House vs Retirement

[HatePayingTaxes]

Hi,

I live in LA area where housing price is just crazy. Forturnately, me and wife can afford to pay the mortgage and max out our 401k and roth. However, once we have kids, we probably won't be able to max out our retirement accts. We LBOM, only have 23k in non-mortgage debt and have our cars paid off.

I look at my co-workers/friends and wonder what they're gonna do for retirement. They basically either have to do minimal retirement contribution (only up to employer contribution if that) or make payments on their house. It's extremely difficult to do both. It's not like these people make median income either. Household income is at least $100k and they're not able to do both. I guess $100k really doesn't go that far when houses start at $500k. It's not like rents are cheap either. 2bd apt costs at least $1,400 unless you want to live in a bad neighborhood but you can't really live in these places once you have kids.

My question is whether the only solution is moving out of state. No matter how much they want to live frugally, there's no way they can buy a house and put enough money in retirement every month. It's just tragic because it's not like if they live below their means then they'll be ok. It's just impossible. Maybe they should wait until housing goes down but who knows when/if that's going to happen.

 

[Brat]

If you look at homes built between WWII and late 70s (yes, I am dating myself) they are much smaller than what folks want today.  The difference between then and now is STUFF.  It is my opinion that if young couples would purchase these homes and don't buy anything more than they reasonably accomodate they would have more options.

I do not mean to imply that home prices are "reasonable", but if you look for a inexpensive sound small home in the best school area you can find it is do-able.  Some time in the future you may need to do upgrades or an addition, but in the mean time you will be building equity.

There is nothing wrong with two daughters or two sons sharing a room.  My parents subjected me to my sister's company- as a result I spent more hours in the library and tried to do my homework at school. 

 

[LOL!]

Here's a thought: If all your good friends (who are good people I'm sure) moved into the bad neighborhoods, then they would become good neighborhoods wouldn't they? Thus they would not have to move out of state.

Also, I like this thought as well: if folks can't save enough for retirement, then they will not be able to retire. That means they will be working when they should be drawing social security benefits. That means that they will be taxed heavily on their SS benefits which means more money left over for the retired folks. I like it.

So the situation you depict sounds like it has built-in solutions and there is really nothing to worry about.

Next problem, please!

 

[Delawaredave]

The difference between then and now is STUFF. 

I totally agree with the above quote.   What people call "necessities" today is absurd.

To the original post, if:
- you're already in a house and
- you like CA, and
- it is suitable to raise a family (where "suitable" to me means safe and around people with values like yours - not measured by 4 bedrooms, 2 story foyers, and 3 car garages),

then I probably would not consider deliberately moving to a lower cost area.

I love the "built-in solutions" earlier post !   Wish life was that easy.   But maybe it is......

 

[spideyrdpd]

My opinion is to
a. fund the 401k to the match
b. do the roth to the max
c. add additional to the 401k
I love the idea of no taxes and hate the idea that I dont know what my tax rate will be when I retire.

 

[MasterBlaster]

Spidey:

I would change your advice somewhat...

If there is still some room in the income-tax deductible 401k plan then I would fund that before a Roth IRA. The reason being that the OP is probably in a higher tax bracket now than he will be upon retirement. So dollar for after tax spendable dollar, there will be a net gain by funding a deductable plan over a Roth type plan.

By funding a Roth you are essentially locking in your current high tax rates and not taking advantage of future lower rates.

This advice is somewhat tainted by...

1) Future tax rates are pretty uncertain. The word on the street is that rates will be higher in the future. However it is my learned opinion that current rates are probably still lower for the average joe upon retirement than when working. <your mileage may vary though>
2) If you are a savaholic (like me) you just may find yourself in as high or higher a tax bracket when you retire as when you are working. So in that case the above advice is to be ignored.

So to recap my wise and learned advice...

In order of priority:

a. fund the 401k to the match
b. fund the deductable part of any 401k or IRA that you are eligible for
c. Fund a roth IRA

For additional funds, rather than fund non-deductable 401k or IRA contributions you might consider then funding a long term stock or stock mutual fund portfolio that has very low expenses and minimal capital gains turnover. The present tax code gives much much better tax treatment of capital gains over (non-deductible 401k and IRA) ordinary income tax rates on gains.

 

[FlowGirl]

I do not mean to imply that home prices are "reasonable", but if you look for a inexpensive sound small home in the best school area you can find it is do-able.  Some time in the future you may need to do upgrades or an addition, but in the mean time you will be building equity.

I agree, but is it possible to even find homes that size now? Obviously there are older homes, but since new construction is tending towards bigger and better smaller homes are becoming more scarce. I think when we get ready to buy its going to be hard to find a normal sized house in a good neighborhood.

 

[samclem]

I don't think I would choose to remain in a place where the cost of living was such that I could never save enough to get ahead financially.

I grew up in Southern Calif (the San Gabriel Valley). When I joined the USAF and my first assignment was to a base in the rural deep south, I was frantic. Did they have electricity? Would I be able to get a TV signal? How about the KKK--still burning crosses at night? I thought SoCal was the best place in the world to live. Since then I've moved all over the US and would NEVER go back to California to live. The weather IS gorgeous, but the crowds, the rude people, the lack of a sense of true community, and the incredible cost of living make the place utterly unappealing to me now. But, if I'd never left there, I'd still not know any better.

Just because a place is popular doesn't mean it's a place you'll like.

 

[AltaRed]

I cannot imagine why anyone currently without a house in So Cal and wanting to live in a house would consider staying there and for those that are on almost life support due to steep mortgage payments, I'd throw in the towel and move elsewhere.  Life is way too short to be held hostage to ridiculous housing costs.

I also agree with the post about making do with less. Too many people want too much house and too much junk in it.  Many families have grown up in 3 bedroom bungalows and 1200-1500 sq ft.  I shared a small bedroom with my brother for all the 18 years I grew up at home and have not suffered because of it.

 

[Gone4Good]

I agree housing prices are crazy.

I disagree that there is no choice but to pay $500,000+ for a place to live.  

I don't know LA but I work in another super high cost area, New York City.  There are options but it usually requires sacrifices in the way of less space, longer commutes, second or third "tier" neighborhoods, etc.  People may claim "No matter how much they want to live frugally, there's no way they can buy a house and put enough money in retirement every month." but in reality they just want more house, in a better location, then they can prudently afford.  

If you really can't find a house priced under $500K, then a 2BR apartment (which is what I live in) for $1,400 / month sounds like a steal.  The interest cost alone on a $500,000 mortgage at 6.875% is $2,800 / month.  Besides, $1,400 / month for rent ($16,800 / year) should be easily affordable for someone making $100K, with more than enough left over to save for retirement . . . but you’ll have to live with less house, which seems to be where the problem is.

 

[mb]

Brat,
Alta Red,

Your suggestions regarding looking for a smaller, older home are good, BUT:

In my neighborhood for example, a 1498 sq. ft. house built in 1963 sold for $745k last year. It is a mediocre school district. The same house in a good school district would probably cost at least $100k more.

So I can understand the feelings of the OP. Those prices make it difficult to some one starting out with a family.

HPT, there is no doubt that you need to make compromises to live in a high cost of living place like CA. I think that you need to prioritize what is important to you. Are family, the weather, roller-bladders in string bikinis on the Strand worth it to you

On the positive side I thought that prices were absolutely ridiculous when I bought 25 years ago and my loan was at 13%. Now the house is paid for, all that money is going to investments and I can enjoy the beach on New Year's Day when most of middle America is freezing their rear-ends off

MB

 

[Brat]

I agree that a house that is a stretch today with a fixed mortgage will be reasonable 10 years from now.  If a young person maxes their IRAs and 401K for the first 10 years of their working life, then cuts back for the next 10 to buy/pay for a home, and all along manage debt, they should be well prepared to retire at a reasonable date.

All the "stuff" is a big problem if you want to retire early.

 

[thefed]

Brat,
Alta Red,

Your suggestions regarding looking for a smaller, older home are good, BUT:

In my neighborhood for example, a 1498 sq. ft. house built in 1963 sold for $745k last year. It is a mediocre school district. The same house in a good school district would probably cost at least $100k more.

So I can understand the feelings of the OP. Those prices make it difficult to some one starting out with a family.

HPT, there is no doubt that you need to make compromises to live in a high cost of living place like CA. I think that you need to prioritize what is important to you. Are family, the weather, roller-bladders in string bikinis on the Strand worth it to you

On the positive side I thought that prices were absolutely ridiculous when I bought 25 years ago and my loan was at 13%. Now the house is paid for, all that money is going to investments and I can enjoy the beach on New Year's Day when most of middle America is freezing their rear-ends off

MB

WOW! i mean, just plain mutherf#*!in WOW! I guess i am lucky to have planted my roots in good ol' ohio.

My 1300 sf ranch with a basement cost me 110k 4 years ago (needed 3 weeks of my labor) and i would bet it is on a bigger piece of land than that house for 700k and is just as nice

wow

 

[macdaddy]

I will echo what someone else said. Sometimes there are simply no tradeoffs that can make Southern California affordable. I was raised near LA and my friends who plan to remain in the area are from families who can afford to buy them/help them buy a house. Help in this case measured in some number of hundreds of thousands of dollars. A very small starter home perhaps 1400 sq ft in a middle class area is easily over 500k. What most americans would consider a reasonable nice middle class home (3 bedrooms, back yard) is probably a tiny bit under a million dollars. Even if prices decline by 20% - which is likely - these price points are still 400k and 800k respectively.

California (especially LA/SD/SF) attracts a ton of wealthy international people which drives the prices out of whack. Two examples are Del Mar and Rancho Santa Fe, communities filled with the children of middle eastern oil families and assorted international businessmen. It doesn't matter what the "median earned income" is in these places because home prices have detached from that metric like a hot air baloon with too much hot air and no anchors.

Dual income families are another part of the problem. It's anecdotal but most every family I know in California is dual income and most every family I know in the midwest the wife is able to stay at home. This makes 100k a very middle class salary. Two married public school teachers in their first year would probably make more than 100k. I think they start at 52k. If you have a cop who makes 75k with a little overtime and a teacher who makes 60k after a few years - presto - you're at a 135k annual income for a very middle class family. Part of this is inflation at work behind the scenes.

Houses have ALWAYS been expensive in Southern California. My parents were dual income professionals and had to squeeze into the modest home I was raised in. If you want to stay in the area it means that your wife will have to continue to work full time and you probably won't be able to retire early. But if you love California, then maybe that's worth it. If you want more freedom or if early retirement is important to you then it makes so much more sense to move somewhere 80% as nice but 30% as expensive.

 

[lazygood4nothinbum]

something i read many years ago has always stuck in my head. i guess something said by the op must have shaken it loose. it was a notation by daniel j. boorstin, librarian of congress 1975-1987. as i read his works probably 20 or more years ago, i hope i do not get this too wrong.

my memory of what he said is that the government of the united states of america used native americans on indian reservations to artificially condense & contain white population thereby producing value by reducing land availablity and, more so, to control & maintain economy by not allowing white population to scatter too thinly. as white population densified, indian reservations were reduced in size and openings were created to allow for the expansion of the pale faced race. (to be fair, he probably used the word "europeans".)

fast foward some 200 years, how interesting that these white canvas covered wagons still hesitate pioneering into riskier neighborhoods. send in the gays.

we are the marines of urban redevelopment. we go where "families" fear to tread. we bring what little money we have managed to save without benefit of being a double income family or having their tax benefits, or having any of their marriage benefits for that matter, since you asked. we bring paint and brushes, a seedling or two. and we do the unspeakable act: we move next to a black family (or your local minority) and we landscape. shutter the thought.

 

[Brat]

fast foward some 200 years, how interesting that these white canvas covered wagons still hesitate pioneering into riskier neighborhoods. send in the gays.

we are the marines of urban redevelopment. we go where "families" fear to tread. we bring what little money we have managed to save without benefit of being a double income family or having their tax benefits, or having any of their marriage benefits for that matter, since you asked. we bring paint and brushes, a seedling or two. and we do the unspeakable act: we move next to a black family (or your local minority) and we landscape. shutter the thought.

There is much truth in that. It takes people who are not afraid to be different and who are willing to take risks to change a neighborhood.

Not all 'poor' neighborhoods are high crime. A family starting out can do worse than buying a home in a heavily immigrant neighborhood. These are the people who took risks for opportunity - they want a better life and are working hard to achieve it. Contrary to popular legend immigrant workers have no grater rate of criminal activity than the population as a whole, and if you account for income it is much lower.

lazygood4nothinbum correctly observes that few middle class families are willing to take the perceived risks of low income immigrant neighborhoods.

 

[justin]

If you want to see what the rest of America is like, check this out:

http://www.beautifulbrentwood.com/ and click on the Discover Brentwood presentation. Slides 35 and 75 are my pictures looking over my lake.

My neighborhood (Brentwood) in Raleigh just put together a little promotional slide show to show folks what life is like in our neighborhood. Nice, older houses ranging from 1200 sf to 2500 sf, all on 1/4 to 1/3 acre lots, many adjacent to lakes or with lake views. Word is that one of these 2500 s.f. lakefront houses is still sitting on the market at $175,000! And it's been renovated inside and has a nicely landscaped yard. The neighborhood is in the middle of town, so you're already near everything, and as a result traffic (which still exists) isn't as much of an issue.

As a non-SoCaler, I guess I'll never understand what could possibly motivate anyone to move there today or live there, given the huge costs. Weather, scenery, blah, blah, blah. All that's a short plane flight away (or in your backyard) from most places in America.

 

[Andre1969]

I wonder if one reason that gays might go where "traditional" families may fear to tread is the school system? Now sure, there are plenty of gays and lesbians with children, and the school system would be a concern for them, but there are also many gays and lesbians that live alone or as a couple, and to them the schools wouldn't be a concern.

I've heard that parts of Harrisburg, PA have really been revitalized because of gays and lesbians moving in and reviving neighborhoods. But by and large, the school districts are still pretty bad I hear. I have a friend near there who recently married and is talking about wanting to have kids. He says that when they have kids, they'd most likely move once they became school age.

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!

 

[MasterBlaster]

Justin:

I looked at some of the pictures in your slide presentation.

What would you estimate the value of each of the homes are on slides 24-33 ?

 

[MasterBlaster]

As a non-SoCaler, I guess I'll never understand what could possibly motivate anyone to move there today or live there, given the huge costs.  Weather, scenery, blah, blah, blah.  All that's a short plane flight away (or in your backyard) from most places in America. 

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.

What attracts people to SoCal is the year-round outdoor lifestyle. That moderate Mediterranean-type climate in SoCal is really hard to beat. I lived in Texas for a couple of years and we mostly stayed indoors cause of the humidity in the summer and the cold in the winter. But those two weeks in the spring and fall were great !

 

[Brat]

Home values are driven by demand and the income available to bu them.

Even expensive neighborhoods don't always have strong school systems.  When CA put a sharp curb on property taxes their schools suffered.  Parental involvement, family expectation that their children will work at school, and peers whose families value education are better predictors of academic results than home values.  

 

[Sarah in SC]

So LG4N got me thinking (and you are right, by the way, speaking for Charleston, but along with the gay households you can include the college kids downtown). *
So I had to know the actual demographic numbers for where I live....

Johns Island, SC *pop. 2,682. Breakdown: white 985, black 1589, hispanic 108 on most recent info I could find. *So "I'm" in the under 40% white minority. *Please move in next door and help me with my landscaping projects. *
Sarah

 

[justin]

Justin:

I looked at some of the pictures in your slide presentation.

What would youestimate the value of each of the home is on slides 24-33 ?

24 - $180k
25 - 150k
26 - 185k - they just doubled their house size and spent ~$100k on it
27 - 150k
28 - 170k
29 - 150k
30 - 180k
31 - 140k
32 - 170k
33 - 150k

I'm probably guessing a little high on these, but I'm assuming they have been well-maintained and updated on the inside and have no issues.

Our recent newsletter says:
"Since January 1, 2006, one-story homes in Brentwood
have sold in the range of $73-$108 per square
foot with an average of $97 per square foot. Split
Level/Foyer homes have sold in the range of $62-$83
per square foot with an average of $71 per square
foot."

Ranch 1 stories are usually 1200-1400 sf, and split levels are ~1800-1900. Split foyer 2 stories are usually 2500 sf. Most homes sell for $100k-$160k in our neighborhood.

 

[Mwsinron]

When you live where I do you sit amazed looking at what 180k buys you. I know in the Houston area our friends just purchasd a brand new 2000sq house for 150k. Nice area in The Woodlands.

 

[justin]

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.

What attracts people to SoCal is the year-round outdoor lifestyle. That moderate Mediterranean-type climate in SoCal is really hard to beat. I lived in Texas for a couple of years and we mostly stayed indoors cause of the humidity in the summer and the cold in the winter. But those two weeks in the spring and fall were great !

Salaries are higher - but by how much? 50% more? An accountant or engineer in Raleigh might make 40-50k starting salary. What does that equal in Socal? 60-75k starting salary?

Houses in Socal sound like they are 300-500% higher than other urban areas with moderate housing prices (Raleigh, Atlanta, etc).

Our company in Raleigh keeps getting new hires from bubble real estate areas - Washington DC and Florida. Recruiters have been trying to steal our employees, but who can afford to move to bubble areas now for a 20% pay bump, when they would face a 100-200% mortgage payment increase (and end up far away from work in a less than desirable area and school district)?