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Wife and I live in CA and are tired of renting. We are in our mid 30s. Have a 2 and a 4 year old.

Income: 155k (me), 95k (wife)
Savings: 830k (230k of this is in 401k/ira)
No debt

We've been living in a 2 bedroom apt for the last four years paying 1800 a month and trying to save as much as possible. Before that we lived in a studio that was only 950 a month.

We want to buy a house for around 1.2-1.3 mil. Is this too much? We would love to not have to move again and buy the house we want from the start instead of having to upgrade down the line.

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With this thread I decree that mega housing bubble 2.0 has officially started.

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How much do you plan to put down?
How stable are your jobs and are there opportunities for comp increases?
After making a down payment and looking at your future payments, will you have enough left over to fund your retirement and other expenses?

Without having a more detailed breakdown of expenses, it's hard for us to give feedback.

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I think that's more than I'd want to spend with that income. Our last house buy had a similar income/value ratio, but our savings was a bit better because we weren't "Skipping a starter home". It was our 3rd home so we had good confidence we understood all relevant costs and understood what we really wanted. There are a lot of reasons people move and it's not easy to know what you'll really want 'forever' if you've never owned any home.

Are you really 'tired of renting', or just 'tired of living in a 2 bedroom apt'? What's the market for renting a starter single family home? What's the price range to buy those?

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5 year CDs are yielding 2%. 2% interest on 1.2 million is $2000/month. With the rent/buy ratios in the Bay Area it doesn't make sense to buy. Financially you can afford it but that's ridiculous. Keep renting and leave all the maintenance, real estate market risk, and remote chance an earthquake levels the house or a crash levels its resale value with the landlord.

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The rule of thumb was not to spend more than 2 1/2 times your income on a house. That would be $625,000.

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psychoslowmatic said:   5 year CDs are yielding 2%. 2% interest on 1.2 million is $2000/month. 
  Since when do CD's provide monthly income?

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atikovi said:   
psychoslowmatic said:   5 year CDs are yielding 2%. 2% interest on 1.2 million is $2000/month. 
  Since when do CD's provide monthly income?

  It looks like 1961.

https://www.occ.treas.gov/about/what-we-do/history/150th-negotia...

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JepJepJep said:   
atikovi said:   
psychoslowmatic said:   5 year CDs are yielding 2%. 2% interest on 1.2 million is $2000/month. 
  Since when do CD's provide monthly income?

  It looks like 1961.

https://www.occ.treas.gov/about/what-we-do/history/150th-negotiable-cd-article.html

  I thought there was a penalty for early withdrawals if you were to take out the monthly interest earned on the CD. 

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atikovi said:   
JepJepJep said:   
atikovi said:   
psychoslowmatic said:   5 year CDs are yielding 2%. 2% interest on 1.2 million is $2000/month. 
  Since when do CD's provide monthly income?

  It looks like 1961.

https://www.occ.treas.gov/about/what-we-do/history/150th-negotiable-cd-article.html

  I thought there was a penalty for early withdrawals if you were to take out the monthly interest earned on the CD. 

  you can choose for the interest to be deposited in a regular checking account. THe penalty is for principle withdraw

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atikovi said:   The rule of thumb was not to spend more than 2 1/2 times your income on a house. That would be $625,000.
  Interesting. First time I've ever heard this. Is that assuming a 20% down payment, or regardless of down payment, 2.5x is the max?

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Here's what I've learned:

If someone on FW (or almost anywhere else, really) asks if they can afford a house or car, the answer is NO.

If someone on Bogleheads asks if they can afford a house/car, the answer is YES.

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atikovi said:   The rule of thumb was not to spend more than 2 1/2 times your income on a house. That would be $625,000.
  
This rule may be OK for a family with a median income, but I don't really think it applies to high earners looking at buying expensive houses. When you are a low-to-middle income family, your fixed expenses tend to consume a larger percentage of your take home pay then when you are an upper middle income class family. When your take home pay is $5k/month, a $100/month cell phone bill represents 2% of your take home pay, but when you're bringing in 10k/month, this drops to just 1% of the take home pay.

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jaytrader said:   
atikovi said:   The rule of thumb was not to spend more than 2 1/2 times your income on a house. That would be $625,000.
  Interesting. First time I've ever heard this. Is that assuming a 20% down payment, or regardless of down payment, 2.5x is the max?

  http://money.cnn.com/pf/money-essentials-home-buying 2nd paragraph in #2 "The rule of thumb is to aim for a home that costs about two-and-a-half times your gross annual salary." The size of your down payment will also determine how much you can afford.

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atikovi said:   
jaytrader said:   
atikovi said:   The rule of thumb was not to spend more than 2 1/2 times your income on a house. That would be $625,000.
  Interesting. First time I've ever heard this. Is that assuming a 20% down payment, or regardless of down payment, 2.5x is the max?

  http://money.cnn.com/pf/money-essentials-home-buying 2nd paragraph in #2 "The rule of thumb is to aim for a home that costs about two-and-a-half times your gross annual salary." The size of your down payment will also determine how much you can afford.

The rule of thumb becomes less apt as your income goes higher (assuming you live below your means outside of housing), your down payment goes higher and your accumulated savings is higher. Accumulated savings gives you a cushion if unexpected expenses or job loss hits.

In my mind, it makes more sense to have a rule of thumb around how big a mortgage you have versus home value. Also, with near-historically low interest rates, I'd use 3 as the rule of thumb multiplier. 

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2.5x seems very conservative. I remembered the popular rule as 3x-5x, though I think most here were always recommending the low end of that scale. I thought we were very conservative but still started out closer to 3x than 2.5x. And that was with only 10% down. It was still very comfortably affordable. And I think nasheedb is right, in practical terms, a general rule for this can't scale up and down very well.

In any case, it's important to check against the hard DTI limits that lenders have. Those don't directly factor gross income at all, but might limit the income multiplier range that is even an option for you.

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atikovi said:   The rule of thumb was not to spend more than 2 1/2 times your income on a house. That would be $625,000.
  In California, especially in San Francisco Bay area the rule of thump has been 4  times of income for long time. Considering your savings, I would buy a home, but the time to buy may change  depending on the burst of bubble. It seems Bay area is seems not ready for burst yet. The demand is so high and jobs are available all times high in this area. If you find better deal in the house I would buy.

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With a 250k annual income and a net worth of only 830k (maybe less wit liabilities) I would say you are behind the 8ball some.  With that sort of income I would expect at least 500k+ in retirement and well over a mill in net worth.  Evaluate your spending, as others have posed the rent at 1800 without any concern for property is going to keep getting you ahead.  What are you getting for the 1.2-.1.3 mill?  Look for a bread and butter home that has space you need for rooms (4 / 2.5 bath) that doesn't have all the fancy crap you can live without.  750k-850k is where I would Target with your income and net worth.  Start maxing a ROTH if you can now.

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atikovi said:   
jaytrader said:   
atikovi said:   The rule of thumb was not to spend more than 2 1/2 times your income on a house. That would be $625,000.
  Interesting. First time I've ever heard this. Is that assuming a 20% down payment, or regardless of down payment, 2.5x is the max?

  http://money.cnn.com/pf/money-essentials-home-buying 2nd paragraph in #2 "The rule of thumb is to aim for a home that costs about two-and-a-half times your gross annual salary." The size of your down payment will also determine how much you can afford.

The median HHI in the USA: $56k  Median home value: $200k.  I hate the 2.5-3x salary rule of thumb, because it's existed whether interest rates are 6% or 3%. Do the math and keep your PITI monthly payment around 20-25% of salary.

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All these naysayers not taking into account he is living in freaking CA -- although I guess he doesn't say where. I have a friend who recently bought a $1mm house in SF, I looked on Google Earth because I'm nosy -- it's what I would consider a dump. All of this is location dependent. Here in Houston, get a McMansion for that kind of money -- but that isn't where OP is.

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psychoslowmatic said:   5 year CDs are yielding 2%. 2% interest on 1.2 million is $2000/month. With the rent/buy ratios in the Bay Area it doesn't make sense to buy. Financially you can afford it but that's ridiculous. Keep renting and leave all the maintenance, real estate market risk, and remote chance an earthquake levels the house or a crash levels its resale value with the landlord.

  Where does the $1.2mm come from?  OP said that he has $600k in savings and $230k in 401k. 

 

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rufflesinc said:   
atikovi said:   
JepJepJep said:   
atikovi said:   
psychoslowmatic said:   5 year CDs are yielding 2%. 2% interest on 1.2 million is $2000/month. 
  Since when do CD's provide monthly income?

  It looks like 1961.

https://www.occ.treas.gov/about/what-we-do/history/150th-negotiable-cd-article.html

  I thought there was a penalty for early withdrawals if you were to take out the monthly interest earned on the CD. 

  you can choose for the interest to be deposited in a regular checking account. THe penalty is for principle withdraw

  I didn't make this point well.  What I was trying to say is, if you have no home and 1.2M in the Bay Area, you can either 1) keep 1.2m in an absolutely safe investment that would pay for your rent, or trade the 1.2M for a house which you then have to maintain, pay taxes on, and bear the risk of it losing money or getting destroyed.  Which situation would you prefer?

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elektronic said:   
atikovi said:   
jaytrader said:   
atikovi said:   The rule of thumb was not to spend more than 2 1/2 times your income on a house. That would be $625,000.
  Interesting. First time I've ever heard this. Is that assuming a 20% down payment, or regardless of down payment, 2.5x is the max?

  http://money.cnn.com/pf/money-essentials-home-buying 2nd paragraph in #2 "The rule of thumb is to aim for a home that costs about two-and-a-half times your gross annual salary." The size of your down payment will also determine how much you can afford.

The median HHI in the USA: $56k  Median home value: $200k.  I hate the 2.5-3x salary rule of thumb, because it's existed whether interest rates are 6% or 3%. Do the math and keep your PITI monthly payment around 20-25% of salary.

  
Monthly salary, or after tax amount? Just curious; I own a house already, but I've always been confused by this one. Also, on the "2.5x rule" is that 2.5X total cost of the house, or the total loan amount?  

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DamnoIT said:   With a 250k annual income and a net worth of only 830k (maybe less wit liabilities) I would say you are behind the 8ball some.  With that sort of income I would expect at least 500k+ in retirement and well over a mill in net worth.  Evaluate your spending, as others have posed the rent at 1800 without any concern for property is going to keep getting you ahead.  What are you getting for the 1.2-.1.3 mill?  Look for a bread and butter home that has space you need for rooms (4 / 2.5 bath) that doesn't have all the fancy crap you can live without.  750k-850k is where I would Target with your income and net worth.  Start maxing a ROTH if you can now.
  
Mid 30's, $250k in current HHI in HCOL area and behind the 8ball as they approach $1m in net worth?  Damn your standards are high!

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elektronic said:   
atikovi said:   
jaytrader said:   
atikovi said:   The rule of thumb was not to spend more than 2 1/2 times your income on a house. That would be $625,000.
  Interesting. First time I've ever heard this. Is that assuming a 20% down payment, or regardless of down payment, 2.5x is the max?

  http://money.cnn.com/pf/money-essentials-home-buying 2nd paragraph in #2 "The rule of thumb is to aim for a home that costs about two-and-a-half times your gross annual salary." The size of your down payment will also determine how much you can afford.

The median HHI in the USA: $56k  Median home value: $200k.  I hate the 2.5-3x salary rule of thumb, because it's existed whether interest rates are 6% or 3%. Do the math and keep your PITI monthly payment around 20-25% of salary.

  Only 63.6% of households are homeowners. The median HHI of home buyers is much higher:

Homeownership Rate: https://www.census.gov/housing/hvs/files/currenthvspress.pdf
Median HHI of Home Buyers: http://economistsoutlook.blogs.realtor.org/2011/03/21/median-hou...
 

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moramulile said:   Wife and I live in CA and are tired of renting. We are in our mid 30s. Have a 2 and a 4 year old.

Income: 155k (me), 95k (wife)
Savings: 830k (230k of this is in 401k/ira)
No debt

We've been living in a 2 bedroom apt for the last four years paying 1800 a month and trying to save as much as possible. Before that we lived in a studio that was only 950 a month.

We want to buy a house for around 1.2-1.3 mil. Is this too much? We would love to not have to move again and buy the house we want from the start instead of having to upgrade down the line.

  In SF Bay Area: yes.

Outside of SF Bay Area: no.

rated:
moramulile said:   Wife and I live in CA and are tired of renting. We are in our mid 30s. Have a 2 and a 4 year old.

Income: 155k (me), 95k (wife)
Savings: 830k (230k of this is in 401k/ira)
No debt

We've been living in a 2 bedroom apt for the last four years paying 1800 a month and trying to save as much as possible. Before that we lived in a studio that was only 950 a month.

We want to buy a house for around 1.2-1.3 mil. Is this too much? We would love to not have to move again and buy the house we want from the start instead of having to upgrade down the line.

  You have 600k in non-retirement assets, which is about 50% of the home value you are planning to purchase. If your jobs are fairly stable and you plan to be in the area for a long time, you maybe able to afford it.

On the other hand, 1.8k monthly rent is low for the area. Why not keep renting? Is the 1.2 mil house significantly bigger/better than the current rental. Can you get something decent for say 75% of cost?

In short, the house you are looking at is stretching your finances. It maybe affordable but that assumes things go well with both your jobs.

rated:
Bowen said:   
elektronic said:   
atikovi said:   
jaytrader said:   
atikovi said:   The rule of thumb was not to spend more than 2 1/2 times your income on a house. That would be $625,000.
  Interesting. First time I've ever heard this. Is that assuming a 20% down payment, or regardless of down payment, 2.5x is the max?

  http://money.cnn.com/pf/money-essentials-home-buying 2nd paragraph in #2 "The rule of thumb is to aim for a home that costs about two-and-a-half times your gross annual salary." The size of your down payment will also determine how much you can afford.

The median HHI in the USA: $56k  Median home value: $200k.  I hate the 2.5-3x salary rule of thumb, because it's existed whether interest rates are 6% or 3%. Do the math and keep your PITI monthly payment around 20-25% of salary.

  
Monthly salary, or after tax amount? Just curious; I own a house already, but I've always been confused by this one. Also, on the "2.5x rule" is that 2.5X total cost of the house, or the total loan amount?  
 

DTI ratios are based on gross income (not sure why).  Max for mortgage underwriting is in the 40s.  That's way too high without taking into account all the factors.  40s may be okay for a person earning $1M+, but not for someone earning $50k.

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I am in the same boat as op to a certain extent. wife and I earn 250k +rsus about 50k a year. We have 350k in equity in current townhouse and 350k in savings and 150k in unvested rsus and 450k in 401k.
I bet we are bidding against each other in san jose cambrian park area haha.

We are moving to a better school district and want a backyard.

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johnstarks13 said:   
DamnoIT said:   With a 250k annual income and a net worth of only 830k (maybe less wit liabilities) I would say you are behind the 8ball some.  With that sort of income I would expect at least 500k+ in retirement and well over a mill in net worth.  Evaluate your spending, as others have posed the rent at 1800 without any concern for property is going to keep getting you ahead.  What are you getting for the 1.2-.1.3 mill?  Look for a bread and butter home that has space you need for rooms (4 / 2.5 bath) that doesn't have all the fancy crap you can live without.  750k-850k is where I would Target with your income and net worth.  Start maxing a ROTH if you can now.
  
Mid 30's, $250k in current HHI in HCOL area and behind the 8ball as they approach $1m in net worth?  Damn your standards are high!

  Under the same conditions (age, income and in their local) I would be comfy at 1.25 mill net worth for mid 30s.  Tieing it all in RE would/could derail good progress that they have.  If they max invest hard in 3 years they could triple that retirement account.  If they can do that at the same time as owning a affordable home then they are doing it right, if they get the 1.1-1.2 mill one they will not be on a good track for saving for retirement and college ect, toss in another kid and it will be worse..  I am pretty hardcore for expectations on this but then I consider anything under the 95% mark for net worth for age in the US a fail.  

https://dqydj.com/net-worth-by-age-calculator-for-the-united-sta...

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Calif is in a housing bubble....it will crash....I sold a home in San Juan Capistrano in 1999 for $200,000...backed up on the freeway....zero lot line....Today homes on my street are now listed at $699,000. I would NOT buy now...when there is a boom...there is a bust....happened big time in Clark County Nevada and in Phoenix Arizona...and many parts of CA...it will happen again...if you over pay you will be screwed...to pay over a million dollars for a roof over your head it nuts at best. I live in Florida now....my end unit townhome is FSBO at $169,900 ...ten min to Honeymoon Beach with a duck pond in the back yard....the last time you could buy a beach close property in Calif for that kind of money was about 1976.

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How are the property taxes, dare I ask?

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Good thinking.

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Boom and Bust....when the Bust happens...many people are screwed

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DamnoIT said:     I am pretty hardcore for expectations on this but then I consider anything under the 95% mark for net worth for age in the US a fail.

https://dqydj.com/net-worth-by-age-calculator-for-the-united-states/

  
Phew. Now I feel better. Thanks for the clarification on what you consider failing. I sure am glad I didn't have you for a teacher in school. I would have failed most of my classes!

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prop tax in CA are approx 1%. Set, it doesn't increase every year like other states.

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There are two questions here.

1) Can you afford it? You can do the math on that. don't forget taxes, maintenance, HOA dues, etc  I agree with the 3x-5x earnings and you are a bit higher than that (and I would suggest looking to the lower side of that) 
2) Should you buy? That's completely up to you. I have no doubt we are in a bubble. Everyone I know selling/buying talks of bidding wars going over listing price and cash deals with no inspections on old houses. Sounds crazy to me, but I don't know how much bigger the bubble can get. Buying at the top of a bubble stinks. Even if you can afford the monthly, you could be underwater for a long time, especially at those prices. You could very well be trapped paying a mortgage on value that doesn't exist. Plus you can't move because you may not be able to sell for enough to pay off the mortgage.  The idea that "that is just what things cost in X area" is ridiculous. 

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This Marketwatch article about pre-recession recovery of home values might be of interest for potential home buyers:

“For buyers, the take-away should be [to] make sure you’re in the right financial place to buy a home where you can stay put for 5-6-7 years and make decisions based on those fundamentals, not on what things are going on in your market,” McLaughlin said. “You should treat it as a place to live, where you can gain equity over the long term.”

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misterphillip said:   Boom and Bust....when the Bust happens...many people are screwed
  When bust happens in SF, probably many many people are, all over US

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