House Hunting...

[usc_et]

Hi folks, I'm pretty new here, so let me give you some of my vitals:

Age 31, single, but involved, plan to be engaged soon.
Work full time, fairly stable, income involves sales bonuses, etc., but has averaged close to 100k over the last three years.
Currently have 75k saved in taxable accounts, and 30k in 401k.
I live in Torrance, CA (Los Angeles suburb).

Girlfriend, 28, works full time, stable, income is appx 55k
Currently paying off student and auto loans, appx $600/mo.
Savings are fairly small.

Our combined rent is very cheap ($400), as it is partially subsidized by living with some family. We would like to have a place of our own, and our goal is to buy by the end of 2006.

Our dream location is South Pasadena. But that would mean doubling our incomes or winning the lottery. Even for a small place in that area. We are also interested in Pasadena, Burbank, Glendale, Alhambra, other cities in that area that are safe, and reasonably convenient to get in and out of. We work in Mid-Wilshire, so we don't want to make the commute longer than it already is.

We are considering condos, but our biggest concern is that we believe that condos will decline more in price if there is a general price decline.

Depending on the place we could stay for a long time. The hardest part is that anything that we can see ourselves in for the next 10-15 years, we can't afford.

The way I see our budget, our absolute limit is 500k, and should try to keep it closer to 400k. Any of you who know the areas I described know that those prices are fantasy land.

Does anyone have any advice on where we could be looking, new perspectives for our search.

 

[wabmester]

Keep renting until prices in your favorite area(s) are more reasonable.

Consider that you are making above-average salaries. A lot of others like you are also finding that they can't afford a house without severely compromising. That's what makes the market come back down. Believe me -- it will. Affordability is at an all-time low. That's when the laws of financial physics kick in.

And, you're right to avoid both condos and far-flung burbs. Those will be hit the hardest and fastest in the downturn.

 

[justin]

What would renting a place that would work for the two of you for the next few years cost? $1000/month? I'm sure it'd be less than buying a place. Do that till the market cools down or you are ready to buy the place where you'll end up for the next 10-15 years. If you're making a combined $150k a year or so, and you can't find a place to buy within your price range, that indicates a bubble to me. Prices will correct or price increases will stagnate for a while at some point.

 

[SLC Tortfeasor]

I agree. Keep renting and putting it in the bank. Think of all the money you're not wasting on mortgage interest! And keep your financial resources relatively liquid so that when the perfect opportunity does pop up, you'll be ready to pounce on it.

 

[Jarhead*]

Hi folks, I'm pretty new here, so let me give you some of my vitals:

Age 31, single, but involved, plan to be engaged soon.
Work full time, fairly stable, income involves sales bonuses, etc., but has averaged close to 100k over the last three years.
Currently have 75k saved in taxable accounts, and 30k in 401k.
I live in Torrance, CA (Los Angeles suburb).

Girlfriend, 28, works full time, stable, income is appx 55k
Currently paying off student and auto loans, appx $600/mo.
Savings are fairly small.

Our combined rent is very cheap ($400), as it is partially subsidized by living with some family.  We would like to have a place of our own, and our goal is to buy by the end of 2006.

Our dream location is South Pasadena.  But that would mean doubling our incomes or winning the lottery.  Even for a small place in that area.  We are also interested in Pasadena, Burbank, Glendale, Alhambra, other cities in that area that are safe, and reasonably convenient to get in and out of.  We work in Mid-Wilshire, so we don't want to make the commute longer than it already is.

We are considering condos, but our biggest concern is that we believe that condos will decline more in price if there is a general price decline.

Depending on the place we could stay for a long time.  The hardest part is that anything that we can see ourselves in for the next 10-15 years, we can't afford.

The way I see our budget, our absolute limit is 500k, and should try to keep it closer to 400k.  Any of you who know the areas I described know that those prices are fantasy land.

Does anyone have any advice on where we could be looking, new perspectives for our search.

USC:  You work at Wilshire, do not want long commute, and apparantly plan on staying in the area for a long time.

Hmmmmmmmm.  You have a challenge on your hands regarding housing.  Don't know the details of you current low rent payments, but it certainly (especially based on your two incomes)
gives you an opportunity to save.

Personally, if it were me, and I was bound and determined to buy in the near future,  I would contact as many brokers as I could, with the thought in mind that I want a "horrible" house in a top neighborhood. (One that has no curb appeal, and plenty of deferred maintenance.)

You'd have yourself a part-time job for a few years, but it would probably end up being a solid investment.

Other than that, you're stuck with "holding your nose", and paying 5 to 6 hundred thousand dollars for a home and neighborhood that will wear thin in no time.

Good luck,
Jarhead

 

[GTM]

We are considering condos, but our biggest concern is that we believe that condos will decline more in price if there is a general price decline.

I tend to agree I would stay clear of overpriced apartments.

 

[Mr._johngalt]

I tend to agree I would stay clear of overpriced apartments.

I would stay clear of overpriced anything.

JG

 

[laurence]

My neighbors have almost the exact same income (I live in North San Diego county but lived in North Hollywood, just west of Burbank at one point-roomate went to Art Center). They bought the house next to us for $540,000 and are in a 5 year ARM and are still sweating the payments. The house has not increased in value significantly, and they were counting on that to help them refi and get rid of the second mortgage. Needless to say stress levels are high. Being that close to the margin is just not fun. Maybe you could rent in your local, buy a property somewhere more reasonable and rent it out to cover the mortgage, and build equity that way. Then you would at least be "in" in some fashion, and learn alot about the process.

 

[yakers]

Well I live in Pasadena and my little 1000 SQ FT place is considered over $500k. South Pas, Glendale (esp the Montrose part) Sierra Madre are all very nice. But if you are not looking for good public schools Padasena/Altedena is good and a lot of other places. Eagle Rock, Highland Park, Los Feliz. I would look downtown, no kidding. A friend has a loft near MacArthur Park and I would have sold off my place & moved except my younger son is still in high school.
I wouldn't recommend anyone buy real estate in southern California right now. I had a divorce/refinance in 1990 and it was ten years until the market recovered.
And condos can be OK, unless you really like doing house maintenance. You can be so busy fixing things that you have no time to spend money. I still miss my condo, lifestyle wise.

 

[uncledrz]

I'm with those who say to rent until you can afford to purcahse. The only addition I would add is to make certain that the additional funds are banked/invested and not spent. Put $50,000 a year away, and not too long before you have enough to buy what you want. Defer now, enjoy later.
Uncledrz

 

[HFWR]

My house is a relatively cheap place to live, not an investment...

 

[TargaDave]

USC, I think the current renting theme even applies to us middle aged types when it comes to retirement homes in pricey areas. We thought about pulling the trigger on a modest vacation-future-retirement waterfront home on the east coast last summer after the primary house was paid off and the uncommitted cash pile felt healthy. Of course "modest waterfront" is a relative phrase. After 5 years of ludicrous price run-ups for these properties it wasn't hard to chicken out, and we simply weren't in the market 5 years ago. We'll get there at some point. In the mean time we're saving those pennies and enjoying the economical prime season rental rates of the same properties. Already starting to see some clear cracks in the market.

Dwindling supply and tighter environmental restrictions they say? It's always been there on a steady upward slope from well before 2001. Nope, this frenzy since 2001 is pure Greenspan with a dose of insane loose lending practices thrown in, plain and simple. It will revert back to the long term slope, either nicely or not so nicely.

 

[CyclingInvestor]

I agree with the posters here that now is a very risky time to be entering the LA
housing market. Renting until prices become sane (or your incomes double) is
a very reasonable approach. However, if you must buy, there are areas of Long Beach
which are nice and still in the 400K-500K range. Any local realtor could show you some.
The commute would be a bit longer, however. Further north, Downey has some nice
areas which are reasonably priced (by local standards). I used to live in a bad
neighborhood in East Torrance, but sold and moved to Long Beach in '87. I commute
to Culver City. The few days I drive are not too bad at non-peak hours, but if you are
forced to work 9-5 the commute would be pretty bad (as you know).

 

[Ginger]

USC, I really have empathy for all the young couples who are trying to make it out here in Southern California. The housing market prices are outrageous. How about looking off the 14 Freeway - Santa Clarita area. Nice area, new townhomes, etc.
It is inflated down here in Orange County. We bought our home in 1988 for $170,000 and now worth approx. $700,000. Paid for in full - so we are sitting on a future nest egg.

 

[wildcat]

What kind of salary does it take to live comfortably in Cali? We talking 100+ a must or what?

 

[laurence]

Anyplace you'd actually want to live, 100k won't cut it, unless you are into creative housing (small condo that used to be an apartment, sailboat in a slip). I have a friend who makes ten grand more than I do and he's renting a two bedroom apartment, and has given up buying anything. 150k in San Diego gets you a middle class lifestyle-3 bedroom house, mid level car, eat out once a week, etc.

 

[wildcat]

Places to live:

1) California - LA, San Diego, San Fran, San Jose
2) New York
3) Chicago
3) Central Oklahoma :

Hard to imagine

 

[laurence]

Now don't get me wrong, plenty of people live like I stated above with less than that, but they bought before this latest housing boom. 5 grand a month payments are what you can expect to buy into my neighborhood now, and that doesn't begin to touch what's going on in places like SF!

 

[haha]

Does anyone have any advice on where we could be looking, new perspectives for our search.

I want to echo some of the other posters, except more with an eye to your lives than your money. Two people with numbing commutes just don't make happy times. For way less than you would spend for a piece a junk in a neighborhood that will get you killed, you can rent a nice place in West Hollywood, Fairfax, or many other neighborhoods close to your work. It is made easier by the fact that you both work in the same neighborhood.

Then, as the others have said, if things improve for real estate buyers you can re-evaluate.

Ha

 

[laurence]

Good point, Ha. Life should be enjoyed now, and destroying your quality of life just to say "you got in" ain't good. Plus, take the difference between rent and the mortgage+property tax and sock it away! I bet you won't be to upset 5 years from now. Anything in Westwood rentable? I love that Mongol's BBQ near UCLA, that whole area is a gem.

 

[Under FIRE]

usc_et,

Take it from another Trojan alum and ex-Angeleno here, lay off Southern California real estate for now.

Upgrade your rental to a nice(r) pad and you'll never miss the joy of hemorrhaging $4-5k p.m. on an overpriced dwelling sitting on fragile valuation dynamics.

Horde the differential (~3k p.m.) and wait for the foreclosure carnage thats sure to come post-bubble. Heck, you may even get to pick n choose your South Pasadena dreamhome then.

My own location rule-of-thumb (for rentals): West of La Cienega Blvd, North of I-10, all the way to the coast ..... or anywhere along the coastal strip from Santa Monica to Southbay. BTW, I used to live near campus on the fringes of South-Central back in my starving grad student days at SC   ..... but thats another story.

For now, I'm salivating over tomorrow's ND game


Fight on .......

 

[laurence]

the Co Cal in me smiles on USC, but the Irish Catholic in me screams for Notre Dame! Fight on, Irish! (Plus, mom got her Ph.D from UCLA, so I'm not allowed to root for USC anyway...)

 

[Nords]

For way less than you would spend for a piece a junk in a neighborhood that will get you killed, you can rent a nice place in West Hollywood, Fairfax, or many other neighborhoods close to your work. It is made easier by the fact that you both work in the same neighborhood.

Maybe you could experiment for a year or two while awaiting a "buying opportunity".

For example our wildly-overpriced Oahu home is conservatively appraised to give us an equity of $450K. (We ain't selling.) If we plunked that into a bunch of five-year CDs (at various credit unions) we'd get about 5% or $22,500/year or $1875/month. Yet rentals in our neighborhood are running at $2800-$3200, so theoretically we'd do better renting it out with an ~8% yield (admittedly for a much higher risk) than selling it and stashing the cash.

You could do a similar calculation. Look at how much you'd have to spend annually owning a home, assuming that its value stays flat for a few years, and decide if that's worth the small amount of equity you'd be building. It's quite possible that you could make more money by continuing to pay rent while saving the difference and obtaining a much higher (risk-free) rate on that savings. If you had to take out an interest-only mortgage to buy the house, rising interest rates would hurt you if the house's value is flat.

Then look at the numbers with the assumption that your home rises at about the rate of inflation, 3%. (This is unlikely to continue anywhere in the CA market.) If your equity is rising at that rate, does its return on your mortgage payments exceed the return on your CDs? If your IO mortgage payment rises just as fast as the home's value, are you better off being a homeowner or a CD owner?

The risks are clear if you assume that the CA market cools off and drops your home value by 5-10%. Your mortgage payments won't drop! Even worse, an event that drops home values by that much is probably caused by rising interest rates, so you'd be squeezed between dropping equity on one side and rising mortgage payments on the other. Not a pretty picture.

The advantage of the experiment is that you can quit anytime if you need cash for an emergency. You won't have that flexibility if you're paying a huge IO mortgage during a time of rising rates. And it could hurt even more if your home value had dropped to less than your mortgage. Add in a long commute, no time together, a crappy neighborhood, and you have a recipe for disaster.

 

[Under FIRE]

the Co Cal in me smiles on USC, but the Irish Catholic in me screams for Notre Dame!  Fight on, Irish!  (Plus, mom got her Ph.D from UCLA, so I'm not allowed to root for USC anyway...)

Laurence, good try by the Fightin' Irish and their 80,000 screaming fans. 

But with Leinart, Bush, Jarrett, White, and gang ........ all thriving on clutch plays and many never having experienced defeat in their college careers, its too much to ask ND to end the Trojan's 27 game winning streak.

But SC did wait till 0.03 left on the clock to snuff the Irish. 

Anyway, my hats off to both teams. 

 

[HFWR]

ND beat them in every aspect, but the score...