Is it possible to buy TOO LITTLE house? Is buying a home in a HCOL actually cheaper than a LCOL?

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panchilly
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Is it possible to buy TOO LITTLE house? Is buying a home in a HCOL actually cheaper than a LCOL?

Post by panchilly » Thu Oct 05, 2017 11:38 am

This is likely very counterintuitive to many on this forum, but hear me out.

Disclaimer: this is assuming SFH purchase. SFH house is preferable since you own the land.

If the goal is to maximize net worth over time, is it actually possible to buy TOO LITTLE house? Are HCOL areas more likely to increase your net worth and therefore are cheaper in the long run than LCOL? Is spending a little bit more in a HCOL actually the right move for net worth growth over the long haul?

A simple model of a homes value is broken into two categories:

1) structure value.
2) land value

HCOL areas are expensive due to high land values and in many cases the land value is greater than the structure value, some times significantly so. The land values are very high due to the high demand to live in that location. The incredibly appreciation that HCOL areas have experienced in the past 30 years is due to the land value component rising.

My theory for this? Human settlement patterns. Humans have always settled in a fractal like pattern, congregating in high densities around various center points. Some center points (e.g. nyc) are larger than others. The pattern is like the stars within the galaxy. Some are larger, some smaller, but the 99% of the volume of space is sheer nothingness. Look at the trulia home value map for the USA. 99% of the map is dark green (low value), the higher values decay rapidly as you move away from major cities. I believe the next 100m population in the USA will be mostly clustered within metro areas (<= 30miles from center)

My theory is it is best to purchase a house within close proximity to one of these center points, preferably one of the more powerful center points (the HCOL areas). Speaking based on intuition, there appears to be a decay rate proportional to something like 1/distance^2 as you move further from a center point. Using that logic, being 15 miles away from the city center vs 30 can make a big difference.

I have an older coworker who bought in Massachusetts west of 495 in one of the "dark green" towns about 20 years ago. His payment is very low, but did he make the right decesion? If he stretched 20 years ago and bought in a town with closer proximity to Boston like Newton, Needham, etc. he would have participated in a great appreciation of land values in those towns. I think he would be better off financially now if he spent more to stay within the heat zone of the main city.

Thoughts?

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David Jay
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Re: Is it possible to buy TOO LITTLE house? Is buying a home in a HCOL actually cheaper than a LCOL?

Post by David Jay » Thu Oct 05, 2017 11:46 am

If I could go back 20 years, I would make a number of different investment choices.

But it probably wouldn't be more house, it would probably be Amazon (IPO was May 1997)

(see the first quote on my signature line below)
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Afty
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Re: Is it possible to buy TOO LITTLE house? Is buying a home in a HCOL actually cheaper than a LCOL?

Post by Afty » Thu Oct 05, 2017 11:49 am

I think your hypothesis is that homes in HCOL areas appreciate more than homes in LCOL areas. I worry however that you are using hindsight to identify HCOL and LCOL areas, and that is skewing your perception. The areas you cite as HCOL are HCOL *now*, but were they HCOL 20-30 years ago? Were there other HCOL areas 30 years ago that have fared poorly?

Wanting to live in the city is a recent phenomenon. 30 years ago I would guess the suburbs would have been the "nicer," higher cost of living areas.

panchilly
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Re: Is it possible to buy TOO LITTLE house? Is buying a home in a HCOL actually cheaper than a LCOL?

Post by panchilly » Thu Oct 05, 2017 11:52 am

Afty wrote:
Thu Oct 05, 2017 11:49 am
I think your hypothesis is that homes in HCOL areas appreciate more than homes in LCOL areas. I worry however that you are using hindsight to identify HCOL and LCOL areas, and that is skewing your perception. The areas you cite as HCOL are HCOL *now*, but were they HCOL 20-30 years ago? Were there other HCOL areas 30 years ago that have fared poorly?

Wanting to live in the city is a recent phenomenon. 30 years ago I would guess the suburbs would have been the "nicer," higher cost of living areas.
I didn't mention living the city, i mentioned close proximity < 30 miles to urban core. You are correct, 10,20,30 years ago living in the urban core was not as desirable, but living in suburbs <=15 miles from that urban core were very desirable.

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Pajamas
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Re: Is it possible to buy TOO LITTLE house? Is buying a home in a HCOL actually cheaper than a LCOL?

Post by Pajamas » Thu Oct 05, 2017 11:54 am

Do I wish I had bought a bigger apartment so that I could sell it and take some profit and move into a smaller apartment? No, because I invested that money, instead, and have had good returns.

I don't think of my dwelling as an investment, but as a necessary expense. It is primarily a physical object that is pretty much the same as when I bought it, except for wear and tear, and has roughly the same value to me as it had when I bought it. It's the relative value in relationship to other things that has changed, including U.S. dollars, but I need a place to live, so I pretty much ignore that relative value and its fluctuations and don't even include it in my net worth.

financeidiot
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Re: Is it possible to buy TOO LITTLE house? Is buying a home in a HCOL actually cheaper than a LCOL?

Post by financeidiot » Thu Oct 05, 2017 12:23 pm

panchilly wrote:
Thu Oct 05, 2017 11:38 am
I have an older coworker who bought in Massachusetts west of 495 in one of the "dark green" towns about 20 years ago. His payment is very low, but did he make the right decesion? If he stretched 20 years ago and bought in a town with closer proximity to Boston like Newton, Needham, etc. he would have participated in a great appreciation of land values in those towns. I think he would be better off financially now if he spent more to stay within the heat zone of the main city.

Thoughts?
At different times, Detroit, St. Louis, and other formerly strong cities have looked like sure things. Now they're not so sure. Would Silicon Valley still be valuable if tech moved elsewhere? Seems absurd now, but so did the decline of Detroit in 1950's.

avalpert
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Re: Is it possible to buy TOO LITTLE house? Is buying a home in a HCOL actually cheaper than a LCOL?

Post by avalpert » Thu Oct 05, 2017 12:48 pm

panchilly wrote:
Thu Oct 05, 2017 11:38 am
This is likely very counterintuitive to many on this forum, but hear me out.

Disclaimer: this is assuming SFH purchase. SFH house is preferable since you own the land.

If the goal is to maximize net worth over time, is it actually possible to buy TOO LITTLE house? Are HCOL areas more likely to increase your net worth and therefore are cheaper in the long run than LCOL? Is spending a little bit more in a HCOL actually the right move for net worth growth over the long haul?
The short answer is no, it is not possible to buy too little house (assuming we are just talking for living in and not say needing space to hold business inventory).

Even if you are perfectly able to project which area will have the biggest appreciation going forward, and even if those areas are current HCOL areas it still doesn't follow that for your own housing consumption you are better off buying there. So while I think we can question the rest of the assumptions that lead you to your conclusion, they are moot anyway.

As a simple illustration why this is always so imagine this - you buy an investment property in a HCOL area and rent it out, live yourself in a LCOL area renting or buying for less than you are earning on the HCOL property - does that increase or decrease your total 'net profit' from housing investments and expenditures?

This is why it is a big mistake to conflate the asset investment aspect of buying home with the housing consumption aspect of choosing where to live - it is way too easy to use it to justify spending more than you need to on housing.

ThriftyPhD
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Re: Is it possible to buy TOO LITTLE house? Is buying a home in a HCOL actually cheaper than a LCOL?

Post by ThriftyPhD » Thu Oct 05, 2017 12:51 pm

financeidiot wrote:
Thu Oct 05, 2017 12:23 pm
panchilly wrote:
Thu Oct 05, 2017 11:38 am
I have an older coworker who bought in Massachusetts west of 495 in one of the "dark green" towns about 20 years ago. His payment is very low, but did he make the right decesion? If he stretched 20 years ago and bought in a town with closer proximity to Boston like Newton, Needham, etc. he would have participated in a great appreciation of land values in those towns. I think he would be better off financially now if he spent more to stay within the heat zone of the main city.

Thoughts?
At different times, Detroit, St. Louis, and other formerly strong cities have looked like sure things. Now they're not so sure. Would Silicon Valley still be valuable if tech moved elsewhere? Seems absurd now, but so did the decline of Detroit in 1950's.
Was just going to say, many rust belt cities were HCOL a couple generations ago, now you can buy a house for the cost of the copper plumbing in some areas.

https://www.clevelandfed.org/newsroom-a ... ities.aspx

Code: Select all

                                        Buffalo                     Pittsburgh
                                        1970    2006    Change (%)  1970      2006    Change (%)
Population                              462,783	257,758	−44         520,167   297,061 −43
Median household income (2009 dollars)	38,395  29,637	−23         37,477    33,818  −10
Median home value (2009 dollars)        71,477  64,702	−9          69,570    78,749  13
Fraction with college or higher degree	6.7     20.4    13.7        9.0       31.3    22.3

                                        Cleveland                   Detroit
                                        1970    2006    Change(%)   1970      2006    Change(%)
Population                              751,046	406,427	−46         1,511,336 834,116 −45
Median household income (2009 dollars)	41,674	28,238	−32         46,438    30,184  −35
Median home value (2009 dollars)        92,826	92,477	0           86,108    93,966  9
Fraction with college or higher degree	4.4     12.0    7.6         6.2       11.3    5.1

panchilly
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Re: Is it possible to buy TOO LITTLE house? Is buying a home in a HCOL actually cheaper than a LCOL?

Post by panchilly » Thu Oct 05, 2017 12:55 pm

ThriftyPhD wrote:
Thu Oct 05, 2017 12:51 pm
financeidiot wrote:
Thu Oct 05, 2017 12:23 pm
panchilly wrote:
Thu Oct 05, 2017 11:38 am
I have an older coworker who bought in Massachusetts west of 495 in one of the "dark green" towns about 20 years ago. His payment is very low, but did he make the right decesion? If he stretched 20 years ago and bought in a town with closer proximity to Boston like Newton, Needham, etc. he would have participated in a great appreciation of land values in those towns. I think he would be better off financially now if he spent more to stay within the heat zone of the main city.

Thoughts?
At different times, Detroit, St. Louis, and other formerly strong cities have looked like sure things. Now they're not so sure. Would Silicon Valley still be valuable if tech moved elsewhere? Seems absurd now, but so did the decline of Detroit in 1950's.
Was just going to say, many rust belt cities were HCOL a couple generations ago, now you can buy a house for the cost of the copper plumbing in some areas.

https://www.clevelandfed.org/newsroom-a ... ities.aspx

Code: Select all

                                        Buffalo                     Pittsburgh
                                        1970    2006    Change (%)  1970      2006    Change (%)
Population                              462,783	257,758	−44         520,167   297,061 −43
Median household income (2009 dollars)	38,395  29,637	−23         37,477    33,818  −10
Median home value (2009 dollars)        71,477  64,702	−9          69,570    78,749  13
Fraction with college or higher degree	6.7     20.4    13.7        9.0       31.3    22.3

                                        Cleveland                   Detroit
                                        1970    2006    Change(%)   1970      2006    Change(%)
Population                              751,046	406,427	−46         1,511,336 834,116 −45
Median household income (2009 dollars)	41,674	28,238	−32         46,438    30,184  −35
Median home value (2009 dollars)        92,826	92,477	0           86,108    93,966  9
Fraction with college or higher degree	4.4     12.0    7.6         6.2       11.3    5.1
it is certainly possible to cherry pick different cities which have seen huge population declines and corresponding price declines. Also it looks like you are looking at just the city limits when you should be looking at the greater metro area. Some cities are less desirable within city limits but have stronger metro areas.

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Re: Is it possible to buy TOO LITTLE house? Is buying a home in a HCOL actually cheaper than a LCOL?

Post by Sandtrap » Thu Oct 05, 2017 12:59 pm

Is it possible to buy TOO LITTLE house?

No

Is buying a home in a HCOL actually cheaper than a LCOL?

No
Not a financial expert - just a retired businessman hacking out of a sand trap -- again.

ThriftyPhD
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Re: Is it possible to buy TOO LITTLE house? Is buying a home in a HCOL actually cheaper than a LCOL?

Post by ThriftyPhD » Thu Oct 05, 2017 1:05 pm

panchilly wrote:
Thu Oct 05, 2017 12:55 pm
ThriftyPhD wrote:
Thu Oct 05, 2017 12:51 pm
financeidiot wrote:
Thu Oct 05, 2017 12:23 pm
panchilly wrote:
Thu Oct 05, 2017 11:38 am
I have an older coworker who bought in Massachusetts west of 495 in one of the "dark green" towns about 20 years ago. His payment is very low, but did he make the right decesion? If he stretched 20 years ago and bought in a town with closer proximity to Boston like Newton, Needham, etc. he would have participated in a great appreciation of land values in those towns. I think he would be better off financially now if he spent more to stay within the heat zone of the main city.

Thoughts?
At different times, Detroit, St. Louis, and other formerly strong cities have looked like sure things. Now they're not so sure. Would Silicon Valley still be valuable if tech moved elsewhere? Seems absurd now, but so did the decline of Detroit in 1950's.
Was just going to say, many rust belt cities were HCOL a couple generations ago, now you can buy a house for the cost of the copper plumbing in some areas.

https://www.clevelandfed.org/newsroom-a ... ities.aspx

Code: Select all

                                        Buffalo                     Pittsburgh
                                        1970    2006    Change (%)  1970      2006    Change (%)
Population                              462,783	257,758	−44         520,167   297,061 −43
Median household income (2009 dollars)	38,395  29,637	−23         37,477    33,818  −10
Median home value (2009 dollars)        71,477  64,702	−9          69,570    78,749  13
Fraction with college or higher degree	6.7     20.4    13.7        9.0       31.3    22.3

                                        Cleveland                   Detroit
                                        1970    2006    Change(%)   1970      2006    Change(%)
Population                              751,046	406,427	−46         1,511,336 834,116 −45
Median household income (2009 dollars)	41,674	28,238	−32         46,438    30,184  −35
Median home value (2009 dollars)        92,826	92,477	0           86,108    93,966  9
Fraction with college or higher degree	4.4     12.0    7.6         6.2       11.3    5.1
it is certainly possible to cherry pick different cities which have seen huge population declines and corresponding price declines.

What about the average city though?
Compare it to buying stocks. The 'average' stock has gone up in value over the long term, if you consider the 'average' stock to be an index, or the total stock market. But an individual stock might have gone up a lot more, or gone to nothing. Knowing which company will rise in value (or which housing market will rise in value) is the difficult part.

For housing prices, if you control for inflation, on average it looks like they've just kept up with inflation.

http://visualizingeconomics.com/blog/20 ... s1890-2010

Image

This DOESN'T include the cost of yearly upkeep, taxes, insurance. If you compare that to a mutual fund, that's like having a fund that keeps up with inflation but with a 2-5% ER subtracted. From an investment perspective alone, not a great deal.

financeidiot
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Re: Is it possible to buy TOO LITTLE house? Is buying a home in a HCOL actually cheaper than a LCOL?

Post by financeidiot » Thu Oct 05, 2017 1:42 pm

it is certainly possible to cherry pick different cities which have seen huge population declines and corresponding price declines. Also it looks like you are looking at just the city limits when you should be looking at the greater metro area. Some cities are less desirable within city limits but have stronger metro areas.
Absolutely it's cherry picking, but a piece of real estate can only exist in one location. Because different cities behave differently, there's no guarantee you get the city, location, and real estate type right unless you are buying a basket of real estate in multiple locations. Following this logic, you'd eventually end up with a REIT.

ThriftyPhD's comments comparing this to picking an individual stock is spot on.

dk240t
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Re: Is it possible to buy TOO LITTLE house? Is buying a home in a HCOL actually cheaper than a LCOL?

Post by dk240t » Thu Oct 05, 2017 2:27 pm

panchilly wrote:
Thu Oct 05, 2017 12:55 pm
ThriftyPhD wrote:
Thu Oct 05, 2017 12:51 pm
financeidiot wrote:
Thu Oct 05, 2017 12:23 pm
panchilly wrote:
Thu Oct 05, 2017 11:38 am
I have an older coworker who bought in Massachusetts west of 495 in one of the "dark green" towns about 20 years ago. His payment is very low, but did he make the right decesion? If he stretched 20 years ago and bought in a town with closer proximity to Boston like Newton, Needham, etc. he would have participated in a great appreciation of land values in those towns. I think he would be better off financially now if he spent more to stay within the heat zone of the main city.

Thoughts?
At different times, Detroit, St. Louis, and other formerly strong cities have looked like sure things. Now they're not so sure. Would Silicon Valley still be valuable if tech moved elsewhere? Seems absurd now, but so did the decline of Detroit in 1950's.
Was just going to say, many rust belt cities were HCOL a couple generations ago, now you can buy a house for the cost of the copper plumbing in some areas.

https://www.clevelandfed.org/newsroom-a ... ities.aspx

Code: Select all

                                        Buffalo                     Pittsburgh
                                        1970    2006    Change (%)  1970      2006    Change (%)
Population                              462,783	257,758	−44         520,167   297,061 −43
Median household income (2009 dollars)	38,395  29,637	−23         37,477    33,818  −10
Median home value (2009 dollars)        71,477  64,702	−9          69,570    78,749  13
Fraction with college or higher degree	6.7     20.4    13.7        9.0       31.3    22.3

                                        Cleveland                   Detroit
                                        1970    2006    Change(%)   1970      2006    Change(%)
Population                              751,046	406,427	−46         1,511,336 834,116 −45
Median household income (2009 dollars)	41,674	28,238	−32         46,438    30,184  −35
Median home value (2009 dollars)        92,826	92,477	0           86,108    93,966  9
Fraction with college or higher degree	4.4     12.0    7.6         6.2       11.3    5.1
it is certainly possible to cherry pick different cities which have seen huge population declines and corresponding price declines. Also it looks like you are looking at just the city limits when you should be looking at the greater metro area. Some cities are less desirable within city limits but have stronger metro areas.
It is cherry-picking.

In the exact same way that your OP is cherry-picking the opposite set (those that have risen extraordinarily).

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Re: Is it possible to buy TOO LITTLE house? Is buying a home in a HCOL actually cheaper than a LCOL?

Post by czeckers » Thu Oct 05, 2017 3:21 pm

If you're buying in an area that will have continuing rapid appreciation of home prices, then yes, buying the most house you can afford can payoff handsomly. The problem is that, as we learned in 2008, housing prices don't always keep going up. Many people bought into HCOL areas only to find themselves deeply under water on their mortgages.
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Re: Is it possible to buy TOO LITTLE house? Is buying a home in a HCOL actually cheaper than a LCOL?

Post by adamthesmythe » Thu Oct 05, 2017 3:30 pm

I would suggest that buying the maximum amount of house increases your risk of default due to job loss, etc. People in HCOL areas may have no choice but to buy the maximum they can afford, because that may only get them into the bottom of the market. We are all familiar with the idea that higher risk should have higher potential rewards.

> SFH house is preferable since you own the land.

This does not really matter. Even in condos you own a share of the land, so you really do own land. And you own the right to live in a central area...which OP says is what you want because it has high value.

Land in itself in the city is only good for a parking lot. Maybe.

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