Finding an affordable first home

NEW YORK (Money) -- Question: I'm 27, make about $50,000 a year, and I still live at home. I've got about $80,000 in CDs and a money-market account, another $22,000 in a 401(k) and Roth IRA, and I have no debt. My problem is that the housing prices where I live in Silicon Valley are just way too expensive for me to be able to buy anything. What do you think I should do? - Keith, San Jose, California

Answer: I think the real question you should be asking is what should you do with your life? You've done a pretty good job of saving money while living with your parents, but at some point you'll probably want to go leave the nest and venture out on your own.

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The issue then becomes whether you can do this in the Silicon Valley area or whether it makes more sense to consider relocating to a place where house prices are still tethered to reality.

Or, to borrow from The Clash - should you stay or should you go? Let's consider both options.

There's no doubt that if you want to buy a home anytime soon, it's likely to be a tough go in Silicon Valley. True, the recent housing slump has increased inventory and pushed down asking prices in this area as it has in many others. But the median price of a single-family house as of the end of the second quarter was $865,000, according to the National Association of Realtors. That makes affordability a stretch almost any way you look at it.

Indeed, if you go to our How Much House Can You Afford calculator, I think you'll find that even under the most aggressive assumptions, you would be hard pressed to buy even a $300,000 home. And given that banks and mortgage firms today are becoming more realistic about their lending policies - after virtually abandoning sound practices the past few years - you might have a hard time getting a loan to buy a house for even well below that amount.

There are other ways to go if you want to stay in Silicon Valley. One is to look for less expensive digs, such as a condo or a single-family house that sells well below the median.

That's certainly worth a try, although the further you go down in price, the more compromises you generally have to make. (Would you mind having a freeway entrance in your back yard? Or living in a condo the size of a walk-in closet?) And, of course, you could always hope that prices fall a lot more, giving you a better shot at buying. That's possible, I suppose.

But we'd probably have to see a real meltdown before things got to the point where someone with your salary and resources had much to choose from. You could also stay in your parents' home, continue socking away as much as you can, and hope that the combination of your savings and a higher salary will allow you to gain a toehold in the housing market. The likelihood of this happening largely comes down to your salary prospects.

If you're some sort of hot-shot software engineer who's just getting started and will soon be making big bucks at a tech start-up or an already established firm, then, sure, you could soon have enough income to buy some decent digs.

But if your salary is likely to grow at a more normal pace, say 1 or 2 percentage points above the inflation rate, then absent a huge drop in prices or an uncanny ability to unearth some wonderful deal that's escaped everyone else's notice, I think you're talking about a long-shot at becoming a homeowner in the Valley.

Now let's consider the second choice: relocating. Obviously, your range of possibilities will depend on how far you're willing to move. But if you're willing to cast a wide net, you should be able to find plenty of places where you've got a much better shot at owning a home.

I suggest you begin your search by checking out Money's 2007 Best Places To Live package. You'll find stories that list the best places if you're looking for affordable house prices, the best job growth and the highest concentration of singles.

And by ranking the importance of seven different criteria ranging from affordable housing to access to health care, you can also create your own customized list of best places with our Best Places search tool, which is located on the right hand side of the main Best Places page.

On the other hand, if you really just want to get a sense of what house prices are like in different areas of the country, you can click here to scan median prices in 156 different housing markets.

Once you've identified a couple of areas you might consider, you can then go to our Cost of Living Calculator, which lets you compare how far your salary will go in a new city compared to where you're living now.

Of course, such a move isn't something you undertake lightly. Aside from practical considerations, like whether you'll have the same employment prospects in a new locale, you've also got to consider a number of personal issues, such as how you'll feel moving away from family and friends and whether a new area feels like a place where you could see yourself making new friends and building a new life.

Then again, a young person like you could look at this as an exciting adventure. I remember leaving my native Philadelphia (Go Phils!) at your age to move to the Big Apple. Did I experience some trepidation? Certainly. But it was also one of the most exciting times of my life and, ultimately, a move that's worked out. Only you can decide whether you want to hang in and see what develops in Silicon Valley or stake a claim somewhere else.

So I suggest you give it some thought, check out some of the resources I've mentioned and perhaps use some vacation time to visit a few places where you might consider living - sort of a combination road trip and house-job-life search. But whatever you decide, capitalize as much as you can from the low living expenses you enjoy while sponging off - I mean, living with - your parents.

Keep stashing money in that 401(k) and the Roth, and fatten up other savings and investment accounts as much as you can. The more you can sock away now, the more resources you'll have to draw on when you eventually buy a home, wherever that may be.