Everyone discusses this, and some people like the idea of renting–no responsibility, rental prices usually trail buying prices, and so on. But if there were ever a case for buying in the San Diego area, it can be made today.
Consider the following:
Assume you pay $2,000 Per Month in rent. This may be a bit high for your particular situation, but assume that amount, because the numbers work out pretty easily. That $2,000 is going to rise by the amount of the consumer price index (more than likely) each year–say, 3-5%. But for now, let’s just look at what you can buy for $2,000 per month, considering everything you have to put into the monthly bill. The way the numbers work, you can almost buy a $300,000 property, with 3.5% down (at 6% interest), and cover every expense, for $2,000 per month. Should you do that? Heck, yeah! Right now, the rent on $300,000 properties is about $1,700-$1,800 per month. By the 5th year (assuming a 3% growth rate in rents), you will be paying $2,090 for rent, per month. The rent will go up, of course, and at the same time, it is likely that your home will rise in value, although not certain (San Diego property has historically doubled in price every 10-12 years, although the rise accelerated during the “bubble” years, and then crashed). As your new home’s value goes up, you will see an increase (if history is a guide), to about $425,000 in 5 years. I personally think the rise will be slower, but this is “history applied to the future.” At the same time, your payments will have been applied to reduce your principal balance by about $20,000. So your equity position will be about $145,000. This is money that you can use, as time goes on. Even if (as I think), the rise in value takes place much more slowly (3% annually), your equity position will still be about $75,000. Much depends on the economy, of course, but these are sort of “barebones numbers.”
To summarize:
You can buy a house worth about $300,000 for $2,000 per month, if you put 3.5% down (an FHA loan); if you are looking at condos, you can simply adjust your payment ratios, remembering that the Homeowner’s Association fee has to be added in to your total cost per month (I didn’t consider this in the model, because LOTS of $300,000 homes are available in San Diego County). I have purposely padded the interest rates just a bit (I called it 6%; actual numbers have been 5.25-5.5% for most of the year), because 6% is a sort of “historic average.” In other words, if you want a rule of thumb as to what you can buy for a given monthly payment, knock off two zeros, and then figure 2/3 of that number–or figure two-thirds of the purchase price, and then knock off two zeros. Either way works the same. Don’t forget, you will have to have about $12,000 in cash, plus two months’ expenses (including payments for your new home), in your checking account to qualify for the loan. Please DO NOT disregard my preceding advice about loan preapproval. You MUST be preapproved for your loan before you make an offer. Otherwise, the listing agent will simply ignore you.
As always, call or email me if I can be of help. I answer all questions, including those from out-of-towners. You do not have to do business with me to get my “best answer,” but of course, more business is always welcome.
