San Diego Housing Bubble News and Analysis

Do you have money invested ina roth IRA for 5 years or longer. You may be able to access this. You might also want to see if you can pledge assets in your 401K. Not suggesting that you buy but simply giveing you ways to access additional capital.

FHA will work for you but it matters where you are buying

https://entp.hud.gov/idapp/html/hicost1.cfm

3% down, negotiate with the seller to have them pay most of the closing costs and your up front mortgage insurance premium

For most counties, it works except for a few in northern, central and imperial counties

you have to doccument your income, have decent credit and not too high of car payments and cc debt, they actually read that stuff.

Based on your numbers of getting a loan of 350-400 on 140k income you are under 3x, should be fine.

You've got plenty if you can find something you like and can get an accepted offer at a decent price. You could go FHA with 3.5% down or higher. You can get sellers to provide a credit up to 3% of the purchase price in most cases to cover closing costs. You have plenty of cash and an adequate. the real challenge will be finding something you like. Where do you want to live?

Spoke with BofA yesterday. You can get a conventional they said with 10 or 15% down but you will still have to pay the mortgage insurance until the loan to value hits 78%. He stated the rates were about the same as a 20% down. It may be all bs (as I dont listen to much to people dealing in RE) but it is what they said. I will tell you that my buddy had a hard ass time buying in Huntington Beach recently becaue all the decent houses that could go FHA are sellin faster than the fixers. The obvious reason of course are because everyone wants to buy with little cash. I am still waiting for the fixer at 20% down. I need 50-75k reduction to buy from here on a few properties I have recently view here in Racho Cucamonga. FHA is the new subprime.

FHA is pretty stricked on houses needing work. If its a large fixer and you are looking at going FHA you might well forget it as the banks are not willing to do many repairs.

Since you asked a sincere question, I will give you a sincere answer.

If you only have $55K on hand for a down payment, NO WAY should you be looking in the range of $400K-$450K. While its technically possible to get in with 10% down or less, doing so puts you at risk if one of you loses your source of income. This is the type of behavior that caused much of the bubble the last few years. Many are pumping FHA loans, yet the stats show that FHA loans have a very high default rate due to people getting in over their heads. In my opinion, FHA loans should be eliminated, but thats a subject for a different thread.

My advice to you is to find something you can afford at a lower price range, or save up until you have a larger down payment.

Sorry, I agree with Bob. You should have more saved by now to get in that price range or you pay the price of PMI. That's the way this worked before the mess we are in now. Keep looking and saving or lower your range. What is the hurry to buy right now?

Save $4000/month for a year and you'll have 20% in a year.

With your income, this is achievable.

Home prices aren't going up, so there's no urgency.

Saving more is not a bad idea. If you have a contingency plan for job loss that you haven't discussed that would be important to going ahead with buying now. If you don't have some back-up and/or just can't, or won't, wait long enough to save more, buy a cheaper house or at least a house that is as near certain to cash flow as is possible, in the case you can't pay for it .

Nobody ever mentions it here, but many times family is backing the risk and encouraging buying. Might or might not be the case with Emily.

I think relatively few people have $100K to put down on a $500K home. I suspect the ones that are doing it currently are mostly:

1) Those that have sold and are using equity from the sale.
2) Those with access to funds from the Bank of Mommy and Daddy

There are two much smaller groups that also have $100K downpayments:

1) Very frugal savers
2) Very high earners (>$200K/year)

Even those in group #2 will have a hard time saving $100K, because they pay so much in taxes. And if they have their own business they pay even more in tax (double SS/medicare) than everyone else. Plus, these folks hang out with other high earners and are likely to feel pressure to drive Mercedes and pay for country club memberships, which of course makes it harder to save up that $100K downpayment.

Ask yourself how many people are really frugal savers here in Southern California. My guess is not that many. And how many are very high earners that are able to eschew all of the trappings of the Southern California high earner lifestyle long enough to save up $100K, in spite of the heavy tax yoke around their necks? Again, I don't think there are that many.

Now, ask yourself this -- when the news is bad almost every day and unemployment is rising, for those who have saved up that $100K, do they really want to spend it all to purchase a home? Or would they feel more secure having that money in the bank. Realistically they would need more like $150K in the bank to comfortably purchase that $500K home with 20% down and make sure they still have a good emergency savings fund.

I'm sure everyone on this board will tell me that there are hundreds of thousands of people here in San Diego with these $100K downpayments just waiting to throw them down on CV homes once they drop to $550K or so. Maybe you guys are all correct and I'm mistaken.

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I think some others jumped the gun on their advice by saying you should not buy because you do not have enough saved (10% down). They assumed (perhaps correctly) that you had no other assets than the amount you mentioned for a down payment.

Before suggesting that you have no business buying in your situation I would ask how much you have in other assets (401k, IRA, brokerage accounts, etc).

If, for example, you have 2X the amount you have saved for down payment in these other accounts, I would consider buying, especially if the place you buy could be rented out nearly break even or positive cash flow.

The retirement accounts can serve as an emergency backup and if the property could break even you have a contingency plan.

I don't see a problem buying prudently right now with less than 20% down. I would not be in big a hurry, though.

I'm with Bob on this.

A $350K house is the MOST you should be buying based on the facts provided.

Just my opinion, of course.

If you want to buy a home with 10% down there are ways.
1st you will probably enjoy your new home if you have at least $25,000-$30,00 in a cash emergency fund at minimum. My opinion is that you should save another $20,000 and go for it at the end of the year. And who knows maybe that $400,000 home is $350,000 by the end of the year?

If your loan is under $417,000 you can have the PMI paid upfront in closing by the seller and never have to pay it. Even with PMI your payment is around $2300. Very similar to rent or cheaper depending on your location. Look at Aimloan.com or Amerisave.com

The marginal federal tax rate for a couple who earns $100K/year is 25%. The marginal tax rate for a couple who earns $200K per year is 28%. This is a difference of 3%. (The rate does jump to 33% at $208K, but remember this is the marginal rate.) Also, SS and medicare taxes are not progressive (and SS is capped somewhere below $200K), so these taxes would not impact high earners any more than low earners.

The progressive income tax has only a very slight effect on how "hard" it is to save for those making over $200K. If one's income were to jump from $100K to $200K, the progressive component of the tax rate would effectively cost less than $3K. This cost is certainly offset by the fact that anyone making that much should have plenty of disposable income to put into savings.

Why?

Based on their income, and assuming reasonable HOA's and no Mello-Roos, even with a minimal down payment (3.5-5%) they'll have a housing component DTI somewhere in the 23-28% range, which is very affordable, and with a minimal down payment, they'll also have at least 6 months reserves in the bank, which as far as I can see is a bigger hedge against unemployment or other unexpected economic issues than a higher down payment.

I will not comment on whether you should or should not buy but I will say that obtaining financing with 10% down is not a problem at all. As sdr said FHA and VA options are plentiful as well. Note with an FHA or VA you may run into sellers who are reticent to work with you, especially short sales and reo because of requirements that certain repairs must be made to execute those loans.

However if your income can be verified and everything is on the up and up, getting financing is not a problem at all.

Now finding a home you want with this pathetic inventory, that is a big problem.

I think your income is good for the lower end of your price range. 3 *140k is 420k, so if you could find something you like at 400k, it isnt outa line. I am assuming you will want to do some work to it as you are prop gonna get a short sale or a REO, so dont stretch too much to just get into the house.

The answer if you can afford this lies in the stuff you left out.

1) Where are you in your life? IF you are 55 and nearling retirment and at the top of your income potential, this may not be a good idea. If you are just outa college and are still in your twenties and are making 140k you are much better off.

2) Where is this down payment coming from? Is it cash in the bank outside of a basic safty cushion of 6 months income? Or are you cleaning out your 401k, your roth, Aunt betties savings bonds she left you, the kids piggy bank and the couch coushins to get it? Remember, you will have to furnish a house, fix some stuff, prob redo the yard and kitchen, get appliances if they are already gone. It isnt cheap. And what happens if one of you joins the other 500+ thousand people who lost their job LAST MONTH. Do you have a safty net?

3) Are you willing to live in the area you are looking to buy in? I could afford a house in Temecula right now, but I dont want to live there. (nothing against those that do) I work in SD and I dont like the 5 mile commute I have now. drive an hour each way???? Id rather move to the midwest and buy a bunch of land and a nice house and deal with snow and hot summers. That is just me. You know you. Are you willing to live 5+ years in that house, with that weather, with that commute, with that school system? If not then emmotionally you cant afford that house.

and as the SDRE guys both said, good luck finding something you like in that range. It is nuts out there right now. Unless you are are looking for a 2/2 condo downtown that is.

I have around $45,000 in my 401K and my husband has around $30,000. Can I withdraw some of this money at no penalty? We have no money in IRA. I have looked at houses in the $350,000 range but most are too old or in bad neighborhoods.

The progressive income tax has only a very slight effect on how "hard" it is to save for those making over $200K.

No argument there, but there is a lot more at play here than just federal income tax. State tax, SS/medicare, AMT, and sales taxes all eat into the income of high earners. I'm not one of those that says that high earners should pay less tax, but I just want to point out that the numbers are quite shocking when they're added all together. As a business owner I am perhaps more sensitive to this than others since I pay double SS/medicare as well as CA corporation tax, SD city business tax, state disability, and probably several others that I'm unable to think of at the moment.

Also, people in this group usually max out their 401Ks, so that's another big chunk of money that's not available for saving as a down payment.

I still stand by my point that saving a $100K down payment will be difficult for many high earners here in SD, especially those with their own businesses. Yes they can easily do it by driving older cars, living in crappy apartments, and eating top ramen. However, how many $200K/yr attorneys or salespeople are going to do that? Very few will give up their fancy apartments and Mercedes cars.

You can usually (depending on plan administrator) take a loan against some portion of your vested 401K account (most cases I believe it's 50%). It must be repaid, with interest (but at least the interest is going to yourself, so that's not a big deal) over the loan period (I think mine allows 15 years for a loan taken out for a primary residence purchase).

There's a caveat to this - if your 401K is through work, and you lose your job, you may be required to payback that loan in an accelerated manner (60-90 days). If you do not, it is treated as a withdrawal and you will be subject to large tax penalties.

State tax, SS/medicare, AMT, and sales taxes all eat into the income of high earners.

The effective tax rate isn't that much higher than somebody making $100K a year. Especially when you factor in that above $106K you stop contributing to SS. Sales taxes are the same for everyone, but it's true that if you spend more money (there's no reason you have to) you'll pay more $ in tax. Acting like people who make $100K pay a far less percentage of their income to taxes than somebody who makes $200K isn't that accurate.

Acting like people who make $100K pay a far less percentage of their income to taxes than somebody who makes $200K isn't that accurate.

Hi Jordan, I think you misunderstood me a little. People here in Southern California pay a lot of taxes regardless of how much money they make. If you go back to my original post, I was just pointing out that there are only a few groups of people with access to a $100K down payment, and high earners are one of those groups. I totally agree that their share of taxes isn't disproportionately high with respect to those making less, I was just trying to point out that our high taxes make saving difficult for many people, including what I would consider high income individuals. I probably could have been clearer. Combined with the high propensity for consumption here in Southern California, many of these people will have a hard time saving that much money.

I guess I've got a holdover East Coast mentality about money in general. I grew up in a mid-sized east coast city. My brother and his wife make a combined $180K (with no kids) and they were bitching and moaning about ponying up for a $300K house (2200 sq ft) and how it was a stretch. And my brother's job will never disappear - he's a career federal prosecutor.

So, even though I've been out here in SoCal for almost 9 years, I still think like an East Coaster. Not to the degree that patientrenter does, mind you (not that there's anything wrong with his approach).

Of course these folks can afford a $450K house using the "common" ratios. But the question is whether buying what you can afford based on recent metrics is the right way to go about things. Maybe it is, maybe it isn't.

My own opinion - and that's all it is - is that a home priced well below what you can actually afford might be the better choice.

But, again, that's just me.

With foreclosure rate rising almost everyday (I heard from the news), why is it so difficult to find a dream home at reasonable price?

if you have to dip in your 401k to get a house I wouldn't do it.. too much risk

if you can get close to your rent I would go for it, 3% or 10% down..

stay out of the 401k, if you have to dip to get it done it isn't worth it, I gamble, but I don't gamble on that

I agree with this.

Consider your 401k as a cushion in case of disaster, but do not tap it for the down payment..

My earlier point was that if the cash you have for down payment is all of your assets, then it is not enough, you should save more.

In your shoes, I would consider an FHA loan. That way the money you have saved for your down payment can act as a cash cushion. Personally, I'd rather have 12 months of mortgage payments sitting in the bank than have 10% equity in my house.

We bought our first house in 1996 with 5% down, and that was after the lenders has tightened considerably after the early 90's bust. I could have scraped another 5 % together but I slept better at night with that 8K in the bank (sounds like a measly sum these days, doesn't it ?)

Why would you buy a home with no cash reserves, that is what got us here?

What if you lose your job how will you make the payments?

I agree with you, I think jpinpb would also ;)

Yep. I think most have agreed that if your rent would be close to your mortgage, then it makes sense. Problem is finding something you like and would want to buy and stay in for a while that will meet that budget/standard.

I could very easily buy something affordable that is much less than what I'm paying in rent, but not in the area I would want to live in for years to come. I don't really want to settle. I already have investment properties. Next place I get and I want to stay in for a while, so I guess I'm being picky about it.

I also have reserves, but would rather go the 3.5% down. As long as there's cash in the bank and something to fall back on, then I would be comfortable doing it. Many still say 20% down and not have the PMI, but I've done 20% before and wish I had the cash during the hard times.

Life is too uncertain and for me, I wouldn't do the 20% down again. Especially w/the way the economy is right now.