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

[Jim-Bob Jones]

I like how some people like to blame BMWs for why people with $250K incomes cannot afford houses in LA. Let's assume said BMW owners bought a Honda Accord instead -- do you really think the $7-10K saved would make a material difference over whether that person could get a nice non-starter home in a nice neighborhood without a long commute?

[some investor guy]

My wife and I make a little over $300k a year combined. We have no debts. We rent a nice 2000 sq ft house in a nice neighborhood, and pile up savings at an pace which absolutely astonishes anyone who bought a house after 2004 in LA.

Buying the house we are in would cost us slightly more aftertax than the $3000 per month we pay. The houses we would really like are currenty around $1.2 million and would cost about $5000/mo aftertax. The list prices are dropping $30-50,000 per month with no buyers. In another year, they will be just about right.

The question isn't "can we afford $1.2 million?" It's "why would we buy something where the price is dropping faster than we earn money?" With 20% down, we would be underwater in less than a year.

[Myriad]

While the couple mentioned do make more than most people, as with anyone else, they should not have to pay more than 35-40% of gross income for a decent house in a decent neighborhood. In fact, they should be able to afford almost any house, anywhere. (Obviously not a mansion or in the very expensive neighborhoods.)

So the overall problem is that housing in LA is still significantly more expensive than renting. (Up to 2x) While prices have come down, house are not exactly affordable based on income. House rich, cash poor, with no room for any contingencies.

[Anonymous]

I think the angry aspirational folks may have let the point fly right by them. I have $500k in liquid assets, and I would not buy at this point, especially when I'm renting a 1200 sq. ft. SFR for $2000. It makes no sense at all for me to buy an $800,000 house that would barely be better than where I live now. What does buying get me right now? I would pay more per month. I would lose my mobility. And I would also get the chance to lose my entire down payment. PLEASE NOTE: Values do not have to drop 50% for me to lose my entire 20% down payment. With closing costs on both ends, A 10% DROP IN VALUE WOULD WIPE OUT $160,000 IN SAVINGS. Hope this clears things up.

[Common Sense]

I guess Mike doesnt understand what a depreciating asset is.

So again, good luck when you find out that the 4 rental properties you own are down 50% in value in a few years.

You miss my point entirely which is that if affluent earners cannot afford to buy a decent place in the city, and are choosing to rent instead, Common Sense dictates that something is entirely wrong with this picture.

If we are holding out, then who will buy houses? Which translates to more falling, falling, falling prices.

When I buy in a few years, you are free to be a tenant of mine, but with your soon to be bad credit, when you have to go into foreclosure, I'm not sure if you will qualify.

When a bubble pops, it stays popped.

....They never put Humpty Dumpty back together again.

[Dude]

Hi Peter,

Thanks for responding to my post. Obviously, no one has the crystal ball to predict the future ie interest rates and stuff. But there are indications. Jim Cramer is respected even when he's controversial or outright wrong. However, he provides guidance/analysis and education. I look forward to more pieces form the LA Times that help the readers in their diverse situations ie to take advantage of down market, make a safe refinancing move, or discuss the consequences of walking away.

Just my 2 cents.

Thank you.

[Chuck]

This is ALL TRUE. 250k/yr DOES NOT get you a modest LA home in a neighborhood where you can send your kids to school. Anyone who thinks otherwise doesn't make 250k/yr.

bode, there is no 2,000 square foot house in Santa Monica for under a million, let alone 750k. And Mar Vista? I'm not going to spend nine hundred grand on a house so I can send my kid to Venice High. The only thing he''ll have to show for four years at Venice High is a neck tattoo.

[waiting-game]

"If you made $250,000 a year, and could afford a down payment, would you buy a home in L.A. right now?"

F NO!

[Mr.Mortgage]

We make a combined 400k and are waiting at least two years to buy again. Read our latest article for more on the inventory overhang:
Millions of home sellers failed Econ 101?
http://thegreatloanblog.blogspot.com

[shockg1974@yahoo.com]

"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?"

Exactly. If someone can't afford a nice home on a $250K income they have bigger issues and affordability is not one of them.

[shockg]

Dear housing speculators (thats 90% of the posters here). Please wake up, it's not 2005 anymore (when most of you sold your primary residence and decided to rent).

Peter, what kind of comments did you expect from this extremely biased crowd? How about asking these questions to an average Joe on the street and not someone who is attempting to profit from housing.

[MBWD]

In response to the original question:

I do make over $250k a year.

And I will not buy in LA until housing prices are in line with the 1950 - 2000 trendline for prices in LA.

If the only option is to overpay for a home or leave LA, I will leave.

[Valley Renter]

Well..my wife and I make over $250K, Have $600K+in cash and we are renting a $1.5M house for $3k/month - it simply does not make sense to buy at current LA prices, no matter how you slice and dice the numbers.... I am still surprised by how many people continue to buy 1,500 sq ft shacks at reduced but still very inflated prices.

[tew]

No tears shed for high income folks in general, but...

Wait until the government bumps up or eliminate the ceiling on FICA. That will squeeze high income / high home price areas in LA.

Most folks earning these high incomes have no pensions - they have to save their own money for retirement and, if they're lucky, they get a few matching dollars from employers. And they're scared that the more they save the more the government will ultimately reduce their social security payments during retirement.

Think about this: Just to pay the annual property taxes on a $1MM home during retirement this couple needs to have about $200k saved (today's dollars) at retirement. This means our couple in their early 30s needs to save about $10k/yr (rising with inflation each year) until retirement in their mid 60s just to pay property taxes in retirement. You can play musical chairs with them selling the house and moving to North Dakota all you want, but it won't make a difference. And that's just the beginning...

[Anonymous]

One more thing. I love all this talk about Mercedes and BMWs. Even if someone's car expense is an **additional** $300 month, that's only $3600 per year. $3600 per year is really not going to be the difference in trying to raise $160,000 in cash for a down-payment. After six years, it's barely the difference between saving $140,000 and $160,000. Of course, you people don't know if these BMW owners have a car allowance or any other thing about their finances. The fact is that these little luxuries pale in comparison to how overpriced housing is.

Regardless, even if someone had decided that he or she would rather spend their disposable income on cars and vacations rather than owning (I mean "renting from the bank") a 3000 sq ft non-productive asset, why would that be wrong?

Because real estate prices always go up? Sure doesn't seem that way right now.

Because renting is "throwing your money away?" As if spending it on interest is materially different. It's gone one way or the other.

At the end of the day, purchasing a home is almost always a highly leveraged risky investment that restricts your mobility and exposes your financial health to serious problems if you lose your job, have a divorce or become ill. Yes, it worked out spectacularly for LA buyers in the 80 bubble and the recent bubble. There is no assurance that it will ever work out that way again.

[someday the ants will eat grasshoppers]

Kudos to "middle class." Bless you for saving and for shopping within your means. That's what it is all about, whether you are making $50K, $150K, or $250K.

Arti, I'm with you as always. I guess if I worked in the Valley, I might be shopping for a house there, but I can't afford the opportuniy cost of spending 1.5+ hours in the car, when I could be in the office making more money for my family or at home enjoying my time with family. Isn't that why we make all this money? I guess that's my problem...there are only 1 or 2 houses a month that would be under 1.2M within 2 miles of my job. Go ahead and call me a crybaby...but I'm happy renting right now, because I commute home to my 3 BR rental in under 6 minutes. Like the commercial says: "making it home to happy hour with my wife and kids....priceless."

To most readers here, I also think we need to parse what is a "nice house" and what is a "good value." Sure, I've been to plenty of open houses where the house is nice, but a price tag of $1.5K on a small, pre-WW II house that was $500K a few years ago, indicates a TERRIBLE and RISKY investment to me. Maybe other high earners find that their money comes easy. Mine does not. I make comfortably more than $250, but my effort is near the limits of what I can sustain. And of course, forty percent of whatever I make goes right back to the government! Anyway, it's not about quality, it's about value. If I earned three times the money I do now, I would still not want to waste it or invest it foolishly.

Peter, to answer your question more concisely, we earn more than your question requires, and we have $400K saved, and there's no way I'd buy a house in a neighborhood that has not come down at least 15% from the peak. In my neighborhood (90024, 90025, 90049), that definitely has not happened yet. We'll try to wait at least as long as Arti. He makes good money, so he must know something, right?

[zach]

Drop the prices 80% throughout the US and you may see some life

other than that good luck

[looking]

I think we need to differentiate 250K gross or net....makes a difference

[Jim]

We're making about $265K. Wouldn't even consider buying anything right now. Single family home in the west-side? Nothing we can afford. South Bay? Manhattan Beach? Maybe if you're willing to settle.

More importantly, things are still way over priced. We live along the Wilsher corridor and pay about $3000/mo in rent. Problem is, similar condos sell for $800k. Plus taxes, PLUS over $1000 a month in HOA! You can't make those numbers make sense, no how.

[Hugo Chavez]

250k ers
Why don't you move to East LA or South LA or even Ladera? Stop beating around the bush, don't be scared of black and brown. It's the future of this city (and nation).
You could live like a king and I assure you not everyone is a crack dealer.

[david]

Some Investor guy says "With 20% down, we would be underwater in less than a year."

well, yeah. no duh. But in 3 or 5 years you won't be. What kind of investor are you ? Do you cash out your mutual funds in 1 year too ?

[Tim]

My wife and I make 115k a year and we just bought in Burbank (Magnolia Park 2000+ sqft) with a conforming loan. Burbank is probably one of the most underrated communities in Los Angeles. 15 minutes to downtown - 30 minutes to the west side (where I work) our own police, fire, utilities, very low crime and some of the best public schools in the state. Granted we don't eat out nightly, don't trade in our cars every three years and we certainly don't try and keep up with the Jones's. It’s all about choices.

250k a year is more than enough depending on what you have been spending your money on and what you want to buy. Just because you make 250k a year does not entitle you to a beach front house in Santa Monica. My wife and I did not buy there because we just couldn’t afford it. Don't buy until you can afford the house you want or choose to buy something a little smaller or in a less desirable area. But for the love of God, please STOP WHINING!!!

Prices will fall when the demand for housing lets up and investors no longer view Los Angeles as good venue for investment. 60% of the homes in Burbank are owned by investors and with the demand for housing as high as it is I don’t see that changing in the near future. As soon as we can we will probably invest in a rental property ourselves as the demand for housing in the LA metro will be high from here on out. Get use to it. LA is just like NYC, Tokyo and other major cities with large populations and compact business districts. We bought now because we did not want to be priced out of the market in 10 years. We were priced out once in our life and as soon as prices got to a level where we could get in the door we jumped on the chance. In 10-15 years prices will be sky high again. There is not enough land and there are way too many people in LA.

[Robert]

What you pay for a house should be based on what it's actually worth, not on what's available by emptying your pockets.

[Laker]

I'm reading all these comments on people making $250K a year and can't afford to buy...
This is BS. Everybody on this blog knows me by now. I'm not a realtard, sure not a housing Bull. But please, if your monthly gross is $20,000 documented income, you can afford to pay $5000 mortgage...You can find a nice place in the valley for that payment.
Arti, fixer in the valley in a good area will go for $400,000-500,000. With a $250K income, you should be able to buy it for cash@!
If you can't, you are a moron.
....
Now, problem is that it does not matter your income. If you wait for the bottom which should be 2010-2012, you could probably buy twice the house you can buy today....in the same hood.
That is why a couple (doctors/engineers/lawyers) that make $250K, could afford to buy a $700,000 house. But doing that today means they will get a 1600 sf fixer in westside or 2000 sf in a nice part of the valley.
In 2010-2012, they could still buy a house for $700,000 (assuming they still have the jobs) but now, it will be 3500 sf house on the westside or 5000 sf mansion in the best part of the valley.
Simple as it.

Now, the question is are people that make $250K need to live in a 1500 sf house or 4000 sf house...
If you really think they fit the 1500 sf house, so where will the people that make $50,000 live at? Under the bridge....

A couple that makes 250K, should live five years renting and saving one of the incomes for a down payment, after 5 years, you should have about HALF Million Dollars.

[mike d.]

david said: "well, yeah. no duh. But in 3 or 5 years you won't be. What kind of investor are you ? Do you cash out your mutual funds in 1 year too ?"

what kind of investor are you? who would be stupid enough to invest in something today that you believed you could buy a year from now for 20% less?

prices are too high period. doesn't matter whether you can afford something decent on $250k, prices are way above what can be sustained based on local incomes and the much more sane lending environment. there is absolutely no financial upside to buying right now, especially in the nicer areas that haven't dropped much yet. there's really not much to lose by waiting it out a year or two.

i agree w/ the commenter who said that prices will revert to the long term trend. that trend was fairly stable for a reason. the only thing that really changed in the last few years were the lending standards. now that down payments and income documentation are back there's really no where else for prices to go.