current salary) paycut. Perhaps a poor financial decision but apparently there’s more to life than money.
So after 4 months on the market they’ve had one offer that fell through due to financing. Now they have a solid offer at 10% below what they paid and the buyers want a fast close. My friend is planning on taking the deal and liquidating the entirety of both of their 401K’s (between 100-150K I estimate from what I’ve been told) to make up the loan balance and pay the sales commission. This should get them free and clear with a few thousand dollars in the bank to start their new life.
What other options are available to them? I hate to see them use 401k money to get out of this jam, because of the taxes and 10% penalty, not to mention the time value (present stock market conditions notwithstanding…) of that money. Being in your late 20s / early 30s with no retirement savings isn’t the end of the world I guess. They have no other substantial assets besides the condo (i.e. cars are leased). The best I could think of was to somehow wait until 2009 to liquidate the 401K to lessen the tax hit in their new (3% ) state and presumably lower fed tax bracket. That and to talk to a financial professional.
Any ideas would be appreciated.
[Editor’s Note: Please see: We Should All Be So Lucky To Have A Plugged-In Friend Like Stu.]

Question for you guys is: If this is the worst downturn in history,
it is not. there have been other downturns far worse. this MIGHT be the worst downturn SINCE the Great Depression (even that is debatable), but the GD was far worse.
and SF is essentially flattish, does that mean SF prices start surging again if our financial system gets fixed, and people start getting paid?
first, that’s a big IF about our financial system. The securitization model is broken. It is not getting “fixed” right now. It is worse today than it was 6 months ago. Currently the disease has “spread” to commercial real estate, Auction Rate Securities, and the new guys on the block: credit cards and auto loans. it will be years before our credit system is “fixed”
even when it is fixed RE will still have problems. It is unlikely (but not impossible) that RE will become a favored investment anytime soon. perhaps in 1-2 decades or so. too many banks, investors, sovereign wealth funds, individuals are getting burned badly by the current mortgage fiasco. Not only that, soon it will be the taxpayer getting slaughtered as they are forced to bailout the big boys.
there is no foreseable reason why RE should appreciate any time soon. that is not to say it can’t happen, just that there’s no reason why it should.
most people don’t seem to understand how badly the credit markets are malfunctioning right now. There is no quick fix. IT will be quarter after quarter of grinding awfulness as the various institutions (banks, Fannie/Freddie, Investment Banks, Insurance Companies, etc) unwind and deleverage.
this is why I keep telling people there is no hurry to buy a home. just wait until you see 1 year of YOY increases in home values, then jump in. The only problem with my advice: it is possible that we may see such restriction of credit that future aspiring homebuyers can’t get a loan at all. it is possible and has happened at various times in history before. i don’t think it will happen, but it could.
but before you buy: make sure you are in excellent financial position. raise an emergency fund of 6-18 months, pay off all your debt, live under your means, make sure you’re timely with your bills, don’t take on unnecessary expenditures (high carloan, etc). this way you’ll be as healthy as possible pre-home purchase. And if things don’t turn out so negative it never hurts to follow my advice anyway!

“how many people on this blog had high starting salaries and then doubled them? (I’m not talking going from 30-60k… I’m talking from 130-260k)”
personally, i and others i know have found it very difficult to go up 50% once you get to $150K. In most industry jobs, you pretty much have to be a VP to make over $200K.
Obcviously this doesn’t include banking or commercial real estate where you may get a VP title out of college.

I bought in 1992 in the Marina, and earn about 170K, and if I had to buy at today’s prices, I would be renting. There is no way I would be able to sleep at night having more than half of my income going towards “ownership” of a 1bd Soma condo.

“Sounds like the lowside scenario of every single resident of the condo where I live. Most people earn far more and have multiple homes”
so clearly your building is not the “average” person, is it? since average people don’t earn “far more” than $150k and most people don’t have multiple homes.
we’re talking rationale for why the AVERAGE home (actually a home that is 15% LESS than average) is affordable at 700k.
using people who are on the far right of the earning potential to show why the AVERAGE person can afford a 700k condo is silly.
using that argument, anybody should be able to increase their income by 1,000x, since everybody on Google’s board did it.

using the calculator providing via satchel via link……..
If in 2004, I bought goods or services for $750,000
then in 2008, the same goods or services would cost $856,008
So according to many, we are back at the 2004 median in SF in nominal prices, which is about $750K.
But really if someone bought a place in 2004 for $750K and sold it in 2008 at $750K, then they lost $106,008 + brokers fees, transaction costs etc.
Under this scenario, you need upwards of 4% annual apprciation to break even

“I am renting and (like most people) believe I am typical of the majority here in SF. Regardless of whether that is the case, I would very much like your opinion based upon the following data (which is very unlikely to change) of whether to:
a. Buy in SF. If so, what is the maximum purchase price you would advise, and where would you advise I look? If it goes beyond the “old” rules of 3x income and 28% gross/33% net, please advise with greater level of detail on i,e how to continue to save for retirement, pay bills during an inflationary period, etc.
or
b. Continue to rent, for ~1.5 years, and return to a far more affordable part of the country.
Cash available for down payment: 150,000
Cash savings: 30,000
Credit score: Excellent
Annual Gross Salary: $153,000
Annual Net: $104,834
Expected salary increase year-to-year: 15% to 20%
Retirement savings (available within 20 years): 50% of what will be required
Industry: Biotech
Stability in Company/Industry: High
Monthly rent: $3,000″
Continue to rent. it is much cheaper and with a salary of $253K, you can’t afford to buy (right now).
However, if you rent for 2 more years, increase your salry by 15% annually (now $202K) and consider that the market will stay flat or drop 10-15%, you can definitely buy.

Max2,
Thanks for all the information. You sound level headed and smart. You seem to have real skills and have confidence in your career, and if you are sensible enough to homeschool your kids (great choice – I admire you!) you probably have a pretty good handle on your future. Also sensible that you are not tied to SF. It’s a nice place – no more, no less.
At $3K per month on the border of Noe/Glen Park for a 3/1, I’d probably be inclined just to keep renting for another year or two and watch how this all shakes out. I am assuming that to buy a similar place in a similar neighborhood would run about $850K – $1M, which would mean that your all-in costs (including opportunity cost on the $150K you’ve got already) are realistically going to be double your current rent (more or less), in after tax dollars equivalent. You will also expose yourself to the risk of decline, which could seriously hamper your ability to move out of SF if you choose.
If you feel like moving from your current place within SF, and like safe neighborhoods, I’d recommend looking in the West Portal/Forest Hill Extension area (as close to West Portal Avenue as possible). We lived not too far from there, and loved it – a much better family environment IMO than GP/Noe for sensible people. You should be able to get a better value rental property is my guess. But moving stinks, so if you’re happy where you are, just stay!
I wouldn’t get too worried about being “priced out” of SF real estate if you decide to stay. In my experience, the only people who should worry about that are people with limited value in the workplace. If you really think about it, the idea that productive talented people can be priced out of a city is sort of silly.
I hope that helps, and best of luck.

“The real question is can someone making $132K afford a place they’d be happy with in this city.”
NO

“Not to be mean about it, but your math skills are pretty rusty spencer. In your 12:17 post you forgot to include tax breaks in your calculation, while in your 12:00 post you forgot about how inflation affects your loan balance value as well. Perhaps a financial analyst can help you do these calculations so you can understand what you can and cannot afford.”
not my math, just being vague to simplify the equations for people who clearly are making huge financial mistakes by buying overpriced homes that they cannot afford.
i didn’t include tax breaks in the calculations because are generally offsite by other costs, HOAs, maintenance, commisions, etc.
In my second “mistake” i assumed the asset as a whole. If you are doing a straight comparison of asset A vs Asset B, then it is more relevant to look at fixed costs of asset A vs. B. So assume a cash buy.

So what is that $850k? So you can afford something just fine, there is just nothing in your price range that you would be happy with. That makes sense.

currently am in a money market drawing 6% and large cap biotech, which have done really well over past 8 months (GILD, AMGN, DNA, BIIB)(up about 30%).. hope to switch back to index funds by mid Q4 (barinng major market meltdown)

“currently am in a money market drawing 6%”
is this possible? where?

ok, so i’m seeing i-bonds, muni bonds and biotech stock picks.
i’m not seeing any money market funds yielding anywhere near 6%. (more like 4% which is 33% less)
ORH buyer is in the biz and i think he can tell us if 6% is possible.

^^^How long ago are you talking about with the 6% money market figure? Has to have been quite awhile ago.

So San Francisco is in the top 1/3, almost the top 1/4 of safest cities in America and the top rankings are dominated by suburban communities like Thousand Oaks. The truth is that the overwhelming majority of violent crime in San Francisco happens south of Mission Street.
You never really answered the question as to what your criteria for a safe neighborhood is. How many crimes in what period of time? I am sure that your chance of getting injured in an auto accident in a suburban community is greater than your chance of being a victim of violent crime in the vast majority of San Francisco. People are pretty bad about estimating risk. I can show you the calculations if you like.
I personally think that the Marina, Pac Heights, Cow Hollow, Presidio Heights, Laurel Heights, Sea Cliff, The Richmond, Lone Mountain, Telegraph Hill, Russian Hill, Nob Hill, Forest Hill, St. Francis Wood, Ingleside Terrace, West Portal, Balbao Terrace, Westwood Highland, Monterey Heights, Miraloma, Merced Manor, Lakeshore, Lakeside, Ashbury Heights, Twin Peaks, Corona Heights, Noe Valley, Glen Park, South Beach and Mission Bay are all pretty safe, wouldn’t you?