They’re not wealthy by the standard of the Bay Area, which is the point of the comment you’re replying to. Wealth is relative. Otherwise you could say that just about any American middle class family is wealthy — just look at the entire world’s population, where anyone making over something like $40k a year would be in the top 1%.
Just to underscore the point, Palo Alto declares not too long ago that anyone making under $100k a year is considered “low income”.
People buying houses for $1 million are wealthy even by the standards of the Bay Area. Median household income in the San Jose-Sunnyvale-Santa Clara metro area is ~$125,000[1]. A traditional $1 million mortgage would require a $200,000 down payment, and ~$5000/month. The monthly payment alone would be 48% of the combined monthly pay for everyone in the household in a household making the median. House purchases at this price are only possible for households that are making significantly more than the metro-area median.
Source? It would be surprising to me if lenders were regularly approving loans where the mortgage payment alone (not including insurance or taxes) was >=48% of monthly income. There are certainly lenders that will approve mortgages with high ratios relative to salary (due to the value of bonuses and equity comp), but the $125,000 figure is all-in income, so this isn't relevant.
A 40% ratio for the $125,000 household would give you a maximum purchase price of $830,000, which would be a conforming loan in the Bay Area, not a jumbo one.
In the South Bay near Mountain View, there's basically no single-family homes under $1.5M, and the majority of houses go for $2M up. Many are in the $4M+ range. You can get cheaper in San Jose ($800K-ish for a run-down 2BR from the 50s) or Daly City (low millions), but most of the Peninsula and SF has a floor at a million.
Most Bay Area residents just don't own homes. They rent permanently or maybe own a condo. But the context for this sub-thread is "people with a house", and basically all mortgages for single-family homes are jumbo if you're not paying in cash or putting >50% down.
The median Bay Area household cannot afford to buy a house, yes, but that does not mean that those buying houses are significantly wealthier. The Bay is far, far richer than you can imagine.
Buying a house for $1M is firmly middle class status. True lower class people simply cannot afford to live in the Bay at all.
To be in the top 1% in the Bay Area you have to make close $1M per year.
Truth.. me and my spouse sold our old house in san jose (2016) to a couple who had < 160k in 401k combined(no other assets) and were in their mid/late 50's, their downpayment was the 90k they got from the sale of their condo, they were in construction/design(unsure of income) and had to get a 2nd loan from the bank to make the downpayment. Their total new mortgage is 5k a month(payment and prop. taxes, guessed this), I was shocked that the bank approved them given they seemed leveraged to the hilt.
I wonder if this means a foreclosure crisis is coming.
I've wondered recently how much of this house price inflation is because of cash buyers from China vs. cash buyers because they sold their stock in a unicorn vs. dual-FAANG-engineers with a mortgage vs. people who leveraged up to the hilt with 3-5% down adjustable mortgages. ChuckMcM posted county property records a couple years ago that suggested the former category isn't actually a big one. The first 3 categories are relatively insensitive to downturns. The last will get hit hard this recession. If most houses are owned by people in the last category, the effect on housing prices will be much more dramatic than if they're folks sitting on houses with no mortgage.
A few years back I found a website where I could look up big expensive houses on the east bay area hills and it would mention who owned them. When I looked up a few of the big ones, 8 of 10 I looked at were owned by doctors.
First of all, a $1M house with $200k down means an $800k mortgage, not a $1M mortgage. With rates as ridiculously low as they are, monthly payments are closer to $3.5k/mo. Add in an amortized $500/mo in property tax and you're at $4k/mo, for about 39% of income, not 48%. For that married couple making median income (filing jointly), after the mortgage interest tax deduction I think it's like 46% of their after-tax takehome pay. They'd have about $4.8k/mo ($57k/year) left over for whatever. That doesn't seem like so much of a strain as to be inaccessible.
(I used some crappy googled income tax calculators, so it'll be off, but hopefully not by a ton. I only factored in mortgage interest deductions, and I don't understand SALT deductions and didn't factor that in, so they might be able to deduct more and have even more left over?)
(We're also both using the 2018 median household income, which is like $8k more than 2017, so 2019 was probably even more. Who knows how that relates to today's chaos)
Your numbers are way off - dangerously so. First, nobody is getting a sub-3% fixed 30 year mortgage right now - so your minimum for principal+interest on your 800k loan is already $3656 (assuming you can get 3% - every half% is going to cost you roughly another $350 per month)
Next, your estimate for property taxes is similarly low. I don’t live in CA but where I live taxes are roughly 1% of the assessed value. Let’s say the county assesses your 1m home for 900k - and not to mention the assessment will probably increase over time - so you’re looking at about $750/mo there.
You totally forgot about homeowners insurance - required for that loan plus it’s included in the front end dti ratio. That will set you back another ~$150 per month.
That adds up to a total of $4556, almost 14% higher than your estimate and representing one trip to Disney world’s worth of extra spending over the year.
Often overlooked is the savings you should make for maintenance, repairs, and improvements. Only after buying and selling a few houses do I finally appreciate exactly how expensive they are and how “only” a $100 per month difference adds up - quickly.
Looking at three different calculators from googling "mortgage calculator," I get an $800k loan at 3.25% (higher than the rate I pay on mine in SF, but I paid the rate way down) coming to $3,482/mo for principal and interest.
For property tax, i found this california property tax calculator [0], which says it's $6,490/year ($541/month) for a home assessed at $1M in SF. That brings us to $4023/mo.
You're right I totally forgot about insurance. Oops. Sure let's use $150/mo, but IIRC that's more than I pay on mine. Maybe because I'm in a big building and the HOA has insurance for parts that I'd need to insure if it were a single family home? But I didn't factor in HOA, so $150's fair, even cheap.
$3482+$541+$150 = $4173/mo.
I still think this median household is going to have something like $4-5k/mo left over after principal, interest, property tax, insurance, and income tax. That's the most important number to get right in terms of how accessible this is. It tells us how much to they have to squeeze on everything else to make it work.
... also "$4556... representing one trip to Disney world’s worth of extra spending over the year." Holy shit really? I never would have guessed disney world is that expensive. Daaaaamn. Guess I'm never going there :(
(on second thought, I think you're right about the property tax estimate being low. I pay more than the online calculator said and my place is assessed below $1M. Maybe it's all the other stuff tacked on in SF? Add maybe ~$200/mo to my above estimate, we're still talking about something like $4k/mo left over)
My apologies on the mortgage calculation- you’re right on that.
I didn’t include HOA - depends on the community, some are as low as $100/mo, others are north of $400 but often those include amenities such as lawn mowing or internet/tv or golf/social club memberships
Disney is expensive - especially if you’re taking kids (kind of the whole point isn’t it?). The costs really do skyrocket once you add little people, which I never understood until I was knee deep in it :)
That site is completely wrong about property taxes in California. The property tax is 1% plus a county and city level supplemental. For example, my property tax in Oakland is 1.3688%.
I have no idea how that SmartAsset got that rate. Literally it makes no sense and is comically wrong.
> Otherwise you could say that just about any American middle class family is wealthy — just look at the entire world’s population
Any middle class American is wealthy by the world's standard. The quality of life provided by middle class America is the life of the 1%. To not see this is to not understand how most of the world lives, and the challenges people face from being less lucky.
I’ve spent time a lot of people that live much better than me in what are considered third world countries, including overall quality of life, who make far less than I do. There are countries where money goes much further and family holds much greater value when compared to work than US culture (and laws) generally produces. They see friends and family for meals many times a week, their health care is affordable, and their jobs are more secure. It would be thought of as a cultural taboo to value work over family, whereas the majority of US employers see placing family over work as a fireable offense. Yes we have more paper wealth, but if we have to work longer hours and are spending it all on utilities, healthcare, and vastly overpriced housing, does it really matter?
Edit: This applies to countries with relatively reasonable populations with respect to their resources. This does not apply to places like China and India where there is a huge population to support.
Seriously. I sometimes cringe when I think what I could be making if I moved back to California (I'm even _from_ norcal...) but I just can't handle US workaholism (most of it performative) and the idea that even if I manage to pull off 5+ weeks of PTO a year, my spouse certainly won't, and I like living somewhere everyone gets a month off a year and even people under the median wage can afford a decent holiday.
> They see friends and family for meals many times a week, their health care is affordable, and their jobs are more secure.
This is all true - and all of those are possible while still being wealthy. The peculiarities of US culture are different from being wealthy. As another example you don't need to have an obsession with guns to be a wealthy country, but the US does.
This is exactly my point though. If you look at averages, a jumbo home owner in the US is considered wealthy — but only if you ignore their local market. Like in the Bay Area where you could earn $100k a year and still be considered “low income”. These people may be huge earners compared to the average American. It doesn’t mean they’re living the lavish lifestyles of the rich and famous. A lot of them are living paycheck-to-paycheck. Markets are relative.
Similarly, the average American making over $40k a year will not consider themselves the 1%, but to the average citizen of the world they are.
If people are choosing to live in the Bay Area and spend all their money on COL expenses, that does not mean they are not wealthy. It just means they are choosing to spend all their wealth to stay there. Believe me, those of us who live a state or two east of there see plenty of people who have left after a few years of paying on those jumbo loans, and the equity from those homes sets them up quite nicely in another place.
People who own homes in the Bay Area do not have massive disposable income. But they do have wealth.
I feel like everyone is talking past each other. Or perhaps the definition of wealth is failing this discussion. Telling a family struggling to make ends meet that they are wealthy seems of little value. Depending on the scenario, they could be one job loss away from having nothing just like one of your families a state or two east.
Now that same family, income and house with a paid off mortgage is in an entirely different situation.
The difference is the wealth they accrued in paying down their mortgage. They claimed value in doing so. But merely having a massive mortgage in the Bay Area does not _inherently_ equate to wealth.
As long as they have a supply of buyers for those houses. Article is suggesting that new buyers won't be able to get jumbo mortgages. If people can't borrow $2M for a house anymore the sale price of houses is going to take a big hit.
To agree with you, It's even more complex than even you outline, too. Wealth is, imo, a relative profit and cost of living expense calculation, regardless of how much you make. Ultimately it doesn't matter where you live or how much you make, you can be living paycheck to paycheck in almost any scenario.
There are definitely subtleties, like how feasible it would be for you to reduce expenses while keeping your income the same. Life.. gets complicated.
"The quality of life provided by middle class America is the life of the 1%"
It's been said many times before about similar statements, but this is not true or mathematically possible. I believe it's off by about an order of magnitude.
Middle class in the US is something like $45,200 to $135,600 in household income, which is roughly half the population.
Half the population is about 2% of the world population. And every American is not wealthier than everyone outside the US.
If you google something like "global income percentile" you will find a considerable amount of BS claims - the first one I found was on Investopedia. For fun or ideology or whatever, the meme that middle class Americans are in the top 1% is something that people will just go on the internet and lie about.
I didn't spend enough time looking to find really satisfactory sources, but in trying to find something relatively unbiased I ended up with something that suggested the US middle class might very roughly be around the top 10% globally.
(Note that in the terms of the linked article, it seems like the global middle class is a tier below the US middle class, so if about 85% of the world is "poor" or "middle class", then the remainder or 10-15% equates to the US "middle")
That is true, but there's a flip side problem with this way of thinking: it can lead to a race to the bottom mentality in which improvements are argued against by comparison to those worse off.
"Workers in America don't need better pay or benefits, they're already wealthy by world standards!"
"Workers in China don't need basic safety protections and sane work hours, they're already better off than workers in sub-Saharan Africa!"
"Otherwise you could say that just about any American middle class family is wealthy" Comparatively correct in the global sense.
Nothing bad can come from putting things (yourself?) into a global human perspective. Considering how much chance is involved with where we are born, a middle class person/family in the US is quite wealthy by default.
I wonder how many take pause on any regular basis just to acknowledge and appreciate the relative wealth that they were lucky to be born into?
Yes, but that also comes with the notion that a wealthy family can become poor by moving to a higher-cost area, or a poor family can become wealthy by moving to a lower-cost area; ie, someone can sell a small house in the Bay area and buy a manor estate in the countryside.
There's nothing wrong with that notion, but some will find it odd that, before that transaction happens, a family owning an upscale countryside home is wealthier than a family owning a cramped Bay area home, but after that move happens, the family that moved in from the Bay area is now the wealthier one.
It means that merely having the option to sell your home and buy a countryside manor doesn't make you wealthy until you actually follow through with it.
Sure. But San Jose's median household income is almost double that of the US as a whole. Is its COL double than national average? I don't believe it is.
It is prb about 3 times cheaper than other areas of the country,
- Gas: is still $3 a gallon here while a majority of the nation enjoys close to $1 a gal.
- State taxes: run close to 10% on professional salaries, most other states have 4-5% or no state taxes.
- Housing: This one is the big one, try finding a 3 bedroom house for less than $1M in the san jose/pennisula area, it just isn't possible (I am excluding parts of east san jose where housing is cheaper). A typical house in the US goes for roughly 350k. rent is no better, a 3 bdrm rental in a half decent area runs you 3.5k on up.
- Property taxes: this one is tied to housing, enjoy paying 1.5% a year forever on your $1M+ house, that is 15k+ a year
All (or most) of those are included in the COL estimates I've seen. Yes, the Bay Area is expensive. But, as best I can tell, the salaries (on average, per household) more than make up for it.
Trust me, I hear the same thing in discussions about DC area salaries and COL. Relative to the rest of the nation, software developers here have a high income and high COL, but the income more than makes up for it here too.
Average cost of a house in America is around $380k, average cost of a house in San Francisco is $1.7M according to Zillow. San Jose is $1.2M. Fremont is $1.1M. The cheapest (and not a great place to live and horrible commute) place in the Bay Area is Vallejo and that's still $450k.
So 3-6x more expensive depending on where you look generally.
Doesn't matter - if you can afford to make payments on a 1 million house for several years, you are wealthy, simply because you can sell it, take $400,000, and go buy a huge house in the midwest cash.
Being able to pay for a $1,000,000 house and put 200k down makes you well off.
> They’re not wealthy by the standard of the Bay Area, which is the point of the comment you’re replying to. Wealth is relative.
they end up in possession of an asset worth $1MM. ill-liquid sure but still a durable asset. you can borrow against that asset, it appreciates proportionally, you can eventually sell it, etc. what's the difference between it and $1MM and equities holding? i don't understand how you think being in possession of something like doesn't cross the threshold for wealth simply because other people in the neighborhood are also wealthy?
With mortgages people are generally paying a ton of interest up front, and it takes a long time to build up equity. People are limited by the equity in how much they can borrow against the loan, and for a very long time the bank has a million dollar asset, not the borrower.
Just to underscore the point, Palo Alto declares not too long ago that anyone making under $100k a year is considered “low income”.