Only in L.A.: Singing the $250K-a-year blues

If you make a quarter of a million dollars a year, does it make economic sense to buy a house in L.A. right now?  Back-to-back commenters on L.A. Land answered that question on the blog earlier today with a resounding "no."

Common Sense wrote:

"My wife and I earn around $250K per year, are in our mid 30's and have a newborn child. In any other planet, we should be able to own a very nice house. However, in Los Angeles, the only thing we can properly afford would be a starter home at $750K, maybe that gets you a 2 bed, 1/2 bath crack house, and our combined salary puts us in the top 3% in annual wages in the US.

This just doesn't make sense and will be a big reason why Los Angeles will experience a BLOODBATH in housing prices falling for the next several years, that is unless the entire city is inhabited by multi-millionaires.

In the meantime, we'll keep renting our excellent 2000 square foot apartment, paying nothing, taking awesome vacations, going to excellent restaurants, etc. and saving, saving and saving (A LOT).

We'll enter the market when home prices fall to planet earth (2-4 years).

A few minutes later JayC wrote:

"... wife and I make ~$250K/year, live in apartment on westside, and child is on the way. The problem isn't that we don't make enough or that our expectations are too high (as realtors might say). I've been living in LA my whole life and I DO know what people who make $250K/yr SHOULD be living in. It may not be Beverly HIlls, but it sure is more than a 1500sq-ft fixer in Sherman Oaks. Sucks not to have any tax breaks, but I'd rather pay $1800/mo to rent a townhouse than pay $5000K/mo to rent money from the bank that owns the house I 'bought.''

I'll put the question to the readers: If you made $250,000 a year, and could afford a down payment, would you buy a home in L.A. right now? If so, where, and for how much, and what do you think you'd get?

-- Peter Viles

Photo Credit: House on Providencia Street in Woodland Hills, via L.A. Times

Comments

[E]

I'd rent below my means, save like crazy and retire early, rather than become a debt slave to a house that someone making 125k a year currently owns, but wants 1.5M for.

[shockg]

$250K with a decent down will get u a nice house in a nice neighborhood. If they can't afford a home they have too much debt or have unrealistic expectations.

[jay]

My wife and I make 175K a year and we sold our house in '05 and made a decent profit on the sale of the house. We have been renting for exaclty three years now and we plan to wait on the next purchase of a house until prices come down to earth. The areas we are interested in purchasing is Walnut, Diamond Bar or Pasadena. The nicest areas of these cities are still way too expensive. For example, homes that sold in 05/06 and that are relisted have a higher asking price! I'm waiting for the next wave of foreclousre to hit the market. Of course, the next wave will be trigger by the upcoming ARM resets. I have friend who stop making payments on his house because his mortgage payment went up due to the reset.

[copter]

My wife and I make "only" $190k/year, and would have to stretch (i.e. no college savings for kids, no vacations, etc.) to be able to buy a mediocre 1200 sq/ft. $600k home with a $100k downpayment. We estimate that this would cost about $3700/mo. all told. Instead, we are renting a beautiful $700k home for $2500/mo., watching as our savings go up and up and home prices go down and down. No way will I overpay to subsidize someone's early retirement.

[really?]

Shock G, could you please show us a few examples of nice homes in nice neighborhoods that are affordable for a household on 250k annual income?

I concur with Common Sense that most of the stuff out there is still in the starter home range for a 250k annual income.

We will have reached affordability once again when nice, roomy homes in South Pasadena and San Marino are around 800,000 like they were before the bubble.

[bode]

Peter,

Give me a freakin' break! OK, these guys make 250k a year -- that's $21,000 a month. Assume we're talking hitorically 100% sane DTI -- 30% -- that's $6,300 a month. If they buy a fine house for $1m on the west side of Los Angeles (or in, say, Santa Monica) with 20% down and an $800k mortgage. 800k at 7.5% in a fixed 30-year loan is $5,600 a month, and property taxes will be another $1k per month.

So, at the end of the day, they own a 1m house and are pushing DTI of just over 30 percent -- well within the comfort range of everyone.

Some friends are in this exact market, and I can tell you there are very nice houses in Mar Vista, Westwood, Rancho Park, and Santa Monica for 1m. They aren't crack houses, they aren't 2 bedrooms 1 bath. They're 2,000 square feet, maybe need a little work, but are family move-in quality (most were built in the 50s and upgraded over time). Most are near some of the best elementary schools in LA so you might defer 20k a year for school for five years.

Anyway, it boils down to a few things: how long are you going to live here, are both you and your wife going to keep working, and do you enjoy raising your kids in a town home with no yard, no place to run around, no privacy. If the answer is yes, keep renting an apartment or townhome. Or maybe rent a house, though that isn't as cheap as you'd think.

End of the day, I can certainly tell you that the market might drop plenty on the Westside, but it's not exactly poised for the 50% drop that we saw elsewhere. Peter is the first to admit that the Westside has held up well so far. It'll happen, but it'll be longer, slower, and more drawn out. Waiting on the sidelines might be smart from an investment perspective, but I don't understand from a raising your kids perspective what you gain. Especially if the drop never materializes -- ten years from now, when inflation has made everything more expensive, how much drop in price do you expect to see?

[Quetzal]

The problem with these ppl is that they are probably living paycheck to paycheck on that 250k a year, driving BMWs, living high off the hog, etc. They need to save for a few years and then they will be able to afford a nice house with a sizeable downpayment and with that sizeable monthly cashflow.

[Amazing_Happens]

I would move to the Valley and find a job that pays something similar in the Valley!

[TakeFive]

""My wife and I earn around $250K per year..we should be able to own a very nice house"

That's what, $20K monthly gross? Using the 1/4 gross figure for housing, we're talking $5K monthly, right? And you can't parley that into anything better than "...a 2 bed, 1/2 bath crack house"?

Exactly what do you folks do for $250K per year?

[Pat]

Check out smdistress.blogspot.com.
$250K a year and a downpayment gets you a $1,175,000 house. This would get you a ~1500 sq. ft. starter home in Manhattan Beach, a 2000+ sq. ft. townhome in Hermosa Beach, or a 1600 sq. ft. condo in 90403.

Personally, I do make this much and I can swing this down payment. But, I think prices will drop some more, so I am happy to keep renting.

[Nelcisco]

yeah, poor guy, a starter home at 750k crack house? I think he's been sleeping for the last yr. to 18 months, he thinks its still 2005. Good arguement at that time but not now.

He can get something very nice now for 750k, I know that the rancho area of Burbank between Riverside dr. and Alameda and Parish to the west and Mariposa to the east are going for 650k and 800k, when they peaked at 1mil to a house on Lamer that was listed at 2mil (which was rediculous)

[Ace]

My three month old doesn't cry nearly this much. If you are pulling in $250k and renting, you should have been able to save enough cash to buy a house straight out.

Yes prices are going to come down and it isnt' a great idea to buy today. However, you can EASILY find a nice house in LA for a million bucks. Quit crying.

[Jim]

I really think the best approach to buying in L.A. right now -- whether you're in the $250K/year bunch or not -- is to take advantage of the fire sales, buy something for far less than you can afford that no one else wants, and put the time and money into making it the place that YOU want to live. If you want to live there, and are going to do so, then it doesn't matter if prices continue to slide or if you "won't make your investment back." You never lose money on a house until you sell, and if you plan to stay there until you die, then you never lose money on a house. If you buy with a fixed mortgage, then your mortgage payment and taxes will never go up.

So, if I made $250K/year, I'd be looking for something in the $700K range. Here in Pasadena, that'll still buy you a reasonably large 3+2 on a 7,000 square foot lot.

[Common Sense]

Thanks Peter for bringing attention to this.

To reply to the comment above. I have ZERO debt. I have close to $200K already in savings, and everything I do is cash based. My family lives a very very good life.

I just refuse to buy a crack house, and am patient to pick up the pieces when it all falls apart. I am amazed that people in Los Angeles think $750K is a good deal for a 1,500 sq foot shack that is a depreciating asset. Sure, you can get a place in the boonies, but I'm talking about buying a house in a nice neighborhood.

Some LA people live in an alternate, debt-slave, house-poor reality, and prefer to live in ignorance of the truth, or are in a state of denial. The only way they were able to afford a home was to pay less than the interest owed on their home every month (with zero down), and when the option came up, they now realize they cant, and now they, the banks, and the rest of us taxpayers are paying for it.

But, the fact is, housing stability is about the income and affordability, and you know what, people can't afford the houses they have bought. Clear and Absolute.

For comparison, this is what you should be able to have for $400K, in Dallas, a very nice cosmopolitan city:

http://dom01.dallashomes.com/fhomes.nsf/allhomes/
DB65BBDA22510CFF86256F08007685EA?OpenDocument

People who use more than 50%-70% of their salary to "own" (errr. I mean rent from a bank, until you are kicked out) a home are retarded.

I don't feel that I have unrealistic expectations, I feel that some people in LA like to pretend they can afford something they really can't. I'm renting at 1/2 the price it would cost to buy a comparable place.

I'll be patient, and when the time comes in 2-4 years (when I'll have $400K in savings)

I'll buy 3 times the house that people are paying for now (who also are stuck in because they cant refinance because they owe more than what the house is worth).

The day will come when housing prices will be sane and realistic, where someone who makes a decent wage can buy a nice house.

If I recall, the Tortoise wins the race over the Hare.

[iabb]

Sure $250K combined income with a decent downpayment will probably get you a nice house in a nice neighborhood in LA. And you'll be working like a dog to pay the mortgage with both partners/spouses slaves to their jobs, with little ability to save enough money to fund a retirement account, feed/clothe/support/educate your child (or children), take vacations here and there and actually retire comfortably at age of 65 with the house paid off and enough money to sustain you during retirement. This is what's so wrong about the current state of the market here. Prices still need to come down. Way down.

[givemeabreak]

"So, at the end of the day, they own a 1m house and are pushing DTI of just over 30 percent -- well within the comfort range of everyone."

wrong, you rent the house from the bank for 30 years. you don't own anything until you pay it off. your logic is flawed. you have been brainwashed by realtors.

[Dude]

Hi Peter,

I've been reading your blog for a while. There are many homeowners who look to LA Times for information and insights on how to navigate their mortgage contract and how to make the next move. Most people do not walk away when the market is down. People will need objective information.

I understand that this is a "personal blog" but as a representative of the Los Angeles Times, how about offering some solutions? As a good journalist, you should have access to experts. Can your project interest rates in 2009? And LIBOR rates?

By the way, $250K can get you 3bed/2bath single family home in Pasadena $600K - $700K about 1700 sq ft. home on a 8000 sq ft lot. Nice north east family neighborhood.

[Arti]

"$250K with a decent down will get u a nice house in a nice neighborhood"

Who is this Shock G and what city is he living in, Norwalk?

This is an LA blog Shock G. I'm at $300, work in the westside. To be close enough to work not to have to drive more than 30 minutes, I could afford a very old 2 BR in the worst parts of Palms, or a condo on the westside. Otherwise, I'm looking at a fixer upper in the Valley with a hour commute.

Or, I can rent a very nice 1550 square feet two bedroom for $2200, far less than the $5000 monthly mortgage I'd have to pay for to "own" the same kind of apartment. There's no point at all in buying, not at these prices. Still waiting for this Shock G (is he a Realtard?) to tell me what is so nice about commuting an hour each way or buying a condo that's far more expensive per month than anything I can rent right now.

[mike]

quetzal:

that is exactly what they are doing. i have 4 rental properties and ALL i repeat ALL of the renters have mercedes or bmw. if they aren't out to dinner, they are ordering inn from good restaurants and they are constantly out of town and having people in to watch their pets. i commented to this guy on the last blog and he told me to enjoy my temporary "homeownership" or some nonsense like that. if i was making $250,000 right now (and i presume he didn't just start making that much this year) i would have already owned commercial real estate by now. i dont understand why this person does not have a house on that kind of income but i do understand that people like this are paying for my retirement.

[RichW]

"I'll put the question to the readers: If you made $250,000 a year, and could afford a down payment, would you buy a home in L.A. right now?"

Certainly not. As we all know, property values are still nosediving and will continue to do so for quite some time. Buying now is about as smart as flushing money down the toilet. Then again you'll notice some people are buying right now which epitomizes an old saying about a fool and their money...

[REO Guru]

We'll I wouldn't buy anywhere right now. I guess if I had to purchase now, as a single individual, I would look towards downtown. I'd target a loft building near a subway station. Loft values have dropped and continue to drop. However, there's major money being invested into renovating downtown and that may carry it forward during this downturn. Like I said, if I HAD to buy right now, that's where I'd look first.

[sfvrealestate]

What are these people talking about? There are many, many terrific neighborhoods, including most of the Valley, where $750k will get you MORE than updated, move-in condition, 3+ beds, 2+ baths, 2000+sf, decent-sized lot, etc etc. These folks must have really high-falutin' taste.

[middle class]

We make 140K/year and have a child in preschool.
We are looking for 1000 square feet in Echo Park for 300K.

We are finding properties to look at right now. None have been "just so" yet. I need a functioning kitchen, even if it's from the 80s. I need a backyard and a half mile between us and the freeway. At our price range, it's going to take a little patience, but it will come.

I am disappointed that I can't get one of the houses that goes for 600K right now. We've seen some lovely properties in that price range. But life sucks. We deal and move on.

We're cheap. We like ourselves that way. It got us 20% down.

[peteviles]

Dude writes, "I understand that this is a "personal blog" but as a representative of the Los Angeles Times, how about offering some solutions? As a good journalist, you should have access to experts. Can your project interest rates in 2009?"

Thanks, Dude. No, I cannot project interest rates in 2009, nor can "experts." They can give you educated guesses. Some of them will even be correct.

Offering some solutions? I don't have solutions for this market, and I'm not even sure the market needs solutions. I think the best service I can provide readers is good, timely information and a forum for discussion. I throw in some commentary for fun.

As for the question I posed, I'm not sure what I would do if I had an income of $250K to spend. Putting down $160K on a $800K house right now seems pretty darn risky to me.

[90402buyer_postcrash]

I understand the frustration. Wife and I are also renting below our means. Happy with where we are, except when the CPA curses us for missing the tax break. :-) We'll buy when we have to in a year or so in whatever we can comfortably afford at a lower DTI than some of the more optimistic posters referenced.

Hopefully, prices will have fallen by then, and we will have the option of declaring Victory in the 90402. If not we'll be very happy in the 90405 or further East.

When the tech bubble burst, I acquired a fair share of my grandmother's great depression values. I would've guessed that it would be a common thread in the wake of this bubble. But instead, I still see ads pushing ARMs!

Whaaaaaa?