Housing costs ruining my RE plans?

[Surewhitey]

It is a progressive tax so the 9.3% isn't on for full $115K for MFJ. It is on taxable income over $115K. After standard deductions, (no deductions like property tax or retirement savings), the tax on $115K, married filing jointly, would be more like $4K. With $40K in deductions, the state tax would be around $2K. DH and I both had six figure jobs in the past and never paid much in state taxes on our combined incomes, after deductions like retirement savings and mortgage interest.

Despite the narrative pushed by some media outlets, and some high profile exceptions, most of the people leaving California aren't the wealthy leaving because of high state taxes. It is the poor and middle class leaving because of high housing costs. There has been an influx of households making over $100K in recent years. The poorer households are going to Texas, which is what you are seeing. What you are not seeing is the wealthier residents coming to California from other states.

More Californians left for other states in 2018 | The Sacramento Bee (sacbee.com)
A 2017 Bee analysis found that people leaving California tended to be relatively poor, and many lacked college degrees. Higher up the income spectrum, slightly more people were coming than going

California saw the biggest net loss of residents to Texas, Arizona, Nevada and Oregon, according to the census estimates, which are drawn from its annual American Community Survey. It gained residents from much of the northeast United States, along with parts of the upper Midwest.

'Not the Golden State anymore': Middle- and low-income people leaving California | CalMatters
Middle and Low Income People Leaving California - U.S. Census Bureau numbers show that the middle- and lower class are leaving California at a higher rate than the wealthy. Many who left in recent years say they simply couldn't afford to stay...The majority of people leaving reported an annual income of less than $100,000. while the state has seen an influx of those making $100,000 and more.

Yeah, I understand the progressive aspect of taxation. Just saying that your tax bill ramps up pretty quickly when you exceed that # and many do.

We saw a shocking number for 4 years as our lifestyle is simple (no deductions) so we saw the full force of taxation out there. Not to mention gas, sales tax (9.5% on cars in LA), etc. The only thing we saw reduce was electricity as the weather is pretty perfect out there.

You definitely have to "pay to play" out there in my experience. Awesome place to live, just more costly.

Maybe we'll return when we retire...

 

[Scuba]

Paying $1.1M today for a house is defined by most conventional standards as wealthy, let alone 20 years ago. If your house is worth $2.5M now and you are paying $15K, your property tax rate is .6%. Forty-one states have higher property tax rates than .6%. New Jersey's property tax rate is 2.49%.

Is that the house you are renting now? Aren't you getting more net rent money because of your low property tax rate? A landlord who bought more recently would pay around $31K in property taxes, assuming 1.25% on $2.5M. That means you are likely netting an extra $16K a year in rent thanks to Prop 13.

Upping my example from my earlier post, a California retired couple with $200K in gross income, with $50K in Social Security, and $50K in deductions / exemptions (or a working couple with $200K in gross income with $50K going to various retirement accounts and $50K in deductions and exemptions), would pay $3.8K in state taxes, which seems pretty reasonable to me, especially considering all the nice state and regional parks, beaches and other government services here. We moved here from one of the states with lower taxes and home prices, yet few pleasant weather days, no scenery, few parks, not a lot of arts and culture, nowhere to go for day trips, and not a lot of outdoor things to do. We really appreciate what we have now and are happy to pay taxes to support public schools, libraries, park, senior services, etc. I don't know who you mean by people here experiencing a high COL. Housing is crazy high here right now, no doubt about that.


If you mean high because of state income taxes, as I posted earlier, the median income in California is $75K, so if you are middle class in California you probably aren't paying a lot in state income taxes. If you mean this forum, the last survey I could find on retirement income needed to retire from people on this forum only went up to $150K and less than 10% picked a number over that, so most people with those $150K or less kind of incomes, if they live in California aren't going to pay a lot of state income tax, either, per my earlier examples.

Our home is worth nowhere near $2.5 million now. Sadly, although it’s an oceanfront condo, it really hasn’t appreciated that much, especially when you consider the remodel we did which added a big chunk of change to our basis.

I respectfully maintain my original point - by most standards, CA has a very high COL. I call it the sunshine tax. People still like to live in CA because of the great weather and abundance of recreational opportunities relative to many other places. This, combined with long-term friendships, is why we ultimately decided to retire in CA rather than move to NV, TX, or FL. However, the friends we are close to in these states spend FAR less on almost everything than we do. CA has higher housing costs, taxes, labor costs, healthcare costs, gasoline prices, grocery prices, and entertainment prices than most other states.

If you aren’t personally experiencing this, more power to you, but I think your experience is the exception rather than the norm.

 

[caninelover]

One option could be to buy now, mortgage the $200K difference, and then opt to work 1 or 2 years longer if you can't cut expenses elsewhere and if you're not open to living somewhere less expensive.

The current increases are driven by a combination of low rates, a supply shortage, and high demand as Millennials enter prime home-buying years. The low rates may move up and that may cool demand, but the supply crunch will likely remain an issue especially in the urban areas of California. People who own homes seem to be staying put longer (maybe afraid of not being able to buy something if they sell their current home) and new construction can't make up the lag.

So swallowing the pill now and buying what you know you want may be the answer, instead of gambling and seeing prices continue to climb (or at least not go lower).

$200K is a small mortgage and you may even be able to make up the short-fall with some part-time work. Just a thought.

 

[daylatedollarshort]

Our home is worth nowhere near $2.5 million now. Sadly, although it’s an oceanfront condo, it really hasn’t appreciated that much, especially when you consider the remodel we did which added a big chunk of change to our basis.

I respectfully maintain my original point - by most standards, CA has a very high COL. I call it the sunshine tax. People still like to live in CA because of the great weather and abundance of recreational opportunities relative to many other places. This, combined with long-term friendships, is why we ultimately decided to retire in CA rather than move to NV, TX, or FL. However, the friends we are close to in these states spend FAR less on almost everything than we do. CA has higher housing costs, taxes, labor costs, healthcare costs, gasoline prices, grocery prices, and entertainment prices than most other states.

If you aren’t personally experiencing this, more power to you, but I think your experience is the exception rather than the norm.

No one here has said California doesn't have a high COL, though most of that is due to housing. My only point in this thread was that most of the middle class here, and those making up to $200K, do not have high state income taxes relative to other states. The income tax is progressive, so if you and your friends are wealthy, you will pay more in state income taxes. That is by design and how California has a $75B surplus this year.

In most HCOL areas the real high cost is mostly due to housing. Where we live, in the Bay Area, for white collar jobs, that is largely offset by salaries. Not so much for the blue collar jobs, which is why that class is being driven out and moving to other states.

Related article: The High Cost of Living is Really All About Housing - "The quick takeaway is that differences in living costs across metros seem to be driven almost entirely by the huge differences in housing costs." https://www.bloomberg.com/news/articles/2014-07-21/cost-of-living-is-really-all-about-housing

I picked a couple of cities at random, San Diego vs. Omaha, and put them into Sperling's side by side city cost comparison calculator and the most expense difference is in housing, at least based on their 2019 prices. Healthcare was actually much higher in Omaha than San Diego. Omaha expenses overall were 43.9% cheaper, though salaries were also much lower:

A salary of $100,000 in San Diego, California could decrease to $53,465 in Omaha, Nebraska (assumptions include Homeowner, no Child Care, and Taxes are not considered.)


Comparison Highlights

- Overall, Omaha, Nebraska is 43.9% cheaper than San Diego, California
- Median Home Cost is the biggest factor in the cost of living difference.
- Median Home Cost is 72% cheaper in Omaha.

 

[W2R]

We moved from San Diego to College Station, TX, in 1984. At that time, we did not know anything about COL differences and were simply going where my late ex's job went. (Remember that this was 37 years ago and nothing I say here says anything about today.... I am just rambling on.) But still, imagine our glee after we moved when we discovered that for the same price as our San Diego home, we could buy a house with twice the square footage, on twice the lot size, in a neighborhood that was probably 10x better. It was like that old TV show, "Queen for a Day". Grocery shopping was equally mind blowing and everything cost less than half.

Well, except property/school taxes which were insanely high in Texas compared with San Diego.

Back in the 1960's people talked about LSD as a "mind expanding drug". Well, this particular cross country move wasn't a drug, but it was sure mind expanding for me.

 

[someguy]

If you buy a house in California, the assessed value is equal to the purchase price. Its like 1.25% or so.
So yes buy a 700000 house and your property taxes start significantly higher than a 500000 house.

This.

 

[2HOTinPHX]

If you buy a house in California, the assessed value is equal to the purchase price. Its like 1.25% or so.

So yes buy a 700000 house and your property taxes start significantly higher than a 500000 house.

And I forgot to add....property taxes are FOREVER...and typically only go up and up and up..till death do you part....LOL

 

[ncbill]

Our home is worth nowhere near $2.5 million now. Sadly, although it’s an oceanfront condo, it really hasn’t appreciated that much, especially when you consider the remodel we did which added a big chunk of change to our basis.

I respectfully maintain my original point - by most standards, CA has a very high COL. I call it the sunshine tax. People still like to live in CA because of the great weather and abundance of recreational opportunities relative to many other places. This, combined with long-term friendships, is why we ultimately decided to retire in CA rather than move to NV, TX, or FL. However, the friends we are close to in these states spend FAR less on almost everything than we do. CA has higher housing costs, taxes, labor costs, healthcare costs, gasoline prices, grocery prices, and entertainment prices than most other states.

If you aren’t personally experiencing this, more power to you, but I think your experience is the exception rather than the norm.

That was my point I think they missed...CA is simply not very attractive for a new retiree coming from out-of-state.

Sure, those who bought a home back during Reagan's terms have greatly benefitted from Prop 13 over the decades.

Still, as you note the increased costs, which a retiree has to pay, year after year, for everything else in CA offsets that for someone looking for a new place to retire...heck, even Hawaii might be more attractive for those with a public pension.

 

[Ready]

I’ve often wondered what expenses other than housing are really higher in Southern California. We own our home outright. We do pay a fair amount in taxes even with the benefit of Prop 13. But other than housing, I can’t really say I notice anything here costing more than I would anticipate it costing in other parts of the country.

We drive Teslas so gas is not a factor for us. We live by the beach so we don’t need much heat or air conditioning. So it doesn’t feel like it cost us that much to live here. And yet we still spend around $110K per year to live what I would call a relatively “modest” lifestyle, which seems to be quite a bit more than others are spending in LCOL areas.

 

[daylatedollarshort]

I’ve often wondered what expenses other than housing are really higher in Southern California. We own our home outright. We do pay a fair amount in taxes even with the benefit of Prop 13. But other than housing, I can’t really say I notice anything here costing more than I would anticipate it costing in other parts of the country.

We drive Teslas so gas is not a factor for us. We live by the beach so we don’t need much heat or air conditioning. So it doesn’t feel like it cost us that much to live here. And yet we still spend around $110K per year to live what I would call a relatively “modest” lifestyle, which seems to be quite a bit more than others are spending in LCOL areas.

You can compare costs by categories like housing, groceries and healthcare using Sperling's best places to live - Best Places to Live | Compare cost of living, crime, cities, schools and more. Sperling's BestPlaces. Comparing Sacramento to Atlanta, housing is the main difference. All other cost categories (taxes not included and using 2019 data), are under 6% differences. Transportation and utilities are listed as lower in Sacramento. A $100K salary is listed as being about 10% lower in Atlanta.

 

[Koolau]

We moved from San Diego to College Station, TX, in 1984. At that time, we did not know anything about COL differences and were simply going where my late ex's job went. (Remember that this was 37 years ago and nothing I say here says anything about today.... I am just rambling on.) But still, imagine our glee after we moved when we discovered that for the same price as our San Diego home, we could buy a house with twice the square footage, on twice the lot size, in a neighborhood that was probably 10x better. It was like that old TV show, "Queen for a Day". Grocery shopping was equally mind blowing and everything cost less than half.

Well, except property/school taxes which were insanely high in Texas compared with San Diego.

Back in the 1960's people talked about LSD as a "mind expanding drug". Well, this particular cross country move wasn't a drug, but it was sure mind expanding for me.

We got sort of a "reverse" surprise from W2R. We thought our tax expenses would go through the roof. When we moved to HI we were "prepared" for housing costs and most other things (consumables) to be higher. What surprised us was our low tax bill. No, state tax rates aren't a lot lower than what I'm reading about from the Cali folks (I think ours go as high as 10%) but so much income is exempt from taxation for retirees that we really pay very little in state tax. RE taxes are lowest in the nation IIRC. We pay less than $2K/year.

Of course, housing costs are HIGH - but probably in line with MUCH of Cali and lower than SF and some other isolated places. If I'm making a point, being able to live someplace is combining all costs with the fact that you are retired. I can see OPs dilemma. When housing costs are on a tear and you are in the market - your retirement could be derailed if you must stay in the same area. No easy answers since we don't know the future, thus YMMV.

 

[SVHoper]

Perhaps don't compromise on location, but carefully watch prices and buy in Winter and buy with some fixing to do That way you can spend on renovation as you have extra or earned $$$. Perhaps you will enjoy DIY

Is there any way to earn part-time $ after a long vacation

It sounds like retirement is very important to you. For me, time became more important than extra $ so I retired. However, I was confident I could keep initial discretionary costs low and adjust to be secure if circumstances changed.

 

[daylatedollarshort]

That was my point I think they missed...CA is simply not very attractive for a new retiree coming from out-of-state.

Sure, those who bought a home back during Reagan's terms have greatly benefitted from Prop 13 over the decades.

Still, as you note the increased costs, which a retiree has to pay, year after year, for everything else in CA offsets that for someone looking for a new place to retire...heck, even Hawaii might be more attractive for those with a public pension.

California may not be attractive for some retirees due to the high housing costs. Yet, there are many retirees in our senior clubs who moved here in retirement, but they tend to be high income households. Many of the people we know who moved here in retirement did so because their kids and grandkids are here. Income taxes and house size weren't their main criteria. Capitol Journal: High taxes be damned, the rich keep moving to California - Los Angeles Times (latimes.com)

 

[skyking1]

The kids/grandkids thing seems to be the big motivator for my family too. My wife and I don't have any kids but all of my nieces and nephews have moved to Seattle or thereabouts, and their parents are compelled to come to the land of high costs.
I really want to build our last home in 2 years, but this market does have me worried, especially when you when you couple it with the cost of building materials.
2 years out I don't feel like I'm able to plan for anything. The permit process is also glacially slow.

 

[pjigar]

Back to OPs original question: I would stick with the housing budget and buy something smaller. Baring that I would keep working longer since I don't want to move from my adopted home state. If you are OK with moving then you can take advantage of geographic arbitrage.

Side comments: This was the exact scenario going through my mind five years ago so I started moving the chess pieces then rather than waiting for THE day when I am ready to FIRE. e.g. bought a modest piece of land which is my dream RE, started arranging assets/investments focusing on cashflow requirements in RE, etc. I mention this for the young dreamers. I am treating RE as a glide path rather than flipping a switch. I am still working but this glide path allowed us to move to the farm property during this housing frenzy which allowed us to sell the monster house we had at a nice gain. Let someone else pay the giant tax bill going forward. And speaking of tax bill, I have also made conscious efforts to lower our future taxes (both income and property taxes). The farm property now has ag valuation in place which cuts down the property tax bill in half. YMMV.

 

[JJpop]

Believe it or not, stocks and houses will come back to earth. When have they not?

 

[Scuba]

I’ve often wondered what expenses other than housing are really higher in Southern California. We own our home outright. We do pay a fair amount in taxes even with the benefit of Prop 13. But other than housing, I can’t really say I notice anything here costing more than I would anticipate it costing in other parts of the country.

We drive Teslas so gas is not a factor for us. We live by the beach so we don’t need much heat or air conditioning. So it doesn’t feel like it cost us that much to live here. And yet we still spend around $110K per year to live what I would call a relatively “modest” lifestyle, which seems to be quite a bit more than others are spending in LCOL areas.

Gasoline is a lot higher in CA due to emissions regulations. When DH and I seriously considered leaving CA, we did a spreadsheet of the things we commonly buy and compared prices for those items in FL, TX, NV, and CA. Even for produce grown in CA, prices were much lower for groceries in other states. Labor costs are higher in CA which drives up prices at retail, dining out, etc. Utilities are about the only thing I’ve personally seen that’s lower.

 

[cyber888]

It depends on how old you are. It makes a difference if your 50 or 65

 

[daylatedollarshort]

Gasoline is a lot higher in CA due to emissions regulations. When DH and I seriously considered leaving CA, we did a spreadsheet of the things we commonly buy and compared prices for those items in FL, TX, NV, and CA. Even for produce grown in CA, prices were much lower for groceries in other states. Labor costs are higher in CA which drives up prices at retail, dining out, etc. Utilities are about the only thing I’ve personally seen that’s lower.

I checked the produce price index by state and the retail prices don't seem much different in California compared to the other major cities listed - Produce Price Index.

Healthcare by state seems pretty similar according to this chart, with California looking to be in the middle of the pack - Healthcare Costs in All 50 States Ranked (businessinsider.com)

Gas prices are higher here. I checked the price of Costco gas in Phoenix on Gasbuddy and there was an 87 cent difference, with our local Costco being higher. So for us that would mean a couple hundred extra dollars a year on gas expenses.

We get a lot of retail and grocery staple purchases online from stores like Amazon, Walmart and Costco and I don't think any of them charge more based on state.

Your personal costs may indeed be higher in California, but for people like me who get gas and shop at Costco and eat out with coupons, we couldn't see any big savings by moving, except for housing. Our relatives in a more rural area actually pay more for most goods and services due to a lack of price competition, like only one big grocery store close by.

 

[Sunset]

California may not be attractive for some retirees due to the high housing costs. Yet, there are many retirees in our senior clubs who moved here in retirement, but they tend to be high income households. Many of the people we know who moved here in retirement did so because their kids and grandkids are here. Income taxes and house size weren't their main criteria. Capitol Journal: High taxes be damned, the rich keep moving to California - Los Angeles Times (latimes.com)

Previous to reading this thread, I always figured the income tax in CA was so bad, we should avoid it.
Looks like I'll have to use our numbers to see how it compares for us. Maybe it's Ok.
However the cost of housing and the property tax might still take it off the list.

Interesting thread..

 

[statsman]

Perhaps don't compromise on location, but carefully watch prices and buy in Winter ...

That alone is advice I can agree with. Trying to buy now when everyone is looking to purchase and get moved in before the next school year (assuming it's a working family neighborhood) is brutal these days. This is the time of the year when inventory is at its highest, and when buyers start seeing houses go off the market quickly, they'll overspend on the next one in order to not lose it also.

Around the end of August, many sellers will lower their asking prices rather than risk being stuck with an "overpriced" property through to next Spring. You'll have less selection during this period, but you may be able to make it work and keep your budget under control.

 

[pjigar]

Around the end of August, many sellers will lower their asking prices rather than risk being stuck with an "overpriced" property through to next Spring. You'll have less selection during this period, but you may be able to make it work and keep your budget under control.

I second that. I have been on the both side of the fence. I was trying to sell last July and we priced the house lower than market price. The house still did not sell. We sold the same house for $110K more this spring! I have also bought the last property in December where we got a good price break. Winter effect is real everywhere.

 

[Scuba]

I checked the produce price index by state and the retail prices don't seem much different in California compared to the other major cities listed - Produce Price Index.

Healthcare by state seems pretty similar according to this chart, with California looking to be in the middle of the pack - Healthcare Costs in All 50 States Ranked (businessinsider.com)

Gas prices are higher here. I checked the price of Costco gas in Phoenix on Gasbuddy and there was an 87 cent difference, with our local Costco being higher. So for us that would mean a couple hundred extra dollars a year on gas expenses.

We get a lot of retail and grocery staple purchases online from stores like Amazon, Walmart and Costco and I don't think any of them charge more based on state.

Your personal costs may indeed be higher in California, but for people like me who get gas and shop at Costco and eat out with coupons, we couldn't see any big savings by moving, except for housing. Our relatives in a more rural area actually pay more for most goods and services due to a lack of price competition, like only one big grocery store close by.

All I can say is my personal study using specific items we buy frequently had very different conclusions. Anyone considering a move to another state should do their own personal study and confirm what prices will be for the major things they consume/purchase rather than relying on published indices. Just like the CPI may or may not reflect our personal rate of inflation that we are experiencing due to differences on what’s included. YMMV

 

[skyking1]

We are on a 4 day mission tomorrow to study these things at a possible retirement spot in our state.
It is going to be tough, but I am proposing NOT looking at properties this trip.

 

[Out-to-Lunch]

Previous to reading this thread, I always figured the income tax in CA was so bad, we should avoid it.
Looks like I'll have to use our numbers to see how it compares for us. Maybe it's Ok.
However the cost of housing and the property tax might still take it off the list.

Interesting thread..

+1

While I am working, I would pay less state income tax in Cali. than I do in Wisconsin. (AGI ~$150k.)

Of course, maybe my salary would be higher in Cali!