Buy this home?

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shershahsuri
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Buy this home?

Post by shershahsuri » Mon May 21, 2018 8:47 pm

Thinking about purchasing a new construction house in Seattle. Purchase price approximately $1,020,000.
- I earn $155,000/yr and my wife earns $100,000/yr
- We will put 30% down so mortgage will be ~$700K. The monthly payment (incl property tax) seems like something we can comfortably do with total $255K annual salary
- This will be our first house. Seattle housing is out of control and older houses (same size as the new one) are going at $900K in the same area.
- We have been renting a smaller apartment. Trying to rent a similar sized house as the one we're buying in the same area would cost as much as our mortgage or more. Rents are going up yearly for us as well. We've rented in the area for 4 years and know we're going to be around for 5+ years at minimum
- We have enough in reserves for 1 yr+ of expenses (if anything were to happen e.g. loss of job)

Its such a big purchase that we're in analysis paralysis mode. Thought I would turn to the wise minds here---does the purchase look doable? Anything else we should be thinking about?

Thank you in advance.

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Alexa9
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Re: Buy this home?

Post by Alexa9 » Mon May 21, 2018 9:49 pm

Housing prices are ridiculous everywhere. I would make sure you want to plant roots in Seattle (job security, cost of living, taxes etc.) but it sounds like you can probably afford it. You must be careful to also invest money especially in tax advantaged accounts because you don't want all your money tied up in your house and you shouldn't consider it an investment even if it is likely to appreciate.

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sergeant
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Re: Buy this home?

Post by sergeant » Mon May 21, 2018 10:25 pm

That's a good down payment, did you save it or is it from a relative? Your emergency fund looks good. How much in your retirement accounts? Your income looks good for that payment amount.

I can't answer without more information.
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kelvan80
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Re: Buy this home?

Post by kelvan80 » Mon May 21, 2018 11:07 pm

Any kids in the future? Can you still handle the mortgage on one salary should one of you choose to stay home? 15 or 30 year?

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Watty
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Re: Buy this home?

Post by Watty » Mon May 21, 2018 11:24 pm

Alexa9 wrote:
Mon May 21, 2018 9:49 pm
Housing prices are ridiculous everywhere.
Not even close to being true, the median sales price of existing single family homes in the entire US was $245,500 last quarter.

https://www.nar.realtor/sites/default/f ... -05-14.pdf

https://www.nar.realtor/research-and-st ... ordability

They will be making over a $300K downpayment which would be more than enough to buy a nice(or VERY nice) home in most of the country for cash

They can make it work on their income but there is a lot that is not known about the situation like how old they are and if they will have kids.
shershahsuri wrote:
Mon May 21, 2018 8:47 pm
Trying to rent a similar sized house as the one we're buying in the same area would cost as much as our mortgage or more.
Yes, but you would also have $300K in the bank so the situation is a bit more complex.

Here is a "rent vs buy" calculator which might help you decide if renting or buying is a better financial choice in your situation.

https://www.nytimes.com/interactive/201 ... lator.html

shershahsuri
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Re: Buy this home?

Post by shershahsuri » Tue May 22, 2018 1:27 am

I am 40, my wife is 36. We have 2 kids, a 7 year old and a 1 year old. No plans for anymore kids.

401K(s) + IRAs are ~$500K.

I've used the NYT Rent vs Buy calculator many times over the years and initially it made sense for us to rent according to the calculator. But given our time frame for stay in Seattle and home price increases in the area (I only increased the based from 3% to 4% price appreciation), it is a very clear buy. We need more space now and would not be able to rent a similar sized place at the break-even rent shown by this calculator.

Someone asked if we would be able to cover mortgage pmts incl prop taxes if one of us were to lose employment---if I lost my job then certainly not and if my wife did then likely not. That is what the 1 yr+ reserve is for I guess. I've got a side consulting gig that I could always kick back up while searching for a job if it ever came to that.

I'm leaning towards doing this as there is likely some "intangible" house ownership value to us (never owned a place). But I do hate debt. And this level of debt is just worrisome for my type of personality :).

anoop
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Re: Buy this home?

Post by anoop » Tue May 22, 2018 3:45 am

The house price is a little on the high side for your income, but still manageable.

Normally, I would be comfortable with price/income = 2.5 to 3.5. In your case, it's about 4.

Here are some general thoughts on affordability.
http://anoopsplace.blogspot.com/2010/08 ... uying.html

Keep in mind interest rates are rising and that will tend to put downward pressure on house prices--rates are currently at 7 year highs and pushing higher. If inventory is on the rise (I know it was dropping all of last year), then that would point to slowing increases in prices.

This may provide some useful pointers on how to decide whether it's a good time to buy.
http://www.calculatedriskblog.com/2017/ ... using.html
Unfortunately, Seattle is not one of the markets he follows specifically. He does follow Sacramento, Las Vegas, and Phoenix. In Sacramento, inventory is starting to rise. In the latter two it's still falling.

The biggest question I would ask is the following -- how likely are you to see your income rise fairly significantly over the next few years? If not likely, I would try to get closer to 2.5-3. If you think it might go up quite a bit, then a ratio of 4 is probably no big deal.

gotester2000
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Re: Buy this home?

Post by gotester2000 » Tue May 22, 2018 7:29 am

What is your income outlook? If both of you are in IT then job stability is a concern and you maybe hitting peak income at your age. Also, a 30 year mortgage means your mortgage will last till age 70. How do you plan to pay it off while saving for retirement and raising 2 kids?

I think you cannot afford this house - unless you have other savings.

Tal-
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Re: Buy this home?

Post by Tal- » Tue May 22, 2018 8:16 am

I think you can afford it. I don't think you should afford it.

Forgive me for reading tea leaves, but it seems like a lot of people are trying to get into owning real estate now because of how well real estate has done for the last decade. And, markets which have done better, and thus are more expensive right now, tend to be even more attractive.

It's the most dangerous, but subtle example I've seen of basing future expected returns on past performance.

Today, you're on track for a financially secure life. You have a healthy savings and good incomes with excess cash each month. You have a young family where I'd wager, you or your wife could take 5 years off and be OK. That all goes away when you buy this house - and you introduce huge risk to an otherwise robust financial situation.

With that said, you're probably better off that most others who are also buying houses in a market like Seattle. I just think that you are better off if you were to pass.
Debt is to personal finance as a knife is to cooking.

barnaclebob
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Re: Buy this home?

Post by barnaclebob » Tue May 22, 2018 8:21 am

I'm going to guess that this is one of those block houses where 6 of them are crammed onto two lots. Those older houses with character can be really well cared for and won't necessarily be money pits just because they are old.

As far as home ownership goes, I'm a big fan of it but I can also DIY a lot of things. If you aren't one to start searching youtube when you have a double hung window that wont stay up anymore then the new house is probably the right choice for you. I Don't think we'll have a huge crash given what we know now about the housing market. In any case, Seattle is a super popular area for good reason and as long as the jobs from amazon, Microsoft, and other large employers are here the price of housing will be somewhat protected.
Last edited by barnaclebob on Tue May 22, 2018 8:26 am, edited 1 time in total.

bloom2708
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Re: Buy this home?

Post by bloom2708 » Tue May 22, 2018 8:25 am

You can, but I personally wouldn't.

There are some good threads on home building. Have you factored in the cost overruns that are very likely? New house does not equal no issues.

Does that price include landscaping and related? $250k income is good, but I would just be more conservative.
Last edited by bloom2708 on Tue May 22, 2018 11:56 am, edited 1 time in total.
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pascal
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Re: Buy this home?

Post by pascal » Tue May 22, 2018 8:51 am

Why buy a new construction venue when you can buy a similar home thats old and 200,000 lesser. You would be considerably less bothered then.

I bought an old home priced similarity at about at about 2/3 your income in the sf bay area. Turned out to be fine.
"Never underestimate the ability of a bad situation to get worse...rapidly." Ninegrams

shershahsuri
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Re: Buy this home?

Post by shershahsuri » Tue May 22, 2018 11:51 am

Thank you for the great advice and perspective everyone.

I'm very conservative when it comes to money and haven't bought exactly for many of these reasons. My deposit grew because I had it in the market for many years.

We need the space now as my parents (and in-laws) come every year to live with us for 2-4 months. I'm low maintenance but 1300 sq ft apt rental doesn't cut it anymore :). Rents for bigger houses are very high and I know we're going to be here 5+ years. Its already been 4 years renting since the last time I went through the Buy vs Rent decision and we haven't moved :).

I'm also someone who is not handy at all---if I can minimize the probability of maintenance issues than that is a much better outcome for me -> thus new construction.

You guys have gotten me thinking and I might actually look at a new construction town home that is essentially the same size as the SFR and costs $880K. With the same amount down, $580K mortgage is < 2.5x our combined salaries. If my wife loses her job we'll still be able to make the payments (not true if I lose my job though but still not a huge gap). We have enough in reserves. I need a man cave :)

Slacker
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Re: Buy this home?

Post by Slacker » Tue May 22, 2018 7:39 pm

Speaking as someone who has a household income substantially the same as yours at roughly the same age, a $1,000,000 house sounds crazy.

We are about to close on a house for just less than $300K in one of the major metros of North Carolina. I could never imagine spending more than 3x that much on a house (one of the many reasons why I left Seattle 1/2 a decade ago).

Factor in the higher HOA on the townhome vs single family home.

Maybe I'm not as appreciative or accommodating of my parents or in-laws, but I would never try to buy a house that is 4x my income (unless I had more than the value of the house in total liquid assets), because they want to visit for 2-4 months out of the year. That would be too much stress for me for the next 30 years.

Flyer24
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Re: Buy this home?

Post by Flyer24 » Tue May 22, 2018 7:56 pm

It seems like way too much for your income. I make $200K and bought a 4000sf house for $250k. I think a mortgage of double my income would be my absolute limit. Are you tied to the area? Housing is much more affordable in the southeast. I couldn’t imagine having in laws for more than a week. Sorry.

Ron Ronnerson
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Re: Buy this home?

Post by Ron Ronnerson » Tue May 22, 2018 8:00 pm

I think you can afford to buy it. However, transaction costs on $1M houses are not small. You said that you’ll be in the area for 5+ years. If it’s 5 years, I would choose to rent. The economy could take a downturn in such a short amount of time and you might have to sell it for less than you’d like in order to get out of it. Also, having to pay high transaction costs to live in a home for a short time is not the best way to go about things in my view. Personally, I’d look to buy if I were going to stay there for at least 10 years minimum.

toomuchRE
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Re: Buy this home?

Post by toomuchRE » Tue May 22, 2018 8:12 pm

You went from planning to buy a 750K house to 1M house in less than 8 months... You moved around so often all over US. Based on your post history..
I think a 1M house on 250K salary is good enough to give you sleepless nights.. But the good thing is, the salary is combined and is not a single income and single point of failure..

I would say go for a 800K or below house to be safe.

BlackcatCA
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Re: Buy this home?

Post by BlackcatCA » Tue May 22, 2018 8:17 pm

This was in Marketwatch today. You may want to wait a bit longer.

https://www.marketwatch.com/story/econo ... 2018-05-22

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unclescrooge
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Re: Buy this home?

Post by unclescrooge » Tue May 22, 2018 8:29 pm

BlackcatCA wrote:
Tue May 22, 2018 8:17 pm
This was in Marketwatch today. You may want to wait a bit longer.

https://www.marketwatch.com/story/econo ... 2018-05-22
Since when have economists been right about anything? :mrgreen:

shershahsuri
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Re: Buy this home?

Post by shershahsuri » Tue May 22, 2018 11:35 pm

If I were in the Southeast or North Carolina, I would be doing what you guys are doing, buying a home for $300k :)---but I'm not, I'm in Seattle and that too for the long term. Houses for < $800K would pull us further from the better school districts, our jobs etc.

I am not going to try to time my purchase to economic ups and downs (and those too "potential" ups and downs)---I'm looking at this as a long-term dwelling. I said 5+ before just to indicate "long term"---the plan is "forever". Yes, anything less than 5 then the closing costs would make Buy vs Rent more comparable (right now its heavy towards Buy based on the NYT calculator). One thing that I'm doing is using a buyer agent that will be charging only a small fixed fee and giving me back most of the buyer agent commission (so $25K back to me on a $910K purchase)---so reducing closing cost at least on the buying end.

From my point of view, the town house is the way to go at $910K. By the time this closes I should be able to put down $350K (and still have 1 yr+ in reserve for unexpected expenses). That would mean a mortgage of $560K. PITI payment (incl HOA) is well below 28% of gross monthly income at that point. We have no other debt. My wife's job is very secure with room to grow; mine neither too risky nor too safe but not any different from a change of city etc.. Given the Seattle home dynamics (just a shortage of land that can be developed) I see this house in the worst case maintaining value (or slightly decreasing in value---we'll still be well in the money due to the higher deposit). And it would be considerable "intangible" value to a family that has rented small apartments for a very long time.

Tal-
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Re: Buy this home?

Post by Tal- » Wed May 23, 2018 12:40 am

shershahsuri wrote:
Tue May 22, 2018 11:35 pm
If I were in the Southeast or North Carolina, I would be doing what you guys are doing, buying a home for $300k :)---but I'm not, I'm in Seattle and that too for the long term. Houses for < $800K would pull us further from the better school districts, our jobs etc.

I am not going to try to time my purchase to economic ups and downs (and those too "potential" ups and downs)---I'm looking at this as a long-term dwelling. I said 5+ before just to indicate "long term"---the plan is "forever". Yes, anything less than 5 then the closing costs would make Buy vs Rent more comparable (right now its heavy towards Buy based on the NYT calculator). One thing that I'm doing is using a buyer agent that will be charging only a small fixed fee and giving me back most of the buyer agent commission (so $25K back to me on a $910K purchase)---so reducing closing cost at least on the buying end.

From my point of view, the town house is the way to go at $910K. By the time this closes I should be able to put down $350K (and still have 1 yr+ in reserve for unexpected expenses). That would mean a mortgage of $560K. PITI payment (incl HOA) is well below 28% of gross monthly income at that point. We have no other debt. My wife's job is very secure with room to grow; mine neither too risky nor too safe but not any different from a change of city etc.. Given the Seattle home dynamics (just a shortage of land that can be developed) I see this house in the worst case maintaining value (or slightly decreasing in value---we'll still be well in the money due to the higher deposit). And it would be considerable "intangible" value to a family that has rented small apartments for a very long time.
I played around with the NYT calculator with these inputs, but I can't seem to make the buy decision work. My break even if typically 3500-4000 rent depending on a few variable, and you can rent a killer house for that range in Issaquah.

If you want to buy the house, that's your prerogative, and that's fine. You've done well, have a good income, great savings, and a good plan - and I think you can probably make it work. But, unless I'm missing something, buying is not the ideal financial decision, both on the NYT calculator, and considering the strain on your finances that a purchase would place.
Debt is to personal finance as a knife is to cooking.

inbox788
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Re: Buy this home?

Post by inbox788 » Wed May 23, 2018 12:51 am

unclescrooge wrote:
Tue May 22, 2018 8:29 pm
BlackcatCA wrote:
Tue May 22, 2018 8:17 pm
This was in Marketwatch today. You may want to wait a bit longer.

https://www.marketwatch.com/story/econo ... 2018-05-22
Since when have economists been right about anything? :mrgreen:
Economist are always right. On the one hand...

Anyway, as far is home price being 4X salary, it's quite doable. I think conservative number is 3X salary, but that's just impractical in HCOL areas, like Silicon Valley. Anywhere where home prices are inflated, you run the risk of buying at the top, but even if there is a pullback, the top seems to be unbounded.

The other number you're looking at is the 28%/month and you say you're under that. I didn't catch whether the loan was fixed or not, but assuming it's fixed, the percentage should fall as monthly payment remains fixed, while hopefully salary goes up a little each year and you have more room in your budget. Keep saving elsewhere, but I'd feel fairly comfortable going forward with such a home purchase.

shershahsuri
Posts: 10
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Re: Buy this home?

Post by shershahsuri » Wed May 23, 2018 1:46 am

Tal- wrote:
Wed May 23, 2018 12:40 am
shershahsuri wrote:
Tue May 22, 2018 11:35 pm
If I were in the Southeast or North Carolina, I would be doing what you guys are doing, buying a home for $300k :)---but I'm not, I'm in Seattle and that too for the long term. Houses for < $800K would pull us further from the better school districts, our jobs etc.

I am not going to try to time my purchase to economic ups and downs (and those too "potential" ups and downs)---I'm looking at this as a long-term dwelling. I said 5+ before just to indicate "long term"---the plan is "forever". Yes, anything less than 5 then the closing costs would make Buy vs Rent more comparable (right now its heavy towards Buy based on the NYT calculator). One thing that I'm doing is using a buyer agent that will be charging only a small fixed fee and giving me back most of the buyer agent commission (so $25K back to me on a $910K purchase)---so reducing closing cost at least on the buying end.

From my point of view, the town house is the way to go at $910K. By the time this closes I should be able to put down $350K (and still have 1 yr+ in reserve for unexpected expenses). That would mean a mortgage of $560K. PITI payment (incl HOA) is well below 28% of gross monthly income at that point. We have no other debt. My wife's job is very secure with room to grow; mine neither too risky nor too safe but not any different from a change of city etc.. Given the Seattle home dynamics (just a shortage of land that can be developed) I see this house in the worst case maintaining value (or slightly decreasing in value---we'll still be well in the money due to the higher deposit). And it would be considerable "intangible" value to a family that has rented small apartments for a very long time.
I played around with the NYT calculator with these inputs, but I can't seem to make the buy decision work. My break even if typically 3500-4000 rent depending on a few variable, and you can rent a killer house for that range in Issaquah.

If you want to buy the house, that's your prerogative, and that's fine. You've done well, have a good income, great savings, and a good plan - and I think you can probably make it work. But, unless I'm missing something, buying is not the ideal financial decision, both on the NYT calculator, and considering the strain on your finances that a purchase would place.
INPUTS to NYT calculator:
PP: 910,000
Time: 9 years
Rate: 4.5%
Down: 35%
Price Appreciation: 4% (which is conservative for Issaquah based on actual and forecasted)
Rent Increase: 3% (which is less than what we've seen every year for the last 4 years)
Reduce buying closing costs by 1% (I'll actually get most of the buyer fee back but this is a conservative input)
Leave everything else at default

Equivalent rent comes out to $2641.
If you can find a 4 bd with bonus room house for that rent in Issaquah, more power to you. 😀

gotester2000
Posts: 422
Joined: Sun Nov 12, 2017 1:59 am

Re: Buy this home?

Post by gotester2000 » Wed May 23, 2018 5:14 am

shershahsuri wrote:
Wed May 23, 2018 1:46 am
Tal- wrote:
Wed May 23, 2018 12:40 am
shershahsuri wrote:
Tue May 22, 2018 11:35 pm
If I were in the Southeast or North Carolina, I would be doing what you guys are doing, buying a home for $300k :)---but I'm not, I'm in Seattle and that too for the long term. Houses for < $800K would pull us further from the better school districts, our jobs etc.

I am not going to try to time my purchase to economic ups and downs (and those too "potential" ups and downs)---I'm looking at this as a long-term dwelling. I said 5+ before just to indicate "long term"---the plan is "forever". Yes, anything less than 5 then the closing costs would make Buy vs Rent more comparable (right now its heavy towards Buy based on the NYT calculator). One thing that I'm doing is using a buyer agent that will be charging only a small fixed fee and giving me back most of the buyer agent commission (so $25K back to me on a $910K purchase)---so reducing closing cost at least on the buying end.

From my point of view, the town house is the way to go at $910K. By the time this closes I should be able to put down $350K (and still have 1 yr+ in reserve for unexpected expenses). That would mean a mortgage of $560K. PITI payment (incl HOA) is well below 28% of gross monthly income at that point. We have no other debt. My wife's job is very secure with room to grow; mine neither too risky nor too safe but not any different from a change of city etc.. Given the Seattle home dynamics (just a shortage of land that can be developed) I see this house in the worst case maintaining value (or slightly decreasing in value---we'll still be well in the money due to the higher deposit). And it would be considerable "intangible" value to a family that has rented small apartments for a very long time.
I played around with the NYT calculator with these inputs, but I can't seem to make the buy decision work. My break even if typically 3500-4000 rent depending on a few variable, and you can rent a killer house for that range in Issaquah.

If you want to buy the house, that's your prerogative, and that's fine. You've done well, have a good income, great savings, and a good plan - and I think you can probably make it work. But, unless I'm missing something, buying is not the ideal financial decision, both on the NYT calculator, and considering the strain on your finances that a purchase would place.
INPUTS to NYT calculator:
PP: 910,000
Time: 9 years
Rate: 4.5%
Down: 35%
Price Appreciation: 4% (which is conservative for Issaquah based on actual and forecasted)
Rent Increase: 3% (which is less than what we've seen every year for the last 4 years)
Reduce buying closing costs by 1% (I'll actually get most of the buyer fee back but this is a conservative input)
Leave everything else at default

Equivalent rent comes out to $2641.
If you can find a 4 bd with bonus room house for that rent in Issaquah, more power to you. 😀
Do you have 350k for downpayment excluding your retirement and emergency funds? Good to have a lesser mortgage - house would be two thirds of your net worth.

Tal-
Posts: 313
Joined: Fri Apr 22, 2016 10:41 pm

Re: Buy this home?

Post by Tal- » Wed May 23, 2018 8:32 am

shershahsuri wrote:
Wed May 23, 2018 1:46 am
Tal- wrote:
Wed May 23, 2018 12:40 am
shershahsuri wrote:
Tue May 22, 2018 11:35 pm
If I were in the Southeast or North Carolina, I would be doing what you guys are doing, buying a home for $300k :)---but I'm not, I'm in Seattle and that too for the long term. Houses for < $800K would pull us further from the better school districts, our jobs etc.

I am not going to try to time my purchase to economic ups and downs (and those too "potential" ups and downs)---I'm looking at this as a long-term dwelling. I said 5+ before just to indicate "long term"---the plan is "forever". Yes, anything less than 5 then the closing costs would make Buy vs Rent more comparable (right now its heavy towards Buy based on the NYT calculator). One thing that I'm doing is using a buyer agent that will be charging only a small fixed fee and giving me back most of the buyer agent commission (so $25K back to me on a $910K purchase)---so reducing closing cost at least on the buying end.

From my point of view, the town house is the way to go at $910K. By the time this closes I should be able to put down $350K (and still have 1 yr+ in reserve for unexpected expenses). That would mean a mortgage of $560K. PITI payment (incl HOA) is well below 28% of gross monthly income at that point. We have no other debt. My wife's job is very secure with room to grow; mine neither too risky nor too safe but not any different from a change of city etc.. Given the Seattle home dynamics (just a shortage of land that can be developed) I see this house in the worst case maintaining value (or slightly decreasing in value---we'll still be well in the money due to the higher deposit). And it would be considerable "intangible" value to a family that has rented small apartments for a very long time.
I played around with the NYT calculator with these inputs, but I can't seem to make the buy decision work. My break even if typically 3500-4000 rent depending on a few variable, and you can rent a killer house for that range in Issaquah.

If you want to buy the house, that's your prerogative, and that's fine. You've done well, have a good income, great savings, and a good plan - and I think you can probably make it work. But, unless I'm missing something, buying is not the ideal financial decision, both on the NYT calculator, and considering the strain on your finances that a purchase would place.
INPUTS to NYT calculator:
PP: 910,000
Time: 9 years
Rate: 4.5%
Down: 35%
Price Appreciation: 4% (which is conservative for Issaquah based on actual and forecasted)
Rent Increase: 3% (which is less than what we've seen every year for the last 4 years)
Reduce buying closing costs by 1% (I'll actually get most of the buyer fee back but this is a conservative input)
Leave everything else at default

Equivalent rent comes out to $2641.
If you can find a 4 bd with bonus room house for that rent in Issaquah, more power to you. 😀
Ah - that helps frame the discussion.

Can we go back and start with some conservative assumptions, namely that rent and price increases keep pace with a 2.5% inflation, and that your investments (stock/bonds) will generate a 2.5% real return (i.e. inflation + 2.5%). Using this, I've set:

Price Appreciation = 2.5%
Rent Increase = 2.5%
Investment Returns = 5.0%
Inflation = 2.5%

Using this, the break-even = $3799.

Now we can ask the key questions: What will price appreciation, rent increases, and investment returns be in the future? Here's a conservative dissenting opinion on each:

Price Appreciation: 100 years from now, I expect the value of the house (not the land) to be very small. To illustrate this point, compare a 100 year old house to a new house that are on identical lots... Whether it's 50 years or 200 years, at some point, the gap between the two houses will be large enough that you can tear down/rebuild the old house for the same price of the new house. For these reasons, I feel strongly that over a long-enough time period, the value of the structure will not keep pace with inflation.

Will the land keep pace with inflation? Probably. But, over the next 50 years, I expect for more-and-more jobs to become remote, meaning I expect for employment centers (like Issaquah) to become less-and-less a draw for people. And, I expect for the price gap between markets to decline, meaning I expect Everett to increase and Issaquah to decrease.

Combined, if you buy a house in a median-ish market, you will probably struggle to keep pace with inflation. If you buy in a high market, there's a good chance that you will not keep pace with inflation over a long enough time period.

Rent Increases: Rent control aside, Rent is largely a factor of what the market will bare. Today, around 27% of gross income goes to rent. If rents keep pace with inflation, in 30 years, 27% of gross income will go to rent. But, if you assume inflation + 1%, in only 30 years, around 36% of gross income will go to rent. This increases to 43% in 50 years. I don't see how this pattern can hold.

Market Returns: Over the last 90 years, a 60/40 allocation has returned 8.7%. Actually, when I plug in 8.7% into the calculator with my other assumptions, the break even point goes to $4811.

I could be wrong about any of this, and that's fine. I know that everyone thinks that housing prices will continue to increase. But, I go through this detail to highlight one key point:

Buying is only the right financial decision as a speculation. When you make a huge financial decision based on the need for a house price to increase at a pace faster than inflation, this runs the very serious risk of being a wrong financial decision.

Again, you've done well for yourself and are in great shape. And, you could probably buy the house, have it be the wrong decision, and still be OK. But, my recommendation remains for you to rent.
Debt is to personal finance as a knife is to cooking.

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Watty
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Re: Buy this home?

Post by Watty » Wed May 23, 2018 9:48 am

shershahsuri wrote:
Wed May 23, 2018 1:46 am
Price Appreciation: 4% (which is conservative for Issaquah based on actual and forecasted)
That would imply that the home price would double about every 18 years.

Inflation might make that possible but in real inflation adjusted numbers there is a limit to just how much people can pay for a house. The OP has exceptional income and they can barely afford it now with a 4% mortgage. Very few people will ever be able to pay more for the house especially if interest rates are higher in the future.

At these price levels I would not count on any big real(inflation adjusted) home price appreciation.

e5116
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Re: Buy this home?

Post by e5116 » Wed May 23, 2018 10:22 am

Tal- wrote:
Wed May 23, 2018 8:32 am
shershahsuri wrote:
Wed May 23, 2018 1:46 am

INPUTS to NYT calculator:
PP: 910,000
Time: 9 years
Rate: 4.5%
Down: 35%
Price Appreciation: 4% (which is conservative for Issaquah based on actual and forecasted)
Rent Increase: 3% (which is less than what we've seen every year for the last 4 years)
Reduce buying closing costs by 1% (I'll actually get most of the buyer fee back but this is a conservative input)
Leave everything else at default

Equivalent rent comes out to $2641.
If you can find a 4 bd with bonus room house for that rent in Issaquah, more power to you. 😀
Ah - that helps frame the discussion.

Can we go back and start with some conservative assumptions, namely that rent and price increases keep pace with a 2.5% inflation, and that your investments (stock/bonds) will generate a 2.5% real return (i.e. inflation + 2.5%). Using this, I've set:

Price Appreciation = 2.5%
Rent Increase = 2.5%
Investment Returns = 5.0%
Inflation = 2.5%

Using this, the break-even = $3799.
The above further reinforces that while the NY Times Buy vs. Rent Calculator is a great tool that's highly customizable, it cannot accurately predict which decision is financially better because it's so heavily dependent on those four above items as inputs which nobody can predict accurately. So, obviously, if key inputs that have such a huge influence on the final output are unknown, the output isn't a sure thing. (Certainly, it can be directionally elucidating). I'd make the decision based on desired lifestyle instead of the financials.

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unclescrooge
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Re: Buy this home?

Post by unclescrooge » Wed May 23, 2018 12:33 pm

inbox788 wrote:
Wed May 23, 2018 12:51 am
unclescrooge wrote:
Tue May 22, 2018 8:29 pm
BlackcatCA wrote:
Tue May 22, 2018 8:17 pm
This was in Marketwatch today. You may want to wait a bit longer.

https://www.marketwatch.com/story/econo ... 2018-05-22
Since when have economists been right about anything? :mrgreen:
Economist are always right. On the one hand...
LOL. Show me a one handed economist.

FoolMeOnce
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Re: Buy this home?

Post by FoolMeOnce » Wed May 23, 2018 1:03 pm

shershahsuri wrote:
Tue May 22, 2018 11:51 am
I'm also someone who is not handy at all---if I can minimize the probability of maintenance issues than that is a much better outcome for me -> thus new construction.
If the goal is to find something that will likely require the least maintenance, I would prefer something 10-20 years old. New constructions have various problems that would hopefully be discovered and fixed in the first 5-10 years.

Also, a reduced mortgage frees up plenty for a handyman fund...

Slacker
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Re: Buy this home?

Post by Slacker » Wed May 23, 2018 1:14 pm

shershahsuri wrote:
Tue May 22, 2018 11:35 pm
If I were in the Southeast or North Carolina, I would be doing what you guys are doing, buying a home for $300k :)---but I'm not, I'm in Seattle and that too for the long term. Houses for < $800K would pull us further from the better school districts, our jobs etc.
...
From my point of view, the town house is the way to go at $910K. By the time this closes I should be able to put down $350K (and still have 1 yr+ in reserve for unexpected expenses). That would mean a mortgage of $560K. PITI payment (incl HOA) is well below 28% of gross monthly income at that point. We have no other debt. My wife's job is very secure with room to grow;
...
Understandable. A $560K mortgage is definitely more comfortable at 28% gross monthly income (especially with the lower income tax rates, the gap between gross to take home isn't nearly as wide).

Still a new build?

Enjoy many years of comfort in your new home and comfort in your larger living situation.

MiddleOfTheRoad
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Re: Buy this home?

Post by MiddleOfTheRoad » Wed May 23, 2018 1:48 pm

Others have already beat the numbers to death. Looks like you can afford it, albeit not 100% comfortably.

You have to take some risk in life. Is the risk worth it for your happiness? What is the worse case scenario? 20% or 30% down side if you sell in a down market? How much would you lose in the worse case scenario? How long would it take to dig yourself out in the worse case scenario? Are you willing to extend your working years at the tail end in exchange for some happiness now?

Estimate your risk and upside potential (finacial and emotional) and go for it.

goaties
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Re: Buy this home?

Post by goaties » Wed May 23, 2018 2:13 pm

This may be really gauche, but if your parents and inlaws are part of the reason you are looking for a bigger house, mightn't you ask them to pony up some "rent" for those 2 to 4 months they are staying with you? You could apply it to the principal of the mortgage. Might help you sleep better.

chillyuber
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Re: Buy this home?

Post by chillyuber » Wed May 23, 2018 2:30 pm

You can easily afford this house.

harrychan
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Location: Pasadena

Re: Buy this home?

Post by harrychan » Wed May 23, 2018 2:33 pm

I think you are stretching. This reminds me when I got a 3 row SUV that sits 7 thinking I could shuttle my inlaws. In the 3 years I had the SUV, they sat with me a total of 4 times. Get a home that fits you.

In another perspective, I would be wary of the housing costs as it heavily depends on AMZN. It seems AMZN and the city of Seattle (or state of WA) are not getting along and may yield to a DECREASE of employees in Seattle proper. This may impact housing prices of bigger homes in outlier areas.
This is not legal or certified financial advice but you know that already.

niceguy7376
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Re: Buy this home?

Post by niceguy7376 » Wed May 23, 2018 3:27 pm

goaties wrote:
Wed May 23, 2018 2:13 pm
This may be really gauche, but if your parents and inlaws are part of the reason you are looking for a bigger house, mightn't you ask them to pony up some "rent" for those 2 to 4 months they are staying with you? You could apply it to the principal of the mortgage. Might help you sleep better.
Based on the OP name, it is a cross continent flight and thus the longer duration of the visit. it is also much more culturally accepted norm for them to visit the grand kids.

Malinois000
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Re: Buy this home?

Post by Malinois000 » Wed May 23, 2018 5:28 pm

Coming from a person that has relocated in the double digits during the past 30 years so have purchased a number of homes, I think you and your wife make a nice income and have a substantial down payment. However, I would not recommend a home at that price point given your income. There are so many other expenses that come with a home at that price point. My two cents. Good luck

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prudent
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Re: Buy this home?

Post by prudent » Thu May 24, 2018 12:14 pm

Topic moved to Personal Finance (Not Investing).

GodelianKnot
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Re: Buy this home?

Post by GodelianKnot » Thu May 24, 2018 1:20 pm

shershahsuri wrote:
Mon May 21, 2018 8:47 pm
Thinking about purchasing a new construction house in Seattle. Purchase price approximately $1,020,000.
- I earn $155,000/yr and my wife earns $100,000/yr
- We will put 30% down so mortgage will be ~$700K. The monthly payment (incl property tax) seems like something we can comfortably do with total $255K annual salary
- This will be our first house. Seattle housing is out of control and older houses (same size as the new one) are going at $900K in the same area.
- We have been renting a smaller apartment. Trying to rent a similar sized house as the one we're buying in the same area would cost as much as our mortgage or more. Rents are going up yearly for us as well. We've rented in the area for 4 years and know we're going to be around for 5+ years at minimum
- We have enough in reserves for 1 yr+ of expenses (if anything were to happen e.g. loss of job)

Its such a big purchase that we're in analysis paralysis mode. Thought I would turn to the wise minds here---does the purchase look doable? Anything else we should be thinking about?

Thank you in advance.
It's a stretch, but seems do-able if you have the 30% down without going into retirement (and still have 1+ yr expenses available). I would definitely prefer the new construction over older for ~$100k, myself.

Just realize that going from a small apartment to a house is a very big jump in expenses, even aside from PITI. For me (copying my comments from another thread):
  • Electricity - significantly more than I expected, even after doggedly replacing all my lights with LEDs and getting rid of other energy-wasters
  • Heating - way way more than I expected in the winter
  • Water - actually a decent cost, had assumed it was nominal
  • Lawncare - did it myself for one year, but after a kid, it's just too much time and still has costs even if you do
  • Pest control
  • Security system
  • Annual maintenance for everything - constantly dropping $100-$200 for random crap I hadn't thought of; furnace check-ups, A/C check-ups, sprinklers turn-on, sprinklers turn-off, chimney cleaning, gutter cleaning, etc.
  • 2 cars + insurance + gas + maintenance

rich126
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Re: Buy this home?

Post by rich126 » Thu May 24, 2018 5:15 pm

Although the job market may be different now, how did Seattle housing do during the issues in 2007/8 ? How stable are the jobs?

I lived through the housing bust (and it was a big one) in Arizona. I saw houses around me go from $300K up to $700K and back down to $300K within a 7 year time frame. In my case my house was always worth more than the mortgage and I lived in a nice area that was likely to rebound (and it has, not to 700K but over 500K). But unfortunately I saw some people get wiped out (hey housing can't go down since they aren't making any more land!).

Fortunately I've never lived in CA or someplace else with those costs (east coast is bad enough).

I'd wager on prices coming down but they could and if interest rates go up, it may not help a lot.

Are all of the homes similarly priced? Or are you buying on the high end of the neighborhood? I'd prefer to always have a mid/low priced house in a nice neighborhood than a top priced house in a lesser area.

Anyhow, good luck.

Slacker
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Re: Buy this home?

Post by Slacker » Thu May 24, 2018 7:22 pm

rich126 wrote:
Thu May 24, 2018 5:15 pm
Although the job market may be different now, how did Seattle housing do during the issues in 2007/8 ? How stable are the jobs?

I lived through the housing bust (and it was a big one) in Arizona. I saw houses around me go from $300K up to $700K and back down to $300K within a 7 year time frame. In my case my house was always worth more than the mortgage and I lived in a nice area that was likely to rebound (and it has, not to 700K but over 500K). But unfortunately I saw some people get wiped out (hey housing can't go down since they aren't making any more land!).
...
Maybe more relevant - how did Seattle housing react when Boeing HQ moved to Chicago in the early 2000s? I think there is a slight risk of Amazon using HQ2 either as something to hold over the Seattle City Council or to go ahead and make a slow transition out of Seattle or (more likely) downsize their Seattle operations. [hopefully I'm not speculating too much in a political fashion for this forum]

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