How Much House Can You Afford in San Diego?

A First-Time Buyer's Guide to Budgeting for Homeownership

One of the most common questions I get from first-time home buyers is, "How much house can I actually afford in San Diego?"

It's a great question, and unfortunately, there isn't a simple answer. Many buyers assume that affordability is determined solely by what a lender approves them for, while others assume they should buy significantly less than what they're approved for in order to play it safe.

The reality is that affordability is personal. It depends on your income, lifestyle, financial goals, and how comfortable you are with risk.

San Diego is one of the most desirable real estate markets in the country. Home prices can feel intimidating, and many buyers delay purchasing because they believe they need to save more money, earn more income, or wait for the "perfect" market conditions. In my experience, waiting often becomes the most expensive decision of all.

In this article, I'll explain how I believe first-time buyers should think about affordability, budgeting, and long-term wealth creation when purchasing a home in San Diego.

How Do Mortgage Lenders Determine How Much House You Can Afford?

When you apply for a mortgage, lenders primarily evaluate your:

• Income

• Monthly debt obligations

• Credit score

• Employment history

• Down payment amount

• Cash reserves

Using these factors, lenders calculate your debt-to-income ratio (DTI) and determine the maximum loan amount they're willing to offer.

Many buyers are surprised by how much they qualify for.

For example, a buyer earning $175,000 annually with limited debt may qualify for a substantially larger mortgage than they expected.

This often creates a dilemma:

Should you purchase a home near your maximum approval amount, or should you intentionally buy less house?

There isn't a universally correct answer. Both approaches have advantages and disadvantages, and the right decision ultimately depends on your financial situation and long-term goals.

Understanding the Tradeoff Between Buying Less House and Buying More House

One of the biggest decisions first-time home buyers face is whether to purchase a home well below their maximum approval amount or purchase closer to what they can comfortably afford.

There isn't a universally correct answer. Both approaches involve tradeoffs, and the best decision depends on an individual's financial situation, risk tolerance, and long-term goals.

The conventional approach is to purchase less house in order to reduce monthly expenses and minimize financial obligations. This strategy can provide greater monthly cash flow and may reduce financial stress for some buyers.

However, there is another factor that buyers should consider: long-term appreciation.

Historically, home values in San Diego have increased over long periods of time. Just look at what homes were selling for in San Diego 5 years ago compared to today, I guarantee they were less expensive. While there are certainly periods of correction and market volatility, the long-term trend has generally been upward. Because of this, purchasing a larger home or a more expensive property can result in greater wealth creation over time simply because the buyer owns a larger appreciating asset.

For example:

• A $750,000 home appreciating at 5% annually becomes worth approximately $1.22 million in ten years.

• A $1,000,000 home appreciating at 5% annually becomes worth approximately $1.63 million in ten years.

The owner of the more expensive property didn't necessarily make a "better" decision, they simply participated in the appreciation of a larger asset.

This illustrates an important concept that many buyers don't initially consider: choosing to purchase less house may reduce monthly expenses, but it can also reduce the amount of appreciation a buyer participates in over time.

Of course, this doesn't mean that buyers should purchase the most expensive home they qualify for. Factors such as job stability, cash reserves, lifestyle goals, and overall financial flexibility should always play an important role in determining what is truly affordable.

The goal isn't necessarily to buy more house or less house. The goal is to understand the tradeoffs involved and make an informed decision that aligns with your long-term financial objectives.

Example: Buying a $750,000 Home vs. a $1,000,000 Home in San Diego

Let's assume two buyers are both approved to purchase up to a $1,000,000 home. They both have stable income, excellent credit, and sufficient cash reserves, but they decide to take different approaches.

For purposes of this example, let's assume:

• Both buyers put down 20%

• Both obtain a 30-year fixed mortgage at 6.5%

• Both hold the property for 10 years

• Home values appreciate at an average of 5% annually

Buyer A Purchases a $750,000 Home

• Purchase price: $750,000

• Down payment: $150,000

• Loan amount: $600,000

• Approximate monthly principal and interest payment: $3,792 per month

After 10 years of 5% annual appreciation:

• Home value: approximately $1,221,000

• Total appreciation: approximately $471,000

Buyer B Purchases a $1,000,000 Home

• Purchase price: $1,000,000

• Down payment: $200,000

• Loan amount: $800,000

• Approximate monthly principal and interest payment: $5,056 per month

After 10 years of 5% annual appreciation:

• Home value: approximately $1,629,000

• Total appreciation: approximately $629,000

Comparing the Two Approaches

The difference in monthly mortgage payment between the two buyers is approximately:

$1,264 per month.

Over the course of a 30-year mortgage, assuming neither buyer refinances or sells, Buyer B would pay approximately:

$455,000 more in mortgage payments.

At first glance, that sounds substantial.

However, by purchasing the larger appreciating asset, Buyer B generated approximately:

$158,000 more in appreciation after just 10 years.

This example also doesn't account for the fact that many homeowners refinance, move, or experience increases in income over time while their mortgage payment remains relatively fixed.

The point isn't that one buyer made the "right" decision and the other made the "wrong" decision. The point is simply to illustrate that purchasing less house can have an opportunity cost that many buyers don't initially consider.

Why Cash Reserves Matter More Than Buying Less House

The biggest mistake I see buyers make isn't buying too much house.

It's buying a home and leaving themselves with no cash.

As I've discussed in previous articles, I generally believe that liquidity is one of the most important components of financial security.

Life happens:

• Job loss

• Medical emergencies

• Divorce

• Unexpected repairs

• Economic downturns

The difference between financial success and financial disaster often isn't the size of the mortgage payment, it's whether you have cash available when you need it.

I'd personally rather see a buyer purchase a home that fits comfortably within their budget while maintaining substantial cash reserves than deplete their savings entirely and leave themselves financially vulnerable.

What Costs Should First-Time Home Buyers Budget for in San Diego?

When determining affordability, buyers need to account for much more than the mortgage payment.

Some common expenses include:

• Principal and interest

• Property taxes

• Homeowners insurance

• HOA dues

• Utilities

• Maintenance and repairs

• Landscaping

• Commuting expenses

• Emergency reserves

A common rule of thumb is to budget approximately 1% of a home's value annually for maintenance and repairs, although actual costs can vary significantly.

I always encourage buyers to build a budget that accounts for both expected and unexpected expenses.

Should You Wait for Home Prices or Interest Rates to Drop?

Another question I frequently hear is:

"Should I wait?"

Personally, I think this is one of the most difficult questions to answer because nobody knows exactly what the market will do.

However, I do know this:

• Home prices have historically increased over long periods.

• Inflation generally causes the cost of assets to rise over time.

• Most people's incomes increase throughout their careers.

• Mortgage payments remain relatively fixed.

The home that feels expensive today may feel affordable five years from now because your income has increased while your housing payment has remained largely unchanged.

The opposite can also be true:

The home you can comfortably afford today may become unaffordable if you wait several years and prices continue to appreciate.

My Personal Philosophy on Home Affordability

If I were purchasing a home today, my personal approach would be:

• Buy as much house as I could responsibly afford.

• Put down as little money as possible.

• Maintain substantial cash reserves.

• Allow appreciation, inflation, and leverage to work in my favor over time.

To me, the goal isn't simply to minimize monthly expenses.

The goal is to build long-term wealth while maintaining enough liquidity to survive life's inevitable challenges.

Of course, every buyer's situation is different, and there is no one-size-fits-all answer. But in my experience, many people underestimate the long-term financial benefits of purchasing a larger appreciating asset when they have the ability to do so responsibly.

Final Thoughts

Buying your first home in San Diego can feel intimidating, especially given current home prices. But affordability isn't just about what your monthly payment looks like today.

It's about balancing:

• Monthly affordability

• Cash reserves

• Long-term appreciation

• Financial flexibility

• Wealth-building potential

The goal shouldn't necessarily be to buy the cheapest home possible.

The goal should be to purchase the best long-term asset you can responsibly afford while maintaining enough financial flexibility to weather life's uncertainties.

If you're just getting started, my [guide to buying your first home in San Diego] covers the full process step by step.

Let's Connect

As a veteran and licensed REALTOR® serving San Diego, I understand that purchasing a home is one of the biggest financial decisions most people will ever make. My goal is not to pressure anyone into buying a home, it's to help people understand their options so they can make informed financial decisions.

Whether you're ready to buy today or simply trying to understand what you can realistically afford in San Diego, I'm always happy to answer questions and help you develop a strategy that aligns with your long-term financial goals.

Mario Pais
Kappel Realty Group | Compass
DRE #02246635