Recently, my wife and I decided it’s time to buy a house. Our household income is set to more than double in a few months and we will be in a 33% marginal tax bracket. Time to start taking advantage of the tax benefits the government gives homeowners.
For the past year or so, we’ve been living in Los Angeles’s Westside neighborhood, about 2.5 miles inland from the Pacific Ocean.
Rent’s in LA have skyrocketed in the past year…along with real estate prices.
We currently pay $2,400 to live in a nice 2 bedroom, 2 bath, 1550 sq ft condo. I personally feel the neighborhood is run down, but apparently I’m alone in regards – it considered a very desirable part of town, owing to its close proximity to ocean, jobs, downtown, bars, and restaurants.
But this condo we live in would probably sell for $700,000.
It’s nice, but it’s not that nice!
Unfortunately, despite the somewhat stagnant incomes and employment figures over the past few years, property prices have soared in Los Angeles. Many places are up 25% in the past year or so and nearly 50-75% in the past three years.
It seems local residents are competing with foreign buyers from South East Asia, who are looking for a safe place to park their money. Being historically distrustful of governments, they shun liquid savings accounts, stock market investments and prefer hard assets like real estate and gold. But local real estate can be confiscated by their governments, so they prefer the US – where the judicial system makes it harder for the government to explicitly steal from it’s citizens.
In fact, about 50% of all home sales in the area were all-cash transactions. And in Irvine, the number seems to be closer to 80%.
Unfortunately, this has pushed up home prices on the coasts here, often times making it unaffordable for the local population.
Especially at the entry level.
On the Westside (Santa Monica, Brentwood, Westwood, Venice), it’s impossible to find a house for under $750,000. And even at that price, you’re looking at a tiny house – 1,300 sq ft, and its so old, it probably needs to be torn down and rebuilt.
Of course, if you’re willing to live in “the Valley”, you can find a very decent house for that price, but the trade off is a much longer commute.
So the question most people face, regardless of where they end up buying, is whether it makes sense to buy when prices are so high?
The probably with this calculation is that making an apples-to-apples comparison is hard. There are many variables to consider, and it can become excessively complicated for most people.
Luckily, the New York Times has an amazing interactive tool comparing the cost of owning vs. renting. It factors in home prices, rents, appreciation, opportunity cost for investments, property tax rates, your income tax rates, inflation, etc.
So for a $775,000 condo in my area, assuming a 2% annual increase in home prices and rents, it seems that you’re better off renting even if it’s only by $200 a month.
You need to break the $1 million mark before a home purchase even matches renting.
And $1 million gets you a nice home in SoCal, but nothing fancy like you’d get in any other major city like say Dallas or Atlanta.
Meanwhile, we’re in escrow on a nice 4 bedroom house in the valley. We decided to bite the bullet and a large home so we don’t have to ever move again – unless it’s to downsize in retirement.
I’m liquidating my entire portfolio of dividend paying stocks and municipal bonds to put towards a down payment.
So instead of dreaming of an early retirement, I’ll be starting from scratch to replenish my investments. It sounds like I’ll be pushing back retirement a few years, just for the pleasure of living in a big house.
I don’t believe one’s home is a good investment. Over the past several decades, ample research has shown that home prices have significantly underperformed stocks, even in places like California.
But this is a choice that I’ve decided to make. It’s not something that I’ve rushed into, only to be caught by surprise when I turn 60 and don’t have enough savings to last me another 30 years.
What sort of sacrifice would you make to buy a house?