House vs Retirement

[Andre1969]

I like that house on slide #27, the way it's partially obscured by the trees. I think I'd be worried about roots though, with them being that close to the house.

Looks like an interesting style, too. In most split levels I've seen , you enter on the main level and then go up half a flight of stairs to the bedrooms, or down half a flight to the basement. And the bigger ones often have another sub-basement under the livingroom/dining room/kitchen area as well.

With #27 though, it looks like you actually enter on the basement level, then go up half a flight to the living/dining/kitchen leve, and then up another half flight to the bedroom level?

Looks like a nice area to live.

 

[MasterBlaster]

Justin:

How much of your income actually goes towards housing ?

Keep in mind that just cause houses in SoCal cost 3 times as much as where you live that you need not make 3 times as much to have a comparable lifestyle.

a moderate increase in salary goes further than you have indicated.

I stand by my statement that in general terms after all of the bills are paid that your cashflow is similar.

 

[justin]

With #27 though, it looks like you actually enter on the basement level, then go up half a flight to the living/dining/kitchen leve, and then up another half flight to the bedroom level?

You got it! This style house is very similar to mine, except I only go up 2 steps between the lowest level and the middle level, and then ~10 steps from the middle level to the uppermost level.

 

[jdw_fire]

Justin:

How much of your income actually goes towards housing ?

Keep in mind that just cause houses in SoCal cost 3 times as much as where you live that you need not make 3 times as much to have a comparable lifestyle.

a moderate increase in salary goes further than you have indicated.

I stand by my statement that in general terms after all of the bills are paid that your cashflow is similar.

So you are disagreeing with the OP and saying that even in SoCal a choice between owning a house and saving for retirement doesn't have to be made i.e. you can do both?

 

[justin]

Justin:

How much of your income actually goes towards housing ?

Keep in mind that just cause houses in SoCal cost 3 times as much as where you live that you need not make 3 times as much to have a comparable lifestyle.

a moderate increase in salary goes further than you have indicated.

I stand by my statement that in general terms after all of the bills are paid that your cashflow is similar.

For me, the mortgage plus taxes, plus insurance and flood insurance is $851/mo. Although that includes about $30,000 I cashed out above the purchase price for investment purposes.

The total housing cost is equal to ~10% of our annual income. How many Socal families buying into an average middle class neighborhood could make the same claim?

I seriously doubt cashflows are similar after all bills are paid. You forget about taxes. I pay very little because of the progressive rate structure. If you're making $50k more/yr, you're only getting a portion of that after taxes.

I'm sure if you compare Podunk, Nebraska incomes for some jobs with Socal incomes for the same jobs, you may see that the income differential compensates for the housing differential. But compare incomes btw more desirable metro areas (with plenty of professional employment), and then see if the income differential pays for the house. Maybe at the very upper end of society (a place I'm not at!) your assertion holds true, but for the majority of middle class America, I doubt it.

 

[MasterBlaster]

Justin:

Well to beat this thing to death.

The houses that you showed in the slideshow sold for around $150k and up. Without putting lots of money down it would be very hard to get a $851/month total housing payment.

To purchase one of the homes in the slide with say 10 percent down would take at least 15% of your income.

So if you get a 30 percent raise then the same cashflow would support a home costing three times as much.

Per the income taxes, Keep in mind that most of the interest/taxes are tax deductable so the extra income would be a wash.

 

[donheff]

Lets say the Socal guy likes his area and likes his job but is attracted to the Brentwood area (it is a nice slide show). He can work for 30 years and pay off the high priced house. He sells the house for $1M, moves to Brentwood and buys the lakefront house for less than $200K and has $800K, plus SS and whatever he was able to sock into his 401K and savings to live on. (All figures in today's dollars and assuming Brentwood stays a relative value -- maybe not a fair assumption).

 

[maddythebeagle]

What people can't seem to grasp is that yes real estate prices are higher in SoCal. However salaries are higher too. After all of the bills are paid I suspect that the net cash flow is similar to living in other areas. Sure the midwest or the southern states have less expensive housing, however salaries in general reflect that.

MB: I would also have to disagree with you on this. I recall hearing info. that CA wage growth is not keeping up with home prices...that is the reason why folks have moved to the non-traditional mortgages like interest only...to be able to afford housing.

 

[MasterBlaster]

Donheff:

That is exactly the retirement plan of many. They are the so-called equity bandits who have been known to drive up real-estate prices and property taxes.

The locals have no problem selling houses at inflated prices to outsiders. However they then like to complain that their younguns can't then find a "reasonably" priced house and it's those outsiders (especially Californians and New Yorkers) fault.

 

[Andre1969]

I'd imagine that the people in SoCal that are the best off are the ones that have lived there for ages, or at least have enough equity built up in their homes that they could move into a bigger home and be able to put a nice, big down payment on it.

Aren't property taxes capped in California, so that they rise really slowly as long as you don't move around?

 

[justin]

Justin:

Well to beat this thing to death.

The houses that you showed in the slideshow sold for around $150k and up. Without putting lots of money down it would be very hard to get a $851/month total housing payment.

To purchase one of the homes in the slide with say 10 percent down would take at least 15% of your income.

So if you get a 30 percent raise then the same cashflow would support a home costing three times as much.

Per the income taxes, Keep in mind that most of the interest/taxes are tax deductable so the extra income would be a wash.

Plenty of the houses are selling for around $100k. I would say $150k is the higher end of most of the houses that sell in this neighborhood. Those that sell for this amount are very nicely remodeled and have nice yards. For a fixer upper 3-4 BR house that might have previously been a rental in a less desirable section of the neighborhood, ~100k is the norm.

Here's the numbers I'm looking at:

$150,000 house in a low cost of living area vs. a comparable $600,000 house in Socal.

Put $15000 down on BOTH houses.

The monthly mortgage payment (principal and interest only) is $900 vs. $3900 per month. Assume taxes and insurance run you 1.2% of the house value (based on what I pay now). That's another $150 vs. $600 per month.

All said and done, I'm paying $12,600 per year, and Socal Joe is paying $54000 per year (or $41400 more than me). Ignoring taxes and other costs of living which are most likely higher in Socal (to some extent, maybe small?), I'd have to get a $41400 pay raise (about 41% of our current household income). Good luck!

You have a point that higher incomes will help with higher housing costs, but I don't think it's a wash.

 

[justin]

Lets say the Socal guy likes his area and likes his job but is attracted to the Brentwood area (it is a nice slide show). He can work for 30 years and pay off the high priced house. He sells the house for $1M, moves to Brentwood and buys the lakefront house for less than $200K and has $800K, plus SS and whatever he was able to sock into his 401K and savings to live on. (All figures in today's dollars and assuming Brentwood stays a relative value -- maybe not a fair assumption).

Or you can move to Brentwood in the first place, plunk the $10,000's extra savings in index funds for 20 years, and retire 10 years earlier!

I concede it's a trade-off if you really love Socal.

 

[MasterBlaster]

Maddy:

I read that people are priced out of the market then I look at my personal example. My house is worth around 4 times what I paid for it 20 or so years ago. However people where I work at the salary grade that I was then at make more than twice as much as I did. Furthermore interest rates are approximately half of what they were when I bought. I'd say the cash flow to buy a house like mine compared to when I bought is about the same. I don't see any housing penalty in my personal example.

Justin:

You win ! You are better off than me! And I just may move next door to you when I cash out of here in a few years.

Andre:

Aren't property taxes capped in California, so that they rise really slowly as long as you don't move around?

Yes due to a voter initiative (Prop 13) property taxes are capped at 1 percent of the original purchase price of the house. This amount can then go up a maximum of 2 percent a year. However they have just shifted the burden from property taxes to higher income taxes. For a retiree with a paid off home bought long ago that could be good cause the property taxes will be low and income taxes might be moderate for a retiree on a moderate income.

 

[justin]

Justin:

You win ! You are better off than me! And I just may move next door to you when I cash out of here in a few years.

I don't think this is about winning or losing the discussion at hand. The original poster asked whether the solution to the problem of high cost of living in the LA area is to move out of state. I would say "yes", it is a possible solution. Not the only solution by any means. I tried to provide concrete examples of why it would make sense from a strictly financial sense. It seems financially foolish to ignore the facts as they are today.

If you really love the Socal area and have a ton of family and friends that you can't part with, then stay. You'll probably be happier in the long run. Acknowledge that you will pay a financial price however.

People in general are usually very willing to relocate to less desirable places for a 10-20% pay bump at a new job. Why not relocate for a 20%+ reduction in housing expenses? The goal is the same - put more money in your pocket after all the bills are paid. Sure, you're building more equity in Socal with your oversized mortgage payment, but almost all of your mortgage payment is for interest (who cares if it's deductible?!).

I went to salary.com to see how much more I'd earn in LA than here in Raleigh being a civil engineer I. $57938 in LA versus $50912 in my zip code. That's only 14% more. The number is amazingly accurate for my locality based on my personal salary and knowing what peer civil engineer I's are making. Maybe it's way off base for LA?

 

[lazygood4nothinbum]

I wonder if one reason that gays might go where "traditional" families may fear to tread is the school system? ...I don't have kids, so the school system is usually the last thing I think of.  However, it can affect even childless people, as property taxes usually foot most of the school costs.  With inefficient school systems, they often have to raise the property taxes to raise more money to inefficiently use up!

even though florida totally bans gay adoption, 16 states are (quick web search 2004 figure) actively seeking to ban gay adoption and only 9 states openly allow gay adoption--never mind that we still actually have the parts to make our own--even though the largest portion of my tax bill goes to the school board to pay for the children of people who vote to keep me from enjoying the same rights they have, speaking for the gay population, we do believe in an educated society and we do prefer living within the boundries of a good school system, if only for resale's sake.

i would further add something my ol'man once told me and i think rings always true: you can get a great education at a state school or a crappy one at ivy league. as to the resources of schools, our county divides the money fairly. schools are regionalized so one neighborhood does not have more tax money than another. inequity does exist where communities pour local resources into a system beyond taxes collected. so a cookie drive will bring in more money in a wealthier area. also, volunteer non-working mom's improve individual schools. but even in lower income areas, given some measure of organization, it would seem the mothers could unite where maybe one does day care for the group while another is freed up to volunteer in the school. it's just a matter of building community. not too difficult if you want it. involvement of the student and the parent, more than money, determines the quality of education.

in the x-crack neighborhood i helped pioneer, where on the site of the old drug rehab center now rises loft townhomes (two remaining unsold & selling for over a half mil each), the elementary school just two blocks from my house is an international studies magnet. a mostly minority "a" school. we tore down the old one, built a brand new one, and it is my neighbors (40% gay) who pushed for the development of the school and who paid to put in a playground for the school and lighting for their ballfields.

turns out though, now that we've so successfully redeveloped and increased prices on 2/1's from $60k to $400k that young families can no longer afford to move here with their children and so our school goes underpopulated. now that the re-redevelopment is underway and the 2/1's are being replaced with million dollar 4/4's, i would imagine those kids will be going to private school.

oh well, at least we got a nice playground and a ballfield for our gay softball league out of it.

 

[donheff]

If you really love the Socal area and have a ton of family and friends that you can't part with, then stay. You'll probably be happier in the long run. Acknowledge that you will pay a financial price however.

People in general are usually very willing to relocate to less desirable places for a 10-20% pay bump at a new job. Why not relocate for a 20%+ reduction in housing expenses?

Agreed on both points.

Despite my post about working in Socal and retiring in Brentwood, I think it makes good sense to try to work where you would like to retire. I suspect Justin that what you like most about Brentwood is the community - the friends you have developed over the years - and that you are either already retired or plan to stay put when you do retire.

It is easier for many of us to become part of a community over time. That is why retirement gurus caution people about moving after retirement. What good does it do you to move to a nice, affordable place if you have a difficult time fitting in. If I ever consider moving I will rent for a while first to discover whether this is my dream place or someone else's.

 

[brewer12345]

oh well, at least we got a nice playground and a ballfield for our gay softball league out of it.

Aha! So there was a nefarious plan all along...

 

[justin]

Agreed on both points.

Despite my post about working in Socal and retiring in Brentwood, I think it makes good sense to try to work where you would like to retire. I suspect Justin that what you like most about Brentwood is the community - the friends you have developed over the years - and that you are either already retired or plan to stay put when you do retire.

Well, I'm actually just 26, so I've got a few years till retirement. There are an however a number of retired folks in my neighborhood who are original residents from when they first bought in the neighborhood in the 60's. Some are starting to move away to retirement homes and/or die.

 

[justin]

Aha! So there was a nefarious plan all along...

I was going to ask if straight folks had to switch teams to switch to this league. I decided not to ask, since I thought it might be insensitive.

 

[REWahoo]

"...gay softball league..."? How do you know if a softball is gay or straight?

 

[justin]

"...gay softball league..."? How do you know if a softball is gay or straight?

By the pitch. The straight one's a little lower pitch than the gay one.

 

[Rich_by_the_Bay]

It is easier for many of us to become part of a community over time. That is why retirement gurus caution people about moving after retirement. What good does it do you to move to a nice, affordable place if you have a difficult time fitting in. If I ever consider moving I will rent for a while first to discover whether this is my dream place or someone else's.

DW and I feel the same way, that it is an advantage at retirement to already have a built-in network of friends, and a deep knowledge of your locale's finer points. But that's also in part because we intend our retirement life as more or less a continuation of our pre-retirement life, just with less work and more travel .

Maybe the fact that the career brought us to 3 different regions in 6 years makes the prospect of total makeover less appealing at this point.

 

[HatePayingTaxes]

To go over some of the points that's been raised here…

Some of you mentioned that So Cal people shouldn't get the 2000+ sq house but live in a smaller house.  My in-laws have a 4 bed / 2 bath 1600sqft house in a good school district desirable area.  House is built in the 50s I think.  House is going for $750k.  My parents have a 3 bed / 2 bath 1900 sqft house in a lesser desirable area than inlaws.  Built in early 90s.  It's going for $725k.  In other parts of desirable area, 3 bed / 2 bed condo will be at least $500k and these are not newly constructed condos and probably 1,200 to 1,500 sqft.  So I think living in a modest house doesn't really work either.  Either get a house or rent and put the difference in retirement.

Salary adjustment for living in So Cal doesn't make up for housing price difference from other parts of the country.  In most professional jobs, unless you're a top candidate in a given field, I doubt an employer will pay you 50% or more for living in So Cal.

Yes, a lot of people I know basically are banking on their future house appreciation as a retirement.  They think that my house will be worth how ever much money and they would have paid off their mortgage by then.  My concern is that they still need a place to live and unless they're willing to sell it and go to another, you can't live off the equity on your house.  By the way, most of these people don't want to leave So Cal.  I guess when they become desperate, they can sell it and go somewhere but you've pretty much built up your life in So Cal and your kids are probably living around So Cal so it'll be difficult to just pick up and go.

For most of the non property owners in So Cal, I think it's either put in money for retirement or buy a house.  Oh and, if you're going to buy a house, both spouses have to work.

 

[kcowan]

To go over some of the points that's been raised here…
...
Yes, a lot of people I know basically are banking on their future house appreciation as a retirement.  They think that my house will be worth how ever much money and they would have paid off their mortgage by then.  My concern is that they still need a place to live and unless they're willing to sell it and go to another, you can't live off the equity on your house.  By the way, most of these people don't want to leave So Cal.  I guess when they become desperate, they can sell it and go somewhere but you've pretty much built up your life in So Cal and your kids are probably living around So Cal so it'll be difficult to just pick up and go...

The challenge with this approach is the cyclic nature of the housing market. Nationally, it has been a 14 year cycle, 7up and 7down. The recent unprecedented low interest rates have created a set of conditions unknown before in our working lifetimes. So I expect the cycle may be longer and the downward correction more severe.

This may be moot as I am pretty sure that the up cycle in So Cal is over. Like you say, even modest housing is over $700k. The only choice might be sell out and to rent something comparable for the next 8 years and then buy again. Ideally a purchase and leaseback but I imagine most buyers would not go for that. Keeping exposure to the sector during rental can be accomplished by buying stock in builders or REITs. At least those are liquid.

 

[Brat]

HatePaying Taxes, your solution is to find a job in an affordable housing market.  There is a salary premium for LA so you may take a small pay cut, but you will have a life.  You can always visit your folks in LA.