FREE NEWSLETTER
Go to main Forum page »
My son is 30 something working in Silicon Valley paying outlandish rents and looking at expensive housing. Is it still a good option to purchase in this market? I was burned on real estate as a young adult and don’t want to advise him If it is not a good idea.
As many have already pointed out it depends on many factors. Does your son command an extremely high income as some Silicon Valley folks do or is he earning an average salary? If it’s the former I would lean on purchasing. Is he planning to stay in that local for 10 plus years then perhaps purchasing is a good option. If the house in question (or even the rent he’s currently paying) is north of 30% of his monthly income I would highly recommend he move and purchase elsewhere. Life is more than the house or neighborhood we live in.
OK, 3 houses over 55 years, House 1 gain of 7.4% per year for 8 years, House 2 4% per year for 37 years, House 3 6.6% per year for 6 years. But the biggest reason to own a home, is it is a GREAT way to raise a family, and not have to answer to a Landlord, or neighbors banging on the wall, when baby needs to sleep. The Autonomy is worth a small loss, but in my situation we gained on every home and bought a bigger one each time. Neighborhood and a little luck have a lot to do with it. I would not give up ownership for renting, I did that as a child until 21 years old, and living in your own home is an American Dream, and thankfully we did that. That said at 74 we moved into Independent Living, have a great apartment and are surviving quite well, however the average age here is 83 years old!! No noise after 9 PM.
William,
We have never rented and always owned.
And based on sales prices on both ends of the transaction we have made money.
Yet there are costs to ownership. Upkeep and property taxes and insurance.
Your analysis that “ … the biggest reason to own a home, is it is a GREAT way to raise a family … “ is 100% correct!!!
Rather than frequently moving our kids could have the same set of friends at both school and Church. We have great memories of our forever home and our neighbors and our children’s friends. Whatever it may have cost it was definitely worth it.
I was lucky to have been able to buy my first home at age 25 and have only owned a total of three homes in the intervening 50 years.
The value of my current home is beyond anything that I could have imagined at age 25. That said, the cost of a mortgage, taxes, insurance, repairs and improvements over the years has been considerable. In addition, I have lived through several major real estate resets and have seen the value of my homes swing wildly.
So, is owning a home a good thing? Yes, but it depends. Over time owning a home makes sense, but the timing of a move can have a huge impact on the amount of equity you can move to a new home. Buying a fixer can also make sense, but only if you: a) can afford to pay for the repairs and improvements, or b) have the skills, tools, time and willingness to take on significant home repairs and improvements. My wife and I also were very conscious of never having a mortgage payment that we couldn’t manage on one income, which has become more difficult to achieve with today’s housing costs.
All I can say is that owning a home has worked for me, but I am less certain of what my son’s experience as a home owner will be over time. He rightly states that the relative cost of my first home was much lower than what he has had to face, which could only be accomplished with the help of the Bank of Mom and Dad. And, if he were to suddenly lose his job, the family bank might have to extend further aid in order to keep a roof over his head.
It’s always interesting to see the relative cost of housing of today versus the past.
I remember my dad telling me that the home he bought in 1966 cost $20,000 and he was earning $12,000 a year at that time. This would be about 1.6 times his salary. Now that home is worth $475,000 (realtor.com) and his salary would be $95,091 (He worked for a large city government and his job title still exists and the salary is posted). This would be about 5 times someone’s salary for that job today. His house was also brand new but now is almost 60 years old.
However, his family responsibilities were greater than most families today since he supported a wife, 4 children, and a divorced mother. Home buying has gotten harder, but each generation has different advantages and disadvantages.
There are a lot of factors to consider. One metric I use is a simple question: “Will I own it for at least 10 years?” I’ve used that in every situation regarding a home, even a portable one such as the recreational vehicles (RV) I have owned.
There are the upfront costs to consider, maintenance and almost everyone makes some improvements, buys furniture, etc. Homes can be a money pit and a drag on retirement savings.
One of my sons decided to move to silicon valley; it was really a mirage. He was young and couldn’t buy, so he rented. After saving for four years he realized that the cost of living was simply too high. He relocated to the Midwest. Since then he has rented, owned a home, sold it because of demand and relocated as a remote worker. He now rents.
In his situation he tells me he was glad not to be strapped to a house; he’s enjoyed his relative freedom and lives in a loft in a downtown area with his spouse. When/if he gets a RTO order he may rent or buy.
Bonnie:
In my lifetime of working, starting at McDonald’s at a 16 year old, until I retired in January 2024, I owned 11 houses in 9 states. I lost money selling 7 of them and it would have been 8, if my employer hadn’t contractually been required to “make me whole” on another sale. The BIG Lie about real estate is that “it always goes up.”
I am NOT in favor of young people owning homes, however, it is for another reason, and that reason is even more important today. Opportunities missed!
When you own a home, you do not have the flexibility to seek out opportunities in other cities and states, as readily as you do when you are renting, especially when you go to month to month, at the end of your original lease/rent period. In todays labor market, where their is ZERO loyalty FROM employers, as an employee, you need all the flexibility you can get.
Add to that the vastly different costs in housing in different parts of the county. In 1987, I was offered a position at home office of a major Japanese Auto Finance Company, located in Irvine, CA. It was literally down the street from Disneyland! At the time, I was an upper mid-level executive living in the Dallas Texas metro Area. Although I was going to get a substantial increase in salary, the cost of housing and cost of living in SOCAL made the move financially impossible. I was living in Arlington TX, in a 3000 sq ft brick home, on a 75 x 125 suburban lot. When I went to SOCAL on a site visit, which I required before I would accept or reject the offer, I found that my home in CA would cost 3.5 times what we were paying in TX. I declined the offer to move. 18 months later, I changed jobs, for higher pay and no move.
Another example…On a certain day in 1995, I was considering TWO SEPARATE offers for employment. ones from a US Company and the other from a US based Japanese’s Company. The salary offers were similar, but the fringe benefits were vastly different. Japanese Companies did not have then same level of fringe benefits as US companies I those days. I selected the US company because they offered to buy my home, to enable me to make the move from SC to TX.
Last example…In 2004, I was offered my dream job, Assistant Professor of Insurance Education, at a prestigious Eastern College. I would be one of the primary professors in their CFP Program. I accepted the position, and moved East, leaving my wife to sell the home. 11 Months later, I resigned the job and moved home. Our home would not sell in the TX market during 2004-2005, even at a loss.
I was able to return to my professorship, at the same institution, in 2009, and even though it took 8 months to sell, and we barely broke even, I spent the rest of my career in a job I loved. I retired from that position in January 2024.
Yes…maybe rent doesn’t earn you any equity and some say you are throwing money away…but every one has an opinion…and many of them are simply wrong! Until you are relatively settled, later in life, or not subject to the whims of employers, I wouldn’t consider buying a home, but again…that’s only my opinion…and I could be wrong.
Kevin,
That was well stated. Even though I personally disagree with much of what you wrote.
I’ve owned homes in SV since 1982 and while they seemed horribly expensive (5X North Carolina where I moved from), they all have appreciated quickly. Just because homes are expensive doesn’t mean they won’t continue to be even more expensive.
I’ve made a serious effort to never rent, even buying a more expensive home than I needed because it had a separate building that could be converted to 3 offices. So I worked at home the entire time I was a financial advisor saving 100,000s in rent over the 22 years.
However, home ownership can require a decent cash flow to pay for remodeling, a new roof, and other repairs. But it’s yours and you can remodel whatever you wish. With a fixed rate mortgage, the “rent” is steady with only property taxes and insurance that may increase.
As a recently returning Silicon Valley resident, I have seen firsthand various housing options, in addition to single residences, condominiums, apartments and senior housing complexes. Communal housing (via owning or renting) is very popular. There are creative options for poor California students, out of state students, foreign students, teachers, accountants, grocery clerks, baristas, servers, janitors, gardeners, new divorcees, retirees, to name a few. We rent a room in our large house to a foreign student for $800 / month (free rent during vacation). Many young contractor workers rent sleeping places nearby, and commute 2 to 3 hours home for weekends. My sister rents her house to 3 young accountants for about $1000 / room per month to help with mortgage payment after her divorce. A group of young Tesla employees pooled money to rent a house next door to the factory (owned by my neighbor) then bought that house after the owner passed away. There are people (my nephew, my friend as examples) who bought large houses outside the Valley but rent a room from a retiree for $700 / month in the Silicon Valley to use for workdays to reduce long distance commute.
Since the big tech companies still expand and buy up the available space, the need for more workers and the housing shortage will continue. That is the main support for house equity. Yet workers, rich and poor, will find way to cope by a combination of renting and owning. The suburban sprawl continues also to accommodate work-from-home owners and commuters.
I’ve never made much money, so I was never able to save much for retirement, yet I’m fairly secure today — because of home ownership. I always hated the necessity of being a renter, of just paying somebody to live in an anonymous box. So I bought places to live that I loved, and they mostly went up in value, and I sold them and moved someplace else and bought again, and somehow it has all worked out.
“somehow it has all worked out” really sums up our housing system in this country. Somehow it all keeps going, who knows why?
Bonnie – here are a couple of recent posts by well-known, youngish financial bloggers who both lean toward buying versus renting
https://www.financialsamurai.com/sacrificing-the-stock-market-for-the-good-of-your-loving-home/
https://affordanything.com/how-to-buy-real-estate-when-everything-is-expensive/
We helped both our children get on the property ladder early in their working lives, and it has worked out positively for both. Still, as others have rightly pointed out, the rent versus buy decision depends completely upon your son’s lifestyle, finances, and personal views.
If the goal is happiness, then your son is the perfect person to decide whether to rent or buy in the Silicon Valley. You are the perfect person to advise him about your personal experience and preference regarding homeownership. We have 2 sons, one is happy to own a property, one is happy not to have homeowner responsibilities.
If the goal is optimal housing costs, then future projection is unavoidable.
The future is not what it used to be. Ay, there’s the rub.
I’m not sure there is aright answer. It depends on so many factors.
I agree, and of course it’s much more than just math. Besides personal preferences, even for the same person circumstances change. Owning was good for us when we did but I’m not sure whether we will again.
Both of my sons are in their mid/upper 30’s and have never owned homes due to lifestyle. The oldest is in the military and is subject to reassignment every few years. The youngest was in the military but is now a civilian, but has moved to be within 30 minutes of us in Raleigh, NC. The cost of housing here is high, and I think he’s still searching for the career path that works best for his family – so they continue to rent.
My point, if I really have one, is that the “buy a house” decision is situational on very many levels. It’s not just outlandish rents and expensive housing.
Jeff, interestingly I recently had a conversation with a neighbor, a 19-year Navy vet who has made it a point to buy a house at every duty station. Never sold one, just rented each one out as he was transferred to his next assignment. He will likely retire from the service next year, with a substantial real estate portfolio producing cash flow like a North Shore surf wave.
Maybe your neighbor is/was an officer so he had higher pay. Military housing allowance doesn’t always cover all costs. Both of my boys started out enlisted. My oldest is scheduled to begin officer training school next month, so perhaps things will change with the upgrade in pay and new assignment.
I grew up in a small apartment. I didn’t live in a house until I was 28. My generation had the goal of owning a home. That’s what we did the year after we were married.
I know there are financial pros cons and more, but I would never suggest renting over owning. Even in retirement we own a condo.
Out of sheer curiosity, why not?
I see the growing home equity as a forced savings. But equally important is the freedom and absence of depending on a landlord. Once we were forced to move when a landlord decided they didn’t want dogs.
Makes sense to me. The dog thing is real. I don’t think I’d want to rent a house to pet owners, personally, but I’m not a pet guy. I’m curious though that if you say paying off a home loan is forced savings, does that conflict with your position that you not use a home to calculate your usable net worth? Another thing I wonder, and this is just generally, is if with home prices vs incomes as high as it is now are homes a less prosperous investment than they use to be? Or will they end up being a financial deathtrap for many? Personally I’m also thinking there will be some serious reversals about the desirability of the suburbs over the next few decades with my generation and younger, so who knows if yesterday’s desirable locations will be the same as tomorrow’s.
Home equity is the forced savings, which can occur even if the property is not paid off, but of course payments also gradually add to that equity.
We have two houses (one is a condo) with a combined equity over $1.5 million. That’s not all profit of course. We paid mortgages over the years, upgraded and made additions to the house purchased in 1987, but the equity is now there as a legacy.
We purchased the condo in 2018 for $580,000 and they now sell quickly for $800,000 to $900,000. Other than HOA fees and a water heater, we made no major investment in it.
They are part of our net worth. But I don’t view them as an investment and I agree there will be downturns. We were underwater for the first ten years on the house purchased in 1987.
On the other hand, what does one have after renting for 30 years?
I’m renting now instead of buying a house because a house makes no sense for my lifestyle. I think it’s foolish to believe that renting is throwing your money away versus having a house, because, just like car ownership (which really is throwing money away), people don’t account for all the costs that go into homeownership. Owning a home is far far more expensive than renting in most cases these days, once you account for necessities like loan interest, maintenance, insurance, higher utilities, furniture, and other details like lawn care, etc. In general though, if your son plans to live there for a long time, has a significant other and/or is interested in a family, and it makes some financial sense compared to renting them I’d say it’s probably fine to look at a house. Oh, and definitely make sure he’s in a strong financial position to do so. That’s definitely crucial too! Otherwise stick with renting, it’s a lot less hassle.
I should also add job stability to the list of considerations as well, especially in the wake of all these tech layoffs we keep hearing about. (I’m assuming he works in tech since he’s in SV.)
This is one of the classic great debates. You can find brilliant people on both sides of it, and I’d encourage you and him to search those out.
Some potential “good news” for his situation is that if indeed he is planning to be in Silicon Valley for some time, but does not yet have enough money for a sold down payment (10-20%), then he can take the time he’ll need to build up that down payment to decide if/when he wants to buy there.
Further adding to the good news is by the time he’s ready his life may be different (married? (more) kids?).
For me, even though we’ve spent A LOT of money on house maintenance, the consistency of the housing, and not having to pay ever increasing rent ended up being good for us. But, we’re in Ohio, not SV.