The prices on purchase and rentals in the entire area have been skyrocketing.
Now the big question everyone is asking is, “What can folks really afford?” Affordability is the most critical component that will put a cap on rising rents and home prices.
One approach to finding the answer would be to use zero-based budgeting for the average resident looking for housing in that area by looking at everything but housing and trying to guess what folks spend. The numbers used in this evaluation were provided by various government statistics. All of the below is based on a single person unless otherwise noted.
Transportation – The cost of getting around town will vary greatly based on your personal preferences, but the low side would be $80 a month for a bus pass. Maybe you add another $50 for upkeep on a bicycle.
In the middle, an individual can lease on a small car at $250, insurance at $100, and gas at $150. Repairs should be minimal on a leased car.
The lease on a pretty nice car would be $600, insurance would climb to $150, and gas to $200 for the upper income earner.
Food – The national statistics suggest that we spend close to $1000 per month on food between home 60% and restaurants 40%. An individual who is on a tight budget can eat for $200 – $300 a month if shopping at Costco or Walmart. Maybe add another $100 for Whole Foods. Where the average gets driven up is purchases of small amounts, packaged products and fish. Therefore the low income person could get by for $200, $350 for middle, and $500 max on the home portion. Add 70% to that for eating out and you get $350, $600, and $850 for the big spender.
Utilities and electronics – There is no big advantage to being poor in this group, other than the fact that you are heating less space. Silicon Beach residents rarely need A/C and only a bit of heat, so this reduces overall utilities by a bunch. We will assume that the low end earner is also wily about spending in this area, so $75 for power, gas, and water; $150 for cable, smart phone, and wireless.
The middle of the road user is likely paying $300 for basic utilities and $250 for electronics, while the upper end is $500 + $350. There is decent advantage to sharing in this category, so the numbers go down pretty sharply if two people are sharing space and bills.
Health Care – The next largest expense is hard to pin down. The amount you spend is based on everything from your own personal health issues to your willingness to go without insurance. Others have their insurance paid by their employer. With Obamacare offering subsidies to the low end of the spectrum, there may be many who are paying close to nothing for health care. Those on Medicare typically pay around $250 for insurance, but could have substantial out of pocket at times. The estimate for health care would be $100 for the low wage earner, $250 for the middle, and $500 for the high end. Keeping in mind that for many at the high end pay nothing, as the company is paying the premiums on Cadillac plans.
Other – For the purposes of this post we will create a large basket for other. This would include insurance, pensions, tobacco, liquor, entertainment, apparel, giving, education, and misc. The national statistics for a low wage single person indicate that this will be $800 a month. For the middle income, it only rises to $900. For the high income group, there is a significant leap to $3000 per month with big increases in entertainment, pensions, apparel, education, and giving.
Time to add it up
The low income earner makes $15 an hour or $30,000 per year. We will assume no taxes at this level. Therefore the actual take home is $2500 per month. Transportation for this person is $130, food $350, utilities and electronics $225, health care $0 and other is $800 for a total of $1505. That leaves $1000 per month for rent. This will pay for a room or a bachelor in some areas of Silicon Beach. If this person gets a roommate, they can easily afford a one bedroom unit in some neighborhoods. But they are tapped out. If prices go up another 20%, they will need to move East of Culver City.
The middle income person makes $30 per hour, and pays some tax. The net is $4500 a month. Out of this they will pay transportation of $500, food $600, utilities and electronics $550, health care $250 and other is $900 for a total of $2800. That leaves $1700 per month for rent. This is enough for a bachelor in most neighborhoods and a one bedroom in a few remaining areas. With a roommate who makes the low end, this team now has $2800 to spend, which is plenty for a two bedroom in most areas. If paired with another middle income earner, they now have $3400 which could even pay the mortgage on some condo’s or small homes.
For the high income earner, we will assume $120,000 in earnings with $20,000 in tax, leaving $100,000 or $8500 per month. With transportation of $950, food $850, utilities and electronics $850, health care $500 and other is $3000 for a total of $6150. That leaves $2350 per month for rent. That will get a studio anywhere, or a one bedroom in many places. It is also probably enough (with tax savings) to purchase a small condo.
If this person shares space with a low income earner, they now have $3350 which is enough to buy a small home or rent a two bedroom almost anywhere. With a bit of savings in utilities or health care, they could afford to rent a two bedroom in very luxurious quarters.
If this person is coupled with a middle income earner, they can afford at least $4000 a month, enough for a two bedroom rental or to purchase a nice condo or small home.
And if the family unit includes two high income individuals they have at least $4700 for rent or purchase, which would give them many options in the area.
What is the bottom line?
There is room for rents and home prices to increase. All of the above models don’t even include the potential for these individuals to have large down payments from the sale of a home or other available funds. Even many living on pensions have two incomes above $100,000 and can easily afford million dollar homes with a good down payment.
San Francisco, New York, and other major hi-tech and financial centers have shown that the sky is pretty much the limit, and Silicon Beach is not yet in the sky category. And what Silicon Beach offers that the other International cities can’t is the combination of hi-tech, finance, entertainment, and unparalleled geographic advantages.
Thanks to http://flowingdata.com/2015/04/02/how-we-spend-our-money-a-breakdown/ for great data.
If you don’t agree with the numbers above, provide your comments below. Do you spend way more than those amounts on any of those categories in West LA or nearby?
When you use a sophisticated mortgage counselor like Bill Rayman, he can help guide you to wise decisions based on your plans and your personal risk characteristics. Call Bill Rayman today to discuss your mortgage needs: 424.354.5325