I know that Salty is requesting feedback from the Sacramento Area, but I thought I'd share some info from down here in the Bay Area. At the price level we were looking at ($400K Max.), all that can be had in the Fremont/Hayward/Union City area are 2 bedroom/ 2 bath condos w/ no garages. Buying even a fixer upper house woud have set us back more than $550K in a respectable neighborhood.

The one thing that was readily apparent was that it was a sellers' market...all potential places we looked at were receiving multiple offers...some up to 10% above asking price!!!! Needless to say...we are still looking.

As for our income, just like most people in the working world, raises received which is about 3% was barely enough to cover the inflation rate (est. 2.64% in 2004). All over the nation, real estate prices are appreciating at a faster rate than income.

What is most disturbing to me is that many of the people buying nowadays are really leveraging their income potential via 100% financing in order to buy a house nowadays. What is especially disturbing is that some people are taking mortgage payments that are nearly 50% of their gross monthly income...nearly double the 28% mortgage allowance to income ratio that is recommended by financial advisors. My wife and I are unwilling to gamble and try for a 100% financing to be able to afford a fixer upper here in the Bay Area. The biggest danger in 100% financing is the very real possibility of Real Estate price stagnation coupled with the ever increasing interest rates (Fed. Chairman Alan Greenspan is hell bent on raising interest rates in order to curtail what he views is an speculative real estate market). People who finance 100% are banking on the fact that house prices are going to appreciate at the same levels they are right now. However, 2 years down the line when the ballon payment kicks in and housing prices have not appreciated enough to re-coup the realtor commission (6-8%) as well as the initial closing costs, those who financed 100% will find themselves in a bit of a bind to say the least.

The biggest misconception that people have is that owning a house as an investment rather than a liability. Yes, a house appreciates in value over time. However, just like any other commodity, it has to be sold or leveraged against in order to withdraw the gains from its value. Re-financing is just an extension of a debt; one is borrowing from the bank and is using the new found equity of the house as leverage. The debt still has to be re-paid.

The only real way to withdraw the equity from a house is to sell it. But that requires finding other means of housing. If one wanted to stay in the same neighborhood, alternate housing means buying another house in the neighborhood that probably appreciated at the same rate as the house one just sold.

At this point and time, my wife and I are looking at other means of investing our money. Renting a nice apartment, some of which are newer and much nicer than some of the condos were looking to buy, and then buying real estate in other parts of California or even out of state maybe just the way to go. By renting, we can still stay in the Bay Area where the economy is doing well. By buying real estate else where to have or event rent out, we are still taking advantage of the 'hot' real estate market.

-Soren

 

And it protecs you from inflation. Buying a house is one of the best things you could do for yourself. Along with starting a Roth IRA. If you haven't done that for retirement, I HIGHLY recommend it. Even if u have a 401(k) already, get a ROTH IRA as well. I'm only 20 and I already have one.

Another thing about owning a house is that it's a depreciable asset. Although it may be gaining in price, you can depreciate it over 27.5 years.

 

Here's my $.02: I think that the California market for housing is a great investment personally. Sure you may be paying $500,000 for a house that elsewhere could cost $175,000 but you are also going to be able to resell the house for a much greater gain(cetebis peribus). If I was writing your article I would include the pertinent Greater Sac./Bay Area comparison but also include the investment trade off. Many people buy houses for the wrong reasons (especially places with a declining market). You would be hard pressed to invest your money elsewhere and make a 21% return without enduring a high risk of lossing a portion of your principle but in many areas of the country this return is completely unrealistic. If you are looking into the long run (preparing for retirement) you may be better off trading off making equity in a house for a more active fiscal investment plan (i.e. savings, bonds, stocks, etc...) The reason I mention this is that if you are forced to live in an area with a declining reality market you would be better off to rent and invest the principal and difference of monthly payments into an interest/dividend yielding investment where you would otherwise be paying equity and interest (assuming you don't pay cash) into a possibly depreciating asset which could cost you greatly in the future. I think it would be worthwhile to bring this oppurtunity up to your readers, especially for those who may be moving to an area with a poor or declining housing market.
As far as the standard of living comparison I think this is based largely off personal interest (obviously) and also about the entire families financial status. If I was living in a family that had little inheritance and not much as far as capital assets I would endure the decreased standard of living to invest in a popular area in hopes of having something worthwhile to hand down to my children, relatives, etc... That's just me. Well that's what I think, hope this helps a little. And by the way, make sure you stress that however fun dumping outrageous sums of money into a hobby car may be, it IS NOT A GOOD INVESTMENT.

 

Interesting. Do you think the income:appreciation ratio is worse in the Bay Area than in the Sacramento area? I think that it's slightly worse in the Sacramento Area based on the fact we're not accustomed to it yet. I mean the Bay Area has been on a constant increase for years. Most parts even had a steady plateau where things could catch-up. I may be wrong though. All I know is that a similar position can be had in the Bay Area for ~10k or more per year and rightfully so. Do the costs of housing make-up for this salary boost and then some? To the point where it's just as bad, if not worse than the Sacramento Area?

It's sad really. I wish I had figures on blue collar and migrant workers. Everytime the housing market appreciates they go further and further into the financial abyss.

 

It's really too hard to say. Especially with a fixer now. I think it'll need to slow down drastically or come to a plateau. This happened in the Bay Area awhile ago. It sucked *** for those investors that got into the market late but it also became a major crossroads for people that just couldn’t compete or justify the quality of life as opposed to Kansas City. Sorta like economic Darwinism.

Much like SF and the Bay Area, I think demand will keep Sacramento's head above water as far as appreciation is concerned. Just as long as demand soars above the supply of homes. Just look at -J-. He truly got lucky with that Belavida home. Damn lucky. If you don't know 1 yr in advance that a development is coming to a specific area then you're SOL half the time. I know that in the 95757 area it's not uncommon to have 100+ people on the waiting list for homes. And don't even think about getting on that list unless you've been pre-approved.

Back to the original topic... We may have a plateau or we may not. Regardless, I think there will always been a slight increase. Why? Because there's always going to be people like Russ that have no problem finding work in another state. Eastward bound is becoming increasingly popular with the young and larger families for this very reason. And it’s reflected in the numbers. These groups of individuals are leaving the Bay Area and other parts of CA at an steady rate. The housing markets in ID, AZ and NV are booming with younger families now. Hell, two of my cousins just moved to Tuson. Likewise, there will always be buyers looking to purchase Russ’ home when he leaves. It might be a foreign investor, someone that's always wanted to live in CA or someone that's recently found work in our growing economy. Of course it may not happen right away depending on condition of the home and neighborhood but that's another story.

 

jvick125 & 1reguL8NSTi - I agree, buying a house is one of the best financial moves you can make, especially in the long run. However, what I am not a big fan of is a family accruing a huge mortgage payment to income ratio, sometimes approaching 50% of their income just to buy a house and even worse, if they do 100% financing. Such a debt burden can put a family in financial jeopardy down the line. Remember, it is not guaranteed that real estate prices will always appreciate. Don't forget that Santa Clara county experience a 5% depreciation in the mid 1990's, so the posibility of real estate prices falling is a very real possibility. Many economists agree that a drastic drop in real estate value is unlikely. However, short term stagnation and higher interest rates can leave many people, especially those w/ 100% financing and ARMs in a bind when it is time to refinance a house in 2-3 years when ballon payments comes into play. If one can afford to put a sizable downpayment and keep the income to debt ratio at around 33-35%, then by all means by a house now. For us, buying a $550K fixer upper would put us above the 35% threshold, so I feel alternate investment such as out of state properties and the stock market may be a better place to put our monies in right now.

Salty- I don't have numerical proof, but I would guess that income: appreciation ratio is worse in the Sacramento Area compared to the Bay Area. For one, median home pricing has driven most people (such as myself) out of buying a house in the Bay Area and looking elsewhere to buy housing. That is why places such as Manteca, Stockton, and Lathrop for example has seen huge appreciation in house prices. Many people are moving out of the Bay Area to buy homes. I know people who actually live in the Sacramento Area, but yet commutes to the Bay Area for work. Many of the outlying communities around the Bay Area are being transformed to "bedroom communities."

Yes, it is the low income families that feels the biggest crunch in all this. IMHO, re-location may just be the best alternative for most people. Cities such as Seattle and Chicago are experiencing economic booms as well. The tradeoff of giving up 5% income for a 40% reduction in housing cost is becoming an even more attractive prospect by the minute.

-Soren

 

It's been like that here too. When we were first looking to buy, we found a house for $160,000 (!!!!!!) that was pretty nice. Neighborhood was a little shady, but we really liked the house. We offered $165,000 and still lost the house.

My neighbor up the street just listed his house (same model as mine) for $410,000. Got an offer a couple days later for $424,000 and countered the buyer at $430,000. He signed over night.

It's crazy trying to buy a house right now :|

 

Oh, and even if you can afford the house payment, don't forget the property taxes. At current values you're looking at about $300 - $400 a month if you have an impound account, and that doesn't include insurance. Our value almost got reassessed about a year and a half ago - that would have hurt

 

http://moneycentral.msn.com/content/...7.asp?GT1=6653

This is exactly what I was talking about earlier and is a good article for anyone dealing with money (all of us) to read.

 

Why would your tax get reaccess?

Prop 13 rules