November 5, 2009

how many can afford $700000 home

It’s search engine result Thursday!

Recently someone found this site by searching for: “how many can afford $700000 home”

Well, let’s do some basic math. Let’s assume that everyone who has a tech job makes at least $100k. This is obviously at the low end, but round numbers make it easy.

Now let’s assume that these people are married/partner’ed with another tech worker. That’s $200k!

Now, in the rest of the nation, the “safe” mortgage limit is 3x gross salary. But in the Bay Area, real estate prices are a sure bet, as are jobs. Let’s bump this up to 4x.

So… in the Bay Area, a typical family can borrow up to $800,000 safely! And that doesn’t even include a downpayment.

I guess the answer is: everyone!

Comments (50) -- Posted by: burbed @ 4:58 am

50 Responses to “how many can afford $700000 home”

  1. sonarrat Says:

    And who cares about all the teachers, civil engineers, artists, small business start-ups, and skilled trades.. tech jobs and nurses make $100K+ and that’s what counts!

  2. bob Says:

    test…

  3. bob Says:

    Here’s some basic math. Assuming the house is $700,000, if the buyer put the now typically required 20% down, the mortgage would be for $560,000. Thus you would need $140,000 up front. But let’s assume that this down payment is just chump change to the typical Bay Area homedebter. So $560,000 it is. Let’s also assume that the government continues to weasel its way into taxpayer’s pockets and give first time home buyers an $8,000 tax credit. Thus the amount becomes $558,000.

    So assuming a $558,000 loan @ today’s rate of 5.750%, The monthly total comes out to $ 3,256.34. That amount of course doesn’t include property taxes:Approximately $500 per month, Insurance: Approximately $100 a month, and the non-stop need for repairs.

    A typical roof replacement is close to $20,000. Painting the house is anywhere from $5,000- $20,000 depending on the size. Plumbers and Electricians get anywhere from $50-$100 an hour. So while its impossible to put a precise cost on maintenance, let’s say that your home needs a new roof twice in your lifetime, and a new paint job twice as well- which is really stretching it. I’ll shoot for the middle of those quotes. So that means in 40 years, your home will need $40,000 minimum for the roof and paint. Throw in any serious work- like earthquake retrofitting at another $20,000, or a major remodel at $100,000 and you’re looking at even more. But just assuming paint and roofs, Tack on an additional $100 a month to that bill. Realistically its more like $300-$400 for the average RBA owner, whom is always frivolously blowing money on knick-knacks to keep up with the neighbors as far as I can tell.

    So… with a 20% down, government assistence, a low-ball maintenance cost, you’re looking at a $4,000 a month bill every month. So now that we’ve settled that, let’s look at how much income would realistically be needed to pay for that.

    Assuming a couple makes $200,000 a year, taxes first have to be considered. I know from experience that after state and federal taxes, that $100,000 salary becomes more like a $60,000 salary. Of course you could write things off like hell, but even so, what you will get is nowhere close to $100,000. So assuming $60,000 each, that’s actually $120,000 for the couple.

    That means $48,000 of that $120,000 is used for the house, leaving $72,000. Not bad huh? Then again we didn’t include the typical car payment. Since most people in the RBA drive yuppie-mobiles, let’s assume both drive a mid-level European sedan. The payments on each are around $400 when all is said and done. $72,000 becomes $62,400.Car Insurance? That’ll be Another $400 a month. Now add in typical utilities: $150 a month, groceries: $400 a month, the monthly purchase of some fancy gadget: ( I’m guessing here) but let’s assume the purchase of something like a carbon fiber bicycle 2-3 times a year). So figure $5,000 a year on toys, which is lowballing it from what I see RBA yuppies playing with. That’s an additional $416 a month. Eating out? I’d say the typical RBA family eats out 2 times a week. Those overrated restaurants ain’t cheap either. Figure a family of four costs $120 a meal. So we’re talking $880 a month eating out.

    How are we doing now? At the end of the year, assuming you spent what I’d describe as the typical RBA family, you’d have around $31,000 leftover. Not bad huh?

    But… what if either the Husband or Wife loses a job? Uh-oh! That means you’d have to subtract $60,000 from that total, which would put you -$30,000 in the hole. That means that you would have to cut out the toys, the cars, the insurance on them, the meals eating out, and frankly the utilities, groceries, and probably a few home repairs before you’d be back to barely breaking even. In the case of a dual-$100,000 couple, their salaries combined are absolutely required to buy a $700,000 house. They are in fact buying under perilous conditions where the smallest professional blip means utter financial disaster.

    This is what I realized years ago. The typical BA house actually requires more like a $300,000 family combined income to support. Each partner would need to make $150,000 minimum to support the entire house come the very likely possibility that one of them loses a job.

    Bottom line: the Bay Area is overpriced. Its much smarter to rent, and buying at these prices even now is financially risky.

  4. mike Says:

    This calculator is the best I’ve seen to determine actual cost of owning a home and whether you can really afford it:

    http://www.irvinehousingblog.com/calculator

  5. no estater Says:

    So $560,000 it is. Let’s also assume that the government continues to weasel its way into taxpayer’s pockets and give first time home buyers an $8,000 tax credit. Thus the amount becomes $558,000.

    Wha? $558,000?

    A couple of other things:
    1) People who live in the RBA don’t have car payments. They buy them with cash. ;-)
    2) All houses in CA are fixers and as such, you sell the house and move when a new roof (or other expensive repair) is required. Shove the deferred maintenance on the next sucker owner.
    3) On a serious note, to say a $300k income is required to safely and comfortably own a $700k house really is laughable. Honest. Been there, done that on a much lower salary. Just need to save your pennies and build a reserve first.

  6. bob Says:

    Well, perhaps you have more balls than I do. But there’s no way I would pay $700,000 for a house even If we made $200,000 total. Again, its risky. Even with a major own payment. But ultimately, its just not worth the price. That $700,000 house is a $120,000 house in Austin. I could buy that outright and be living a lot better anyway.

  7. bob Says:

    Let me re-phrase that. Its laughable to pay $700,000 for a house. Anywhere.

  8. sunnyvalerenter Says:

    Why 20% down payment? FHA now requires only 3.5% down payment right. I wish you could rerun the numbers with that. That way the borrower has very little skin in the game, and risk of any losses is shifted from him to wonderful taxpayers (he included but for a miniscule portion).

  9. steve Says:

    I love bob. I’d say I’ll be sorry to see him go, but I am reasonably confident he will never leave the bay area.

  10. R Says:

    Agree re: 20% down payment. It’s not necessary or smart to put that much cash down if you’re a first time home buyer. Not to mention, the percentage of first time homebuyers with close to that much cash is extremely low, even in the bay area. 10% is about the most I could justify putting down, which is still a pretty decent amount.

  11. no estater Says:

    Yes, bob. More balls and more math mojo.
    :-P

  12. bob Says:

    Yes- that $6,000 mathematical typo would make a BIG difference for the end result. So ok, let’s assume I’m a “smaht” home buyer. I decide to put down zilch for a down payment. So let’s just say that I- the dual six figure income buyer- takes out a loan for almost $700,000. Just to make it nice-n-neat, Your monthly payment would be around $4,000 a month for the mortgage alone. Add in those other initial costs like taxes, insurance, and repairs, ( which as I mentioned were low-balled) then you’re looking at $4,700 a month. You would be spending $56,000 on that alone.
    Still smells pretty ridiculous.

  13. anon Says:

    “Now add in typical utilities: $150 a month, groceries: $400 a month, the monthly purchase of some fancy gadget: ( I’m guessing here) but let’s assume the purchase of something like a carbon fiber bicycle 2-3 times a year).”

    Nice, bob =).

    “Let me re-phrase that. Its laughable to pay $700,000 for a house. Anywhere.”

    You sure about that one, bob?

  14. Pralay Says:

    but I am reasonably confident he will never leave the bay area.
    —–

    Even if he does, he will cry everyday in his “mostly empty” house, won’t have anything to do except watching TV, fly back to bay area every weekend and tell his sad story to strangers – like crying Austin man.

  15. bob Says:

    Yes… I will try and book flights with RE so I can sob my eyes out over how much I miss the Bay Area. Actually, they will be tears of glee over how glad I am not be living there anymore. Just typing that puts a smile on my face.

  16. steve Says:

    I wonder, which will happen first:

    1) RE buys an investment property;
    2) bob moves out of the bay area;
    3) pig flies?

    wagers, anyone?

  17. mtv-renter Says:

    I find the thought of buying a house in the Bay Area ridiculous because of the ridiculous crap you have to put up with from the city and state governments. I’m on good terms with my landlord, so I’ve been discussing these things with him.

    Living in Mountain View, if I want to paint my house a different color, I have to ask for permission for that specific color. If I want to plant things in my garden, I have to submit a gardening plan and have it approved. If I want to plant or remove a tree, I have to talk to the parks department. If I want to convert my electric dryer to a gas dryer, I have to ask permission to extend the gas line from both the city and PG&E. If I want to tear apart my walls to add insulation, I better not do all of them at once, because then I have to bring the house up to today’s building codes. For crying out loud, ownership here doesn’t mean that you own the house, it means you paid some tremendous amount of money to someone and you lease it from the state. After your home is paid for, and you lose your job and miss a tax payment, you’ll quickly find out who really owns it.

    And in other news, most CA residents are whackjobs and actually approved most property tax increases during Tuesday’s vote.

    This place is going to implode into a black hole of bureaucracy and stupidity.

  18. Pralay Says:

    I wonder, which will happen first:

    1) RE buys an investment property;
    2) bob moves out of the bay area;
    3) pig flies?

    ——

    Don’t know about #2, but there is no sign that it is going to happen very soon. Regarding #1, again bad timing. Holiday season is back. On #3, RFC 1925: The Twelve Networking Truths says:

    (3) With sufficient thrust, pigs fly just fine…..

    So I would go for #3.

  19. DreamT Says:

    Bob,
    I like you too like everybody else, so I’ll bite on your post.
    First, a family that struggles to meet mortgage payments and must live on a budget will not shed $880/month on restaurants. And if they need to, they’ll find transportation alternatives as well. If they struggle with payments, they won’t be shopping for expensive gadgets much longer. Ok? :)
    Insurance? Try dividing your figure by 2, or by 4 if you exclude earthquake insurance. Tax impact? You certainly won’t get a 40% hit when you write down your mortgage interests. I encourage you to do the actual calculation.
    On the other hand… utilities? Your $150 probably won’t be enough to water the lawn, pick up your garbage and keep your house warm year round. $400 a month for a family – maybe at Costco, if you’re a fan. And how about children’s expenses, gifts and charity?
    When you purchase a house, you make lifestyle adjustments, at least the first few years. It’s a given, bob. And with these adjustments, it’s possible to buy into a $700k mortgage with only one salary. The second salary merely augments the savings including retirement. Sorry that reality does not agree with your math, but you should leave your spreadsheet for a moment and talk to people who have actually purchased a few years ago.

  20. steve Says:

    some ball park RBA monthly costs:

    $60 water
    $50 sewer (paid annually)
    $50 garbage (paid annualy)
    $50 cable
    $40 broadband
    $150 PG&E (likely more)
    $125 gardener
    $75 insurance

    add another $200/month for water, electricity and service if you have a pool

  21. nomadic Says:

    Car Insurance? That’ll be Another $400 a month.

    Whoa – do you have a lot of tickets? Even if that’s for two cars, it’s very high. But we don’t have to nickel & dime you back down. Your mind has been made up for a long time.

    I do agree with the $1200/year for homeowner’s insurance. If you’re getting it for 1/4 of that (without earthquake coverage), DreamT, let me know what company you’re insured with!

  22. DreamT Says:

    nomadic – I negotiated fire insurance down to $460.60/year at Farmers, including $300k structure and $1M personal liability. I have a few discounts with them including car insurance. The trick was a $2.5k deductible and bringing up a few quotes I’ve recently received by mail. My 4x figure was including the car insurance amount, which I also think is out of whack (mine’s $900 a year for a 2005 Mazda, compared to bob’s $4,800 – he got a raw deal I guess)

  23. nomadic Says:

    hehe, one good thing about being “old.” Cheap car insurance. I have 2003 and 2006 vintage European cars covered for under $1100/year for both.

  24. steve Says:

    I switched to travelers last spring. the auto was similar to what I was paying with nationwide (whom I liked) but the homeowners and umbrella were very agressively priced. dreamt’s rates look good but I would price travelers as well

  25. Pralay Says:

    some ball park RBA monthly costs:

    $60 water
    —–

    I didn’t know that RBA people take shower once a week.

    On the top of that, I thought, wrongly, most of the RBA people have families with kids wasting lots of water in bathtub.

    It also explains why so many lawns are brown.

  26. SiO2 Says:

    MTV renter
    “Living in Mountain View, if I want to paint my house a different color, I have to ask for permission for that specific color. If I want to plant things in my garden, I have to submit a gardening plan and have it approved. ”

    is this in an HOA community, or from the city? I never heard of a city have rules like this. In any event, as long as you don’t paint a house an obnoxious color, probably nobody would care anyhow.

    I appreciate Bob’s run at the ownership numbers. $400/mo for car ins is out of whack; we pay $100/mo for two reasonable cars (one German) built in the 2000s. Combining homeowner, car, etc, is important. And raising the deductible. Homeowner (non earthquake ) is about $800/yr. You can paint the outside of a house for $3000. Particularly now, the painters are short of work. But you will have to paint it more than twice in your lifetime, maybe every 10 years. Maybe a $20k paint job lasts longer!

    For a car, if you think about it you can get out of the payment cycle. Buy a car and keep it longer than the payments, but save the payment money for a few years. After all you have been effectively living w/o that money for some time. Then you can pay cash for the next one. Of course if there’s a 0.9% financing then that’s worth taking. Or buy a used car and let the first owner take the first depreciation hit.

    Basically it all depends on what you want. I don’t go out to restaurants that often. But I like owning a house here. Bob may want to go out to restaurants a lot in Austin. and that’s good too. I had a great steak in Austin.

  27. anon Says:

    400 bucks a month for car insurance? good lord!! I pay 265 and that’s for a Cayenne S and an m3.

  28. Herve Estater Says:

    > Here’s some basic math.

    No, here is some basic math:
    560,000 – 8,000 = 552,000
    120 x 2 x 4 = 960
    120 x 2 x 52 / 12 = 1,040 (you can first divide 120 by 12, that give you 10, then multiply 52 by 2, which gives you 104, then multiplying by 10 is as easy as appending a 0)

    Exactly how did you manage to get 880? Is that a recurring number for you with your commute?

    That being said, like most people here I find your numbers out of whack.

    Your forget you can deduct the mortgage interest from your taxable income, you forget the tax benefits of having dependents, and most of your other numbers are make-believe.

    Interest rate: 5.75%? Why would you pick a 30-year mortgage for only $560,000? Get a 15-year one.
    Do you have any idea how much a European slate roof costs?
    $20K for a paint job? I doubt a $700K house here will be big enough to justify such a huge job.
    Earthquake retrofitting? Most houses are old and still standing. Who cares?
    $400 for car insurance (2 cars)? Huh?
    $5,000 on toys? WTF?
    Loss of job? Ok, it can happen, but do you have to be that pessimistic and assume no job can be found within a year?

    What you describe is just insane. Look around you, you’ll see plenty of couples not making $300K and still being able to afford a home without stretching their budget.

    Now, tell me you don’t work in finance. And please, use TurboTax, you’re clearly not good with numbers (or apostrophes).

    That’s just my 3 cents.

    By the way, you may want to upgrade your computer, it looks like you’re still using one of those.

  29. DreamT Says:

    Herve, don’t make fun of bob’s computer. His grandfather built him one in his own garage, using only car components.

  30. nomadic Says:

    lol, DreamT

    Why would you pick a 30-year mortgage for only $560,000?

    Herve estater! Dude, that is a lot of money! That’s practically a million dollars.

    :-O

  31. anon Says:

    now that’s real werkin’!

  32. Real Estater Says:

    anon says,
    >>I pay 265 and that’s for a Cayenne S and an m3.

    Wait a minute. What happened to the Turbo?

  33. Real Estater Says:

    Honestly, I never really try to calculate my expenses. When I feel like it, I just go out to eat. When the bills come, I just pay it. My Visa is on automatic payment. I don’t even know how much is on it most of the time.

  34. Herve Estater Says:

    > When the bills come, I just pay it.

    Tonight is a real treat. One cannot count, the other one cannot spell.

  35. Herve Estater Says:

    Does anybody else think bob and Real Estater are the same person?

  36. DreamT Says:

    well, they’re both just here to help and they’re both as successful… maybe you’re onto something

  37. Real Estater Says:

    There’s one key difference between the two of us. He’s saved enough to retire — for real. I can’t say the same about myself.

  38. SiO2 Says:

    35 Herve, I had the exact same thought. let me build on it, could they both be Burbed? Trying to make it more entertaining?

    (probably not but conspiracy theories are fun)

  39. bob Says:

    Herve Estater,
    I used to work at a contractor supply center. Getting your house painted these days is super expensive. My estimate was on the low end. A typical asphalt roof installation is around $15,000-$20,000 and these carry a 20-30 year warranty.That’s the most common roof you’ll find because wooden shingle and slate roofs are expensive. So figure you will have to replace it twice. For a slate roof, it would be more like $75,000-$100,000. If you are living in a non earthquake retrofitted home then you are playing with fire. There hasn’t been a “big one” since 1906. I’d say a good many of those old houses would be reduced to rubble come a serious earthquake.

    Yes- I admit that I screwed up my math a bit. Most of them were “rough” estimates. But the bottom resounding line is that dude- $700,000 bucks for what’s typically a home resembling Wally beave’s house is crazy.Anyway you cut it,the monthly payments are going to be astronomical.

    It just baffles me that people can actually condition themselves to believe that this is anything anywhere close to being normal or acceptable or that its worth the trouble. Yet people- obviously people like your- must think that its totally worth it. Perhaps its because I come from somewhere that is about 1/5th the cost of living where people my age live a lot better for a lot less with middle income salaries.

    To put it simply, the Bay Area pisses me off on many levels. It pisses me off that there is such a huge separation between classes. It pisses me off that the schools are so bad that you pretty much have to be blessed with a family wealthy enough to live inside of the wealthy areas with people rich enough to support the schools that should be correctly financed by the state and not parent’s pockets. It pisses me off that there is this arrogant ” we’re better/smarter/cooler than anyone else” attitude even though 75% of the people here are actually from Ohio, New Jersey, and New Hampshire.

    But more than anything, it pisses me off that houses here are a religion, people fight, argue, bicker, and cuss over them, they fight to keep others from moving in, they create little laws to prevent new homes from being built, they obsess over their purchase, sale, value, and location, and they work their little rears off night and day to make those payments. I’m not innocent of this either as its easy to get sucked in and angry about it. Is there any doubt as to why there are 100′s of blogs just like this, full of people arguing over what?- Houses?99% of these blogs are all in the Bay Area. If that’s not an indication that something is terribly wrong, then I don’t know what is. Its that sick obsession that makes me want to get the hell out of here and live somewhere that is at least more financially viable and sensible where teachers, engineers, plumbers, and doctors can all own houses on the same block. I doubt it’ll be utopia, but for Christ’s sake the houses won’t be $500,000 for a starter home either.

    Anyhow, I’m done ranting. blah blah blah!!

  40. Herve Estater Says:

    > [...] where teachers, engineers, plumbers, and doctors can all own houses on the same block.

    That’s just sick :-)

    Happy Friday!

  41. nomadic Says:

    It pisses me off that there is this arrogant ” we’re better/smarter/cooler than anyone else” attitude even though 75% of the people here are actually from Ohio, New Jersey, and New Hampshire.

    But we are cooler because we moved from there!

    Is there any doubt as to why there are 100’s of blogs just like this, full of people arguing over what?- Houses?99% of these blogs are all in the Bay Area.

    There go the “rough” estimates again. I’d say there are at least 3x the number of housing blogs in SoCal than there are here.

    Anyway, we come here to laugh at the situation. Clearly it has gotten under bob’s skin too much, which is unfortunate.

    Happy Friday!

  42. anon Says:

    “I’m not innocent of this either as its easy to get sucked in and angry about it. Is there any doubt as to why there are 100’s of blogs just like this, full of people arguing over what?- Houses?99% of these blogs are all in the Bay Area. ”

    bob..

    hundreds of other blogs? 99% of which are in the Bay Area?

    Find me 5 blogs similar to this about bay area real estate. Should be easy considering there are “hundreds.”

  43. anon Says:

    “I doubt it’ll be utopia, but for Christ’s sake the houses won’t be $500,000 for a starter home either.”

    You’re really not paying attention, are you bob? Admittedly it is tempting to come here just to rant, but every now and again try reading the blog post of the day. We just saw an entry level condo go pending for 99k. This one in particular actually did sell for nearly a half million during the peak.

    The trash homes that were selling for half a mill have come down in value substantially. You’re just too busy running off your mouth to see it.

  44. burbed Says:

    And in other news, most CA residents are whackjobs and actually approved most property tax increases during Tuesday’s vote.

    I didn’t follow the elections. More info please?

    CA property tax revenues are pretty low (due to Prop 13)

  45. mike Says:

    I agree with many of bob’s points.

    SFBA is expensive.
    Some think the premium is justified; while others don’t.

    * I get paid a lot to work here.
    * There’s nice weather.
    * I sacrifice by not having an amazing home.
    * People have an inflated sense of entitlement here than other places I’ve lived; that probably bothers me more than other things. I think like a blue collar worker; despite my (substantial-for-me) salary.

    Like every other place, these are some of the pros and cons.

    Today, the money is what keeps me here in the rat race.
    Tomorrow, in retirement, I will take my money and run. To a smaller, more affordable, more blue collar, slower paced location. Where people say “hi” to each other when they walk down the street.

    Don’t get me wrong. The bay area is great.
    But the fast pace is better suited for those trying to climb the corporate ladder – not really for retirees which is why I will likely move in a few decades.

  46. anon Says:

    And, to be clear: there are few things in life worse than spending it trying to climb a corporate ladder..

  47. Pralay Says:

    When the bills come, I just pay it. My Visa is on automatic payment. I don’t even know how much is on it most of the time.
    ——

    Yes, considering the fact that someone’s credit card“visa” bill is pretty high and it is higher than mortgage payment, it perfectly makes sense to not look into it.

  48. nomadic Says:

    Sweet – I call dibs on RE’s credit card number.

    I promise not to be as stupid easily caught as the people who stole mine to pay their utility bill!

  49. burbed Says:

    Hey Steve,

    I just sent you an email. That is all.

  50. steve Says:

    burbed, got it, and much appreciated.


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