NRR: Saving for a house

Your asset allocation is pretty good without getting too complicated. I might suggest that you bump up your allocation to 60% equity/ 40% FI and cash from the 50/50 you said. Among the equity you may wish to add an additional asset class in the form of a Russell 2000 index or MSCI EAFE index. Either of these will introduce higher risk in your portfolio so keep the investment small (about 15% of the total).

You shouldn't have to worry to much about incurring fees with the type of funds you are looking at. There are plenty of no load low cost mutual funds offered by Vanguard and other similar companies.

What kind of time horizon are you looking at to purchase the house? There are programs (if you have great credit right now) that will let you purchase a house for 3% down. However, they will be much more difficult to get into without the slowing of real estate.

If you are looking to put the traditional 20% down, it seems like you'll be unable to buy a house for a while. In that case, it seems like you've got the right thinking. You may consider putting more into equities, and less in bonds and cash, if you've got a 6-8 year time frame. Maybe something along the lines of 70%, 20%, 10%

If I were you, I'd find a way to be ready before 5 years from now. Housing experts are already saying that the downturn will stop this summer and that prices will likely head back up. I'd also do the following:

1) If you don't have anywhere near 15% to put down, then don't just save until you do -- you may never be able to catch up. $120,000 a year is good money, but as you know, it's not all that much in San Fransicso. I'd find a loan that will let you put 3% down or even zero down. Wait until the housing stops falling before you do that (hard to time I know).

2) What you do once you have the house and are beginning to pay the mortgage, watch the value of the house. When your combination of value increase and extra money you've saved equals 15%, then re-finance. When I bought my house 9 years ago, I had to buy with just 3% down, but in just TWO years, due mostly to house value increase, I was able to refinance (with a lower rate too) and own more than 15% of the value of the house so that the PMI dropped off. If we had saved and saved and saved, we wouldn't have been able to buy that house when we did.

3) Another option (that I recommend ONLY if you're both very fiscally responsible) is to get an ARM. Get a 5-year Adjustable Rate mortgage with a super low rate, and then be aware that in 5 years you HAVE to refinance. The goal by then should be to make sure you remove the PMI. It's risky because interest rates could go up a lot. Also, even if fixed rates don't go up, you WILL be paying a higher rate than the ARM, so if you base other purchases off what you first 5 years of your mortgage are costing you, you'll be hurting. This is why you MUST have serious fiscal responsibility in order to do this. You should figure out what your mortgage WOULD be costing you if you got a traditional 30-year mortgage and don't spend beyond that. There will be fees for the refinancing.

4) You could ask yourselves if you really NEED to live in San Francisco. Maybe you do and you are willing to pay whatever you need to to live there, but no one says you HAVE to live there. If you decide you must live there, then you could decide that your house if part of your retirement and that when the two of you are no longer working that you will sell and move to a much cheaper area of the country and pocket the money. If I lived in SF, I would have to do that as I wouldn't be able to save extra for retirement due to the high cost of housing.

Good luck.

It's anybody's guess but the housing market downturn is far from over, i'd give it another 2 years. Timing of your purchase is far more important than how much of a down payment you have. ON market thoughts, imo the market is due for a 10+% correction. Would be poor timing to enter the market right now. Just like buying a house, entering the stock market is all about timing. Lastly i would put some of the money into a roth IRA (no tax on it). First time home buyers can take out $10,000 (i think that is the amount) out of an IRA with no penalty. Therefor, you could take $20,000 out of an IRA with no penalty.

Flagpole Willy wrote:

If I were you, I'd find a way to be ready before 5 years from now. Housing experts are already saying that the downturn will stop this summer and that prices will likely head back up. I'd also do the following:

Good luck.

Housing prices are going to keep going up indefinitely. A new era had dawned in the housing market; a few quick downturns here or there, but buying a house is always a wise investment. You stand to make tens of thousands in your first year alone!

Never mind that supply has boomed exponentially and that the rate of foreclosures is starting to skyrocket, or that the avergae family ow can only afford to buy a studio apartment. Prices are just going to keep going up and up.

Wellington Fund, then fuggeddaboudit.

Seriously.

One Q: on $120k you can only sock away $300/mo? If that is so, then you don't want a home NEARLY badly enough.

One Rec: Fiance, you say? Skimp on the wedding and plow the money saved into the housing fund. You can run a simple, elegant, SMALL wedding for under a grand (okay, two grand if your future wife has "princess for a day" type fantasies; for my thoughts on this, review my first commment). Have a "gift registry" for your house (e.g., "one window, $350") instead of a bunch of "stuff." Might sound crass, but, heck, invite folks over to dinner a lot and they'll get over it.

[quote]Asset Mgr wrote:

One Q: on $120k you can only sock away $300/mo? If that is so, then you don't want a home NEARLY badly enough.

I had the same reaction initially, but when you factor in those quarterly/yearly bonuses, it's really about 1000/month which is more appropriate.

As for the allocation, I think the 50/50 bond/stock split is about right. With the relatively short time horizon, you don't want to be too heavily exposed the the risk of equities. I also like the idea of waiting 5 years. No one knows what the SF housing mkt will do, (my opinion is that the decline still has a ways to go), but you don't want to really stretch now and get in over your head.

Go to any major fund family website (Vanguard, T Rowe, etc) and there will be a number of low cost options to suit your needs.

You have a good salary and seem to have the right outlook about saving for the house. You're in a far better position than most.

Prolly the most important question you will have to ask yourselves...

How long do you plan on living there?

If you plan to be there over 7 or 8 years, I'd consider starting to look now.

If you think you will be there long term, you might consider putting less than 20% down but I'd still go with a fixed rate for the majority of the loan. Rates right now are only about 1% higher than the 40 year lows. Who knows what they will be like in 5 years. You could get an adjustable second mortgage and avoid PMI. You will want to avoid paying PMI. Then you can start paying off principal off the adjustable with your extra cash each month/quarter. In a couple years, you could have the marjority of your mortgage at a very low fixed rate. You will have cheap money and with the interest deduction and prolly be paying less out than you will by renting if you calculate it after taxes.

You will also have to think about if you plan to have kids and will they fit in the place you are looking to buy.

Anyway, if you want to wait about 5 years because you don't know for certain that you will be living in the same area long term, I think you are right on target with your plans. I think I'd get a GNMA individual issue bond rather than a bond fund so I know I'd get all my principal back on the bond portion of the portfolio. The average life is usually about 7 years. And I go with Vanguard either total market or S&P 500 but I'd dollar cost average into that fund. We have had a good run up and prices are still reasonalbe but there could very well be a 5-10% correction in the overall market and that would be a better time to enter. For a 5-7 year period, it is just a matter of your individual risk tolerance. After I set aside enough cash for bills and emergency fund, I'd go about 70 equities and 30 bond.

You already have made a horrendous financial mistake by getting married in California (assuming you were too much of a puzzy to get a prenup). How can we expect you to be responsible enough to be a home owner.

Even at $1k a month that seems to be on the low side. Here is a simple scenario to illustrate:

Gross 10,000 monthly

Taxes (2,500)

Rent (2,500)

Car ( 500)

Food ( 500)

Phone ( 100)

Insurance ( 200)

Entertainment( 500)

Gasoline ( 200)

Clothing ( 500)

Parking ( 200)

Potential Savings: $2300

There may be some things I'm missing in here, although I think quite a few are very conservative. Do you have other debt such as credit cards or student loans that need to be factored in? If not, I agree with other posters that you might not be trying hard enough to save.

still seems low wrote:

Even at $1k a month that seems to be on the low side. Here is a simple scenario to illustrate:

Gross 10,000 monthly

Taxes (2,500)

Rent (2,500)

Car ( 500)

Food ( 500)

Phone ( 100)

Insurance ( 200)

Entertainment( 500)

Gasoline ( 200)

Clothing ( 500)

Parking ( 200)

Potential Savings: $2300

There may be some things I'm missing in here, although I think quite a few are very conservative. Do you have other debt such as credit cards or student loans that need to be factored in? If not, I agree with other posters that you might not be trying hard enough to save.

As they are both young, I'd bet they both have student loans. Maybe they have two cars? (perhaps they could get by with one and use public transportation?) Trust me, I'm the KING of frugal spending, and while I think I could make it work with a family income of $120,000 in San Francisco, it wouldn't be easy, especially if you're buying a $500,000 apartment (which is on the LOW end). The Bay Area is outrageously expensive, and not just the housing -- everything is more expensive than most other areas of the country.

Spendthrifts.

rtert wrote:

Prices are just going to keep going up and up.

Not in Southern California. The prices are going down. My house started at $319K 4.5 years ago. Comps peaked at $589K six months ago, and now they're down to $509K. I'm in the LA burbs.

Holland Nass wrote:

rtert wrote:

Prices are just going to keep going up and up.

Not in Southern California. The prices are going down. My house started at $319K 4.5 years ago. Comps peaked at $589K six months ago, and now they're down to $509K. I'm in the LA burbs.

I think you failed to grasp the irony.

rtert wrote:

Holland Nass wrote:

Not in Southern California. The prices are going down. My house started at $319K 4.5 years ago. Comps peaked at $589K six months ago, and now they're down to $509K. I'm in the LA burbs.

I think you failed to grasp the irony.

irony? everyone knows that the only way to go in california is a negative amortization "option" 2/1 ARM, which allows you to maximize the money you're sure to make in real estate. and if you don't do a "stated income", no doc/"liar loan", you're just missing out on free money.

with real estate guaranteed to go up 10% per year, you make $50,000 more each year when you "buy" a $1,000,000 home as compared to a $500,000 home.

all you have to do is count on finding a buyer who is less informed than you are.

p.s. prices can't go up faster than incomes over the long term. you can't be "priced out forever." because if you are priced out and you make about or above the area median household income, then who is buying these places? and who is going to buy them at prices that are even higher?

to the OP, you have the right idea taking your time and saving up for a downpayment. don't let people who live in areas of the country that are way different real-estate-wise tell you otherwise. buying at your age in a market as expensive and arguably overpriced as SF would be premature and in my opinion a mistake. who knows where you'll want to live 3-4 years from now. you don't want to be in a position where your life choices (e.g. going to grad school, taking a new job, living abroad for a few months or years) are constrained by a huge mortgage and the transaction costs of selling real estate. the potential upside at this point in time is just not great enough to counteract the negatives for someone in your position. again, i think you know all this and i think you're doing the right thing.

Flagpole Willy wrote:

As they are both young, I'd bet they both have student loans. Maybe they have two cars? (perhaps they could get by with one and use public transportation?) Trust me, I'm the KING of frugal spending, and while I think I could make it work with a family income of $120,000 in San Francisco, it wouldn't be easy, especially if you're buying a $500,000 apartment (which is on the LOW end). The Bay Area is outrageously expensive, and not just the housing -- everything is more expensive than most other areas of the country.

Flagpole is right. We have approximately $775 per month to pay on student loans between us. I am also going to graduate school part time, mostly on my companies dime, but still have to put in a few thousand a semester of my own money. We also own two cars, both are paid for long ago, but the insurance is expensive because my fiance has had a lot of tickets and fender benders (I don't let her drive much anymore).

Our monthly budget looks like this:

$8900 gross ($1000 to 401K pre tax)

$3000 taxes

$1250 rent (cheapest apartment I have ever seen in SF)

$300 bills (electric, gas, water, garbage)

$600 Food (groceries, about two dinners out)

$260 car insurance (liability only)

$170 parking (at work, needed my job)

$120 gas

$600 Roth IRA

$300 Savings (first for the house/emergency fund)

$750 Student Loans

$150 bridge tolls

$800 grad school tuition

__________________________

leaves $600 for everything else

Money is tight, but we live good and have a good time. We could live elsewhere, but we want to be near family and friends (we grew up here).

Thanks for the suggestions everyone. Anyone else made it in the Bay Area post housing boom and have any tips?

rtert wrote:

I think you failed to grasp the irony.

After re-reading your post, I think you're right (about missing the irony).

Have you taken a look at consolidating your student loans ?

Flagpole Willy wrote:

If I were you, I'd find a way to be ready before 5 years from now. Housing experts are already saying that the downturn will stop this summer and that prices will likely head back up.

I'm not convinced impartial housing experts are saying that. The NAR economists with a vested interest are saying that and the mass media is reporting it as news.

Economic fundamentals don't support these prices.

To the original poster:

1. Under no circumstances listen to realtors or lenders for information regarding the stability and future of real estate prices. Don't listen to "buy now or be priced out forever crap."

2. Under no circumstances take out an interest only or option ARM loan.

3. Go to

Read the articles, but more importantly, read the comments. Everyday. After about a month, you'll be armed with enough knowledge to make an informed decision.

4. In five years you'll be in a great position to buy a house-keep saving.