House Value & Mortgage as a Percentage of Net Worth

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KlangFool
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Re: House Value & Mortgage as a Percentage of Net Worth

Post by KlangFool » Sun Aug 12, 2018 9:16 pm

denovo wrote:
Sun Aug 12, 2018 9:06 pm
KlangFool wrote:
Sun Aug 12, 2018 8:45 pm

<<Send me a redfin/zillow link showing a 400k townhome with those specs that i can buy>>

Why? You bought an 880K house. I want you to stay where you are now. I do not want more people moving from your area to spoil the market around here.

I live in the Northern VA/DC Metro area.

KlangFool
I am skeptical that a 2,000 sq ft townhome in NoVA goes for 400k, nor rents out for $2,300 mo/ and I am pretty familiar with that area.
denovo,

I bought my house a few years ago. Now, it is around 445K. If you are familiar with the area, it should not be hard for to figure out where 2000 square feet townhouse sells for 445K now.

KlangFool

KlangFool
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Re: House Value & Mortgage as a Percentage of Net Worth

Post by KlangFool » Sun Aug 12, 2018 9:18 pm

denovo wrote:
Sun Aug 12, 2018 9:15 pm
bligh wrote:
Sat Aug 11, 2018 9:52 pm
So, I am asking for your opinion on the following questions to see how far off the mark I am. I am providing my answers but they are based on my gut not on any hard evidence I can back up:

OP, this thread has been derailed. Let me make a very simple guide to deciding to buy a home.

1. Do you want to buy a property? That means dealing with plumbers, roofers, or other tradesmen, finding good ones is a start and learning a bit about these things. Do you have the time to do this stuff you landlord does?

2. Do you have good reason you can stay in the area and that this actual home will meet your needs for at least 7 years (consider marriage, children commutes, etc)

3. Calculate mortgage, property tax, insurance, HOA (if applicable) + a reasonable amount for repairs. Can you make your budget work this this while saving at least 10% but preferably more of your income. I would not rely on bonus + RSU's.

4. Do you have enough cash on hand to put 20 percent down and an emergency fund of 1 year of your expenses?

If the answer is yes to all of the above, buy a home.
denovo,

Please clarify what do you mean by saving 10%?

10% of after-tax income or 10% of gross income?

Thanks.

KlangFool

47Percent
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Re: House Value & Mortgage as a Percentage of Net Worth

Post by 47Percent » Sun Aug 12, 2018 9:23 pm

bligh wrote:
Sat Aug 11, 2018 9:52 pm

1) What percentage of a person's gross pay should the monthly payment be? (All inclusive - Mortgage, Principal, Insurance, HOA, etc.).
My Guess: In my opinion if it is more than 25% I am buying/renting too much house. So if you are bringing in 10,000 / month gross, you can go up to 2,500/ month in monthly housing payments.

2) What percentage of a person's assets should the house value be. This means if you have 500K in assets + 500K house value (ignore equity vs mortgage). Your house makes up 50% of your assets.
My Guess: A House should not make up more than 50% of my assets (After the house is purchased). Other wise I am concentrating too much in one place. So if a person has $500K in assets, s/he may then go out and buy a $500K house.

3) Perhaps a better measure would be the mortgage? What percentage of your entire net worth should your mortgage be? If you have a $500K net worth ($400K Assets + $100K House equity) .. And you have a $500K mortgage ($600K House value). Then you have a 100% mortgage. ie. Your mortgage value is equal to your net worth. In this case you cannot actually pay off the mortgage though. You would need $500K outside of home equity to do that!
Your question #one is the only meaningful/relevant question.

Networth happens depending on your financial hygiene.

Value of home happens partly depending on your luck and partly depending on how savvy you were in picking the right one.

In Q2 and Q3, you are thinking about this all wrong. To give an extreme example, it is like asking how many inches in one pound.

KlangFool
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Re: House Value & Mortgage as a Percentage of Net Worth

Post by KlangFool » Sun Aug 12, 2018 9:44 pm

47Percent wrote:
Sun Aug 12, 2018 9:23 pm
bligh wrote:
Sat Aug 11, 2018 9:52 pm

1) What percentage of a person's gross pay should the monthly payment be? (All inclusive - Mortgage, Principal, Insurance, HOA, etc.).
My Guess: In my opinion if it is more than 25% I am buying/renting too much house. So if you are bringing in 10,000 / month gross, you can go up to 2,500/ month in monthly housing payments.

2) What percentage of a person's assets should the house value be. This means if you have 500K in assets + 500K house value (ignore equity vs mortgage). Your house makes up 50% of your assets.
My Guess: A House should not make up more than 50% of my assets (After the house is purchased). Other wise I am concentrating too much in one place. So if a person has $500K in assets, s/he may then go out and buy a $500K house.

3) Perhaps a better measure would be the mortgage? What percentage of your entire net worth should your mortgage be? If you have a $500K net worth ($400K Assets + $100K House equity) .. And you have a $500K mortgage ($600K House value). Then you have a 100% mortgage. ie. Your mortgage value is equal to your net worth. In this case you cannot actually pay off the mortgage though. You would need $500K outside of home equity to do that!
Your question #one is the only meaningful/relevant question.

Networth happens depending on your financial hygiene.

Value of home happens partly depending on your luck and partly depending on how savvy you were in picking the right one.

In Q2 and Q3, you are thinking about this all wrong. To give an extreme example, it is like asking how many inches in one pound.
47Percent,

If you do not think about Q2 and Q3, then, you are assuming that you are very lucky. Aka, you will never be unemployed long enough to use up all your emergency fund. Are you that lucky? No recession and/or economic will affect you adversely.

<<Value of home happens partly depending on your luck and partly depending on how savvy you were in picking the right one.>>

Why? If you pick your house purely on imputed rent, you make money when you buy. Value of the house does not matter.

KlangFool

47Percent
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Re: House Value & Mortgage as a Percentage of Net Worth

Post by 47Percent » Sun Aug 12, 2018 10:09 pm

KlangFool wrote:
Sun Aug 12, 2018 9:44 pm

47Percent,

If you do not think about Q2 and Q3, then, you are assuming that you are very lucky. Aka, you will never be unemployed long enough to use up all your emergency fund. Are you that lucky? No recession and/or economic will affect you adversely.

<<Value of home happens partly depending on your luck and partly depending on how savvy you were in picking the right one.>>

Why? If you pick your house purely on imputed rent, you make money when you buy. Value of the house does not matter.

KlangFool
I don't quite understand your thinking here..

Unless you think the whole house can become worthless -- which of course, theoretically it can. My point was that the full value of the house is not the relevant variable here. What matters is how much will it hold its original value, or how likely will it hold its value. That depends a bit on luck and your savviness.

KlangFool
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Re: House Value & Mortgage as a Percentage of Net Worth

Post by KlangFool » Sun Aug 12, 2018 10:52 pm

47Percent wrote:
Sun Aug 12, 2018 10:09 pm
KlangFool wrote:
Sun Aug 12, 2018 9:44 pm

47Percent,

If you do not think about Q2 and Q3, then, you are assuming that you are very lucky. Aka, you will never be unemployed long enough to use up all your emergency fund. Are you that lucky? No recession and/or economic will affect you adversely.

<<Value of home happens partly depending on your luck and partly depending on how savvy you were in picking the right one.>>

Why? If you pick your house purely on imputed rent, you make money when you buy. Value of the house does not matter.

KlangFool
I don't quite understand your thinking here..

Unless you think the whole house can become worthless -- which of course, theoretically it can. My point was that the full value of the house is not the relevant variable here. What matters is how much will it hold its original value, or how likely will it hold its value. That depends a bit on luck and your savviness.
If you're doing great financially, even if the house is worthless. Then, you do not need luck.

You make money when you buy the house. You do not need to sell the house in order to make money. You lower your housing expenses when you buy.


Klangfool

MrBeaver
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Re: House Value & Mortgage as a Percentage of Net Worth

Post by MrBeaver » Sun Aug 12, 2018 11:04 pm

bligh wrote:
Sat Aug 11, 2018 9:52 pm
1) What percentage of a person's gross pay should the monthly payment be? (All inclusive - Mortgage, Principal, Insurance, HOA, etc.).
My Guess: In my opinion if it is more than 25% I am buying/renting too much house. So if you are bringing in 10,000 / month gross, you can go up to 2,500/ month in monthly housing payments.
Our biggest budget categories (in decreasing order) are: long-term (15+ year) savings, monthly required consumables (food, utilities, etc.), transportation (cars), donations, house. We spend ~9% of our gross income on the house. If we wanted a bigger house, we could 'afford it' by most people's assessment, but doing so would require reducing donations, reducing long-term savings, or restructuring to be a single car family.*
bligh wrote:
Sat Aug 11, 2018 9:52 pm
3) Perhaps a better measure would be the mortgage? What percentage of your entire net worth should your mortgage be? If you have a $500K net worth ($400K Assets + $100K House equity) .. And you have a $500K mortgage ($600K House value). Then you have a 100% mortgage. ie. Your mortgage value is equal to your net worth. In this case you cannot actually pay off the mortgage though. You would need $500K outside of home equity to do that!
My Guess : The mortgage should not be more than 100% of my net worth. ie. If you have a $500K net worth going into a house purchase You shouldn't get more than a $500K mortgage. (For example you could put $200K down on the house and get a $700K house).
I don't ever want my total debt to be greater than 1x yearly salary + my liquid (all taxable) accounts. Likely in 5 years, I will change that to total debt ≤ taxable accounts. Once I was able to pay off my mortgage, I didn't really want to sacrifice that freedom, even if I choose to take mortgages in the future because thats what makes the most sense financially to leverage other investments at higher return than the house.


*As an aside the "can't afford it" phrase is one of my most hated. All it means is that one has decided that other uses of one's money are more important than using that money for the thing in question. Overusing this phrase leads to us imagining there are easy Yes/No rules for how much we should spend (not unlike this thread). In reality, our priorities always shift. We can always 'afford' anything below our income, as long as we are willing to sacrifice enough other expenses in order to make our using of money (expenses + saving + giving) ≤ income. Certainly if something is being financed, the lender will have their own requirements though.

denovo
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Re: House Value & Mortgage as a Percentage of Net Worth

Post by denovo » Mon Aug 13, 2018 1:26 am

KlangFool wrote:
Sun Aug 12, 2018 9:18 pm
denovo wrote:
Sun Aug 12, 2018 9:15 pm
bligh wrote:
Sat Aug 11, 2018 9:52 pm
So, I am asking for your opinion on the following questions to see how far off the mark I am. I am providing my answers but they are based on my gut not on any hard evidence I can back up:

OP, this thread has been derailed. Let me make a very simple guide to deciding to buy a home.

1. Do you want to buy a property? That means dealing with plumbers, roofers, or other tradesmen, finding good ones is a start and learning a bit about these things. Do you have the time to do this stuff you landlord does?

2. Do you have good reason you can stay in the area and that this actual home will meet your needs for at least 7 years (consider marriage, children commutes, etc)

3. Calculate mortgage, property tax, insurance, HOA (if applicable) + a reasonable amount for repairs. Can you make your budget work this this while saving at least 10% but preferably more of your income. I would not rely on bonus + RSU's.

4. Do you have enough cash on hand to put 20 percent down and an emergency fund of 1 year of your expenses?

If the answer is yes to all of the above, buy a home.
denovo,

Please clarify what do you mean by saving 10%?

10% of after-tax income or 10% of gross income?

Thanks.

KlangFool
gross
"Don't trust everything you read on the Internet"- Abraham Lincoln

KlangFool
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Re: House Value & Mortgage as a Percentage of Net Worth

Post by KlangFool » Mon Aug 13, 2018 7:44 am

denovo wrote:
Sun Aug 12, 2018 9:04 pm
KlangFool wrote:
Sun Aug 12, 2018 8:07 pm


Around 400K, 2000 square feet townhouse. 20% down payment, 30 years fixed 3.49% loan

PITI ~ $1,800 per month.

Rent = $2,300 per month.

KlangFool
Something doesn't add up here.

Mortgage: $1,475 /mo
Insurance: $125/mo (est)
HOA: $100/mo (est)
Property Tax: $330 (est 1% of $400,000)

we are already over $2,000.00
denovo,

From my 2016 mortgage statement.

300K 3.49% 30 years mortgage

Mortgage = $1,343.52

2016 numbers
County tax = $4,417.06
Hazard Ins = $441.00

Monthly escrow = $404.84

Monthly total = $1,748.15 (PITI)

HOA not included. It would add about $100 per month.

I have a different philosophy than most people in term of the housing. I would only buy if it lowered my housing expense as compared to renting. The house purchase has to be justified base on imputed rent only.

KlangFool

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bligh
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Re: House Value & Mortgage as a Percentage of Net Worth

Post by bligh » Mon Aug 13, 2018 10:30 am

KlangFool wrote:
Sun Aug 12, 2018 5:36 pm
bligh wrote:
Sun Aug 12, 2018 4:47 pm
KlangFool wrote:
Sun Aug 12, 2018 4:37 pm
T4REngineer wrote:
Sun Aug 12, 2018 4:26 pm
KlangFool wrote:
Sun Aug 12, 2018 4:10 pm

Why would I live in that VHCOL area if I am not paid well enough to live well in those areas?

<<Your solution would have to be to move out of California in the long run>>

Why would I live in California in the first place? In my area, California does not pay high enough to compensate for the additional cost of living.

KlangFool
- maybe they love the weather, maybe they have family and friends in the area, etc etc etc
T4REngineer,

Maybe they do not know that they do not get paid well enough to live in that area. Or, they do not know that many of them could get paid about the same elsewhere.

KlangFool
In my case I do think I get paid well enough to live in this VHCOL area.... if I rent. However, if I choose to buy, the numbers change substantially.
To each its own. If you believe that compromising by renting in a VHCOL with less space is good enough for you, so be it.

KlangFool
I don't have less space. I am renting the size of home I would most likely buy. It's just that buying it would require a size able 20% downpayment (that I can make) but also a ~50% to the monthly outlay for the same house. The difference is that eventually I would own the home outright and my only expense then would be Insurance, Taxes and HOA. Also the houses in my area have appreciated considerably in the last 8 years. It would really suck if I end up renting, not because I am choosing to rent, but because it is too expensive to buy... because I didn't buy now while it is still affordable to me.

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bligh
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Re: House Value & Mortgage as a Percentage of Net Worth

Post by bligh » Mon Aug 13, 2018 10:36 am

denovo wrote:
Sun Aug 12, 2018 9:15 pm
bligh wrote:
Sat Aug 11, 2018 9:52 pm
So, I am asking for your opinion on the following questions to see how far off the mark I am. I am providing my answers but they are based on my gut not on any hard evidence I can back up:

OP, this thread has been derailed. Let me make a very simple guide to deciding to buy a home.

1. Do you want to buy a property? That means dealing with plumbers, roofers, or other tradesmen, finding good ones is a start and learning a bit about these things. Do you have the time to do this stuff you landlord does?

2. Do you have good reason you can stay in the area and that this actual home will meet your needs for at least 7 years (consider marriage, children commutes, etc)

3. Calculate mortgage, property tax, insurance, HOA (if applicable) + a reasonable amount for repairs. Can you make your budget work this this while saving at least 10% but preferably more of your income. I would not rely on bonus + RSU's.

4. Do you have enough cash on hand to put 20 percent down and an emergency fund of 1 year of your expenses?

If the answer is yes to all of the above, buy a home.
Fair enough, you're basically saying "Don't base the decision on your net worth, but on the affordability of the monthly payment, and other life style situations and decisions." .. The reason I keep pulling my net worth into the equation though is that, being self employed, my income itself is very variable from year to year. If I had a more stable and predictable income source, as most professionals tend to do, then it would be a more straight forward calculation where I would only look at the monthly PITI amount as a percentage of my income.

Admiral
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Re: House Value & Mortgage as a Percentage of Net Worth

Post by Admiral » Mon Aug 13, 2018 11:06 am

bligh wrote:
Mon Aug 13, 2018 10:36 am
denovo wrote:
Sun Aug 12, 2018 9:15 pm
bligh wrote:
Sat Aug 11, 2018 9:52 pm
So, I am asking for your opinion on the following questions to see how far off the mark I am. I am providing my answers but they are based on my gut not on any hard evidence I can back up:

OP, this thread has been derailed. Let me make a very simple guide to deciding to buy a home.

1. Do you want to buy a property? That means dealing with plumbers, roofers, or other tradesmen, finding good ones is a start and learning a bit about these things. Do you have the time to do this stuff you landlord does?

2. Do you have good reason you can stay in the area and that this actual home will meet your needs for at least 7 years (consider marriage, children commutes, etc)

3. Calculate mortgage, property tax, insurance, HOA (if applicable) + a reasonable amount for repairs. Can you make your budget work this this while saving at least 10% but preferably more of your income. I would not rely on bonus + RSU's.

4. Do you have enough cash on hand to put 20 percent down and an emergency fund of 1 year of your expenses?

If the answer is yes to all of the above, buy a home.
Fair enough, you're basically saying "Don't base the decision on your net worth, but on the affordability of the monthly payment, and other life style situations and decisions." .. The reason I keep pulling my net worth into the equation though is that, being self employed, my income itself is very variable from year to year. If I had a more stable and predictable income source, as most professionals tend to do, then it would be a more straight forward calculation where I would only look at the monthly PITI amount as a percentage of my income.
If you don't own a home already, then your "net worth" is the same as your liquid assets minus your debs, (unless you have land or something). There's little point in trying to determine what buying a house would do to your net worth, except increase your debt.

For you, with erratic income, the issue is this:

Does (or will) your cash flow allow you to service x dollars of debt on a monthly basis for the foreseeable future, even in a bad year? Remove "net worth" and look at your liquid assets. If you have enough saved in non-retirement accounts so that you can a) put down 20% and b) reliably make $x monthly payment FROM YOUR ASSETS IF YOUR CASH FLOW DOES NOT SUPPORT IT FOR LONG STRETCHES then you can afford to buy. Your erratic income means you need to have a very large emergency fund, and sock away lots of money during good periods.

Of course, you also need to do this if you rent. The difference is a) you don't need a large down payment to rent and b) you can rent a cheaper place if your cash flow dictates. If you buy a home, you might be forced to sell at a loss if you cannot make the payments.

supalong52
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Re: House Value & Mortgage as a Percentage of Net Worth

Post by supalong52 » Mon Aug 13, 2018 11:54 am

I have thought about making a new thread, but I figure my situation fits in well with the topic of this thread. We are in our 30's and I consider ourselves FI with a total NW of say 2-3M (with annual spend of $55k). I left my high paying job a few years ago, took time off, and now consult part time for low 6 figs. My wife also works part time so say we make 250k a year now. Hopefully we will have kids soon, but not yet.

We live in So Cal and want to buy a home. We actually nearly bought a townhouse a year ago (2/2 with 960 sqft), but backed out due to inspection issues. It was cheap @ $425k and would have allowed us to continue being financially independent. After we canceled the contract, I felt a huge wave of relief as I realized that the townhouse would have been too small for us in the future if we do have kids.

Around here, we could buy a 3-4BR SFR for $800-950k or a 3 BR townhouse for $600-700k + HOA of $300/mo. The monthly nut would be $3800 to $5000. We currently rent a 2 BR condo for $2250.

I'm torn by how much house to buy because:

1. We do not know whether we can or will have kids. So don't know how much room we need. As long as we have a first, we can probably assume we will need more space.
2. Our income is variable as I am consulting and one or both of us could decide to quit at any time.
3. Our taxable net worth is still approaching $2M so a $900k house seems like a large amount (we would probably still finance). Probably would drop us out of being financially independent.

Any suggestions on rules of thumb given our 1) higher than average net worth and 2) the fact that we are intentionally limiting our income?

HEDGEFUNDIE
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Re: House Value & Mortgage as a Percentage of Net Worth

Post by HEDGEFUNDIE » Mon Aug 13, 2018 12:36 pm

supalong52 wrote:
Mon Aug 13, 2018 11:54 am
I have thought about making a new thread, but I figure my situation fits in well with the topic of this thread. We are in our 30's and I consider ourselves FI with a total NW of say 2-3M (with annual spend of $55k). I left my high paying job a few years ago, took time off, and now consult part time for low 6 figs. My wife also works part time so say we make 250k a year now. Hopefully we will have kids soon, but not yet.

We live in So Cal and want to buy a home. We actually nearly bought a townhouse a year ago (2/2 with 960 sqft), but backed out due to inspection issues. It was cheap @ $425k and would have allowed us to continue being financially independent. After we canceled the contract, I felt a huge wave of relief as I realized that the townhouse would have been too small for us in the future if we do have kids.

Around here, we could buy a 3-4BR SFR for $800-950k or a 3 BR townhouse for $600-700k + HOA of $300/mo. The monthly nut would be $3800 to $5000. We currently rent a 2 BR condo for $2250.

I'm torn by how much house to buy because:

1. We do not know whether we can or will have kids. So don't know how much room we need. As long as we have a first, we can probably assume we will need more space.
2. Our income is variable as I am consulting and one or both of us could decide to quit at any time.
3. Our taxable net worth is still approaching $2M so a $900k house seems like a large amount (we would probably still finance). Probably would drop us out of being financially independent.

Any suggestions on rules of thumb given our 1) higher than average net worth and 2) the fact that we are intentionally limiting our income?
You should talk to a mortgage broker first to see if financing is even possible with your income variability.

$250k working part time? Not too shabby.

Bacchus01
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Re: House Value & Mortgage as a Percentage of Net Worth

Post by Bacchus01 » Mon Aug 13, 2018 12:47 pm

johussman wrote:
Sun Aug 12, 2018 6:47 pm
denovo wrote:
Sun Aug 12, 2018 6:42 pm
KlangFool wrote:
Sun Aug 12, 2018 6:29 pm
denovo wrote:
Sun Aug 12, 2018 5:48 pm
KlangFool wrote:
Sun Aug 12, 2018 5:41 pm

denovo,

A) That is my safety margin to account for the ownership risk.

B) Those folks are not going to pay my mortgage when I am unemployed. So, why should I care about what they think? My net worth guideline allows me to pay off the mortgage and move elsewhere at any time if I need to. I had survived the Asian Currency Crisis. I had to move out of the country in order to survive.

KlangFool
Re A) But renting has risks too. Rents can skyrocket while most mortgages in this country are fixed-rate. Putting a margin of safety on top of PITI is arbitrary. In many booming metros, rents have gone up a lot these last 4-5 years.

B) Neither will they pay your rent, and I presume you won't pay the rent of anyone who takes your advice, so that's besides the point. Re unemployment, that's why you talk about emergency funds and unemployment that can tide you over during stretches of unemployment. Not saying a home should be x percent of net worth especially since it makes sense for most people to have the bulk of their savings in 401k's and IRA's which will ream you with penalties if you try to take money out of them to pay off a mortgage!
denovo,

A) Rent is at most a one year contract. I can move or downsize if the rent goes up.

<<In many booming metros, rents have gone up a lot these last 4-5 years.>>

In my booming metro area, the house's price has not recovered from the 2004/2005 level. Across 4 to 5 years, the house price had been up. But, it is down from 2004/2005 level.

The bottom line is I do not have to assume that the rent will go up to justify my house price. And, even if the rent goes down, it is still a good deal since the PITI is 20% to 30% cheaper than renting now. I make money when I buy.


<<Not saying a home should be x percent of net worth especially since it makes sense for most people to have the bulk of their savings in 401k's and IRA's which will ream you with penalties if you try to take money out of them to pay off a mortgage!>>

B) If a person has to pay off the mortgage and moves elsewhere in order to survive, paying penalties is a minor issue. In my case, I have enough investment in my taxable account plus the emergency fund to pay off the mortgage even if the stock drop 50%.

KlangFool
Again re A) With those numbers, unless you're market timing, and buy a home in a sudden crash where rents haven't gone down as much, you're never going to see PITI +20-30 percent less than equivalent rent. Again, there's no rational reason to create a margin of safety which leads me to

B) These penalties are huge. Assuming a 25 percent marginal tax rate, the penalty would be 35 percent. Even in taxable accounts, you're looking at paying a LTCG tax rate of around 15-20 percent to pay off a mortgage. This is very bad advice.

There's no reason to just not buy a home when the PITI matches the guideline of 25-35 percent while keeping an emergency fund (in CD's and savings) that match your expenses while unemployed for a good period of time (1 year to 2 years depending on your industry)
+1

The only way you will be able to buy a house with PITI 20-30% discounted from equivalent rent is if the house is in an extremely undesirable and declining area. Similar to high dividend yielding stocks are often red flags and indicate the company is in decline. You'll likely have to buy in the ghetto to get these discounts.
Simply not true. If it costs more to buy than rent, then why would people rent out a house? The answer is, that in MOST SITUATIONS it costs more out of pocket to rent than to buy.

So why don't more people buy? Bad credit. No down payment. More flexibility. Don't want to manage for the ad hoc large expenses. Intend to move, upsize, downsize in the relatively near future.

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bligh
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Re: House Value & Mortgage as a Percentage of Net Worth

Post by bligh » Mon Aug 13, 2018 3:10 pm

HEDGEFUNDIE wrote:
Mon Aug 13, 2018 12:36 pm
supalong52 wrote:
Mon Aug 13, 2018 11:54 am
I have thought about making a new thread, but I figure my situation fits in well with the topic of this thread. We are in our 30's and I consider ourselves FI with a total NW of say 2-3M (with annual spend of $55k). I left my high paying job a few years ago, took time off, and now consult part time for low 6 figs. My wife also works part time so say we make 250k a year now. Hopefully we will have kids soon, but not yet.

We live in So Cal and want to buy a home. We actually nearly bought a townhouse a year ago (2/2 with 960 sqft), but backed out due to inspection issues. It was cheap @ $425k and would have allowed us to continue being financially independent. After we canceled the contract, I felt a huge wave of relief as I realized that the townhouse would have been too small for us in the future if we do have kids.

Around here, we could buy a 3-4BR SFR for $800-950k or a 3 BR townhouse for $600-700k + HOA of $300/mo. The monthly nut would be $3800 to $5000. We currently rent a 2 BR condo for $2250.

I'm torn by how much house to buy because:

1. We do not know whether we can or will have kids. So don't know how much room we need. As long as we have a first, we can probably assume we will need more space.
2. Our income is variable as I am consulting and one or both of us could decide to quit at any time.
3. Our taxable net worth is still approaching $2M so a $900k house seems like a large amount (we would probably still finance). Probably would drop us out of being financially independent.

Any suggestions on rules of thumb given our 1) higher than average net worth and 2) the fact that we are intentionally limiting our income?
You should talk to a mortgage broker first to see if financing is even possible with your income variability.

$250k working part time? Not too shabby.
I had no issues in my case. They looked at my last two years Tax returns to figure out how much mortgage to pre approve me for. Ofcourse, I didn't actually go through and make the purchase so, who knows?.. there may have been a surprise waiting for me further down the process. In supalong52's case, assuming he has maintained $250K for 2x years that is what they will use.
Last edited by bligh on Mon Aug 13, 2018 3:28 pm, edited 1 time in total.

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Re: House Value & Mortgage as a Percentage of Net Worth

Post by bligh » Mon Aug 13, 2018 3:27 pm

supalong52 wrote:
Mon Aug 13, 2018 11:54 am
I have thought about making a new thread, but I figure my situation fits in well with the topic of this thread. We are in our 30's and I consider ourselves FI with a total NW of say 2-3M (with annual spend of $55k). I left my high paying job a few years ago, took time off, and now consult part time for low 6 figs. My wife also works part time so say we make 250k a year now. Hopefully we will have kids soon, but not yet.

We live in So Cal and want to buy a home. We actually nearly bought a townhouse a year ago (2/2 with 960 sqft), but backed out due to inspection issues. It was cheap @ $425k and would have allowed us to continue being financially independent. After we canceled the contract, I felt a huge wave of relief as I realized that the townhouse would have been too small for us in the future if we do have kids.

Around here, we could buy a 3-4BR SFR for $800-950k or a 3 BR townhouse for $600-700k + HOA of $300/mo. The monthly nut would be $3800 to $5000. We currently rent a 2 BR condo for $2250.

I'm torn by how much house to buy because:

1. We do not know whether we can or will have kids. So don't know how much room we need. As long as we have a first, we can probably assume we will need more space.
2. Our income is variable as I am consulting and one or both of us could decide to quit at any time.
3. Our taxable net worth is still approaching $2M so a $900k house seems like a large amount (we would probably still finance). Probably would drop us out of being financially independent.

Any suggestions on rules of thumb given our 1) higher than average net worth and 2) the fact that we are intentionally limiting our income?
OP here, I can see why the topic of this thread fits well for you. Your situation is very similar to mine! The two things that are different are:
1) I have a family with kids.
2) I have a lower net worth, so am not FI yet.. But I am only a few years away from it if things go well.

I have the similar concern about its impact to my path to FI. In my case, I do not have enough taxable funds to buy the house outright. I'd have to take on a 50-80% mortgage.

In your case, if you do decide to up buy a $900K house in cash your monthly expenses would be restricted to Taxes and Insurance (assuming you can pull off no HOA/Mello Roos). On a 900K house that should work out to about $1K/month. So your annual expenses would drop by ~$15K/ year ((2250 Rent - 1000 Taxes & Insurance) * 12). That works out to about $400K less in assets needed to maintain FI (Due to lower expenses) so your net impact is -$500K to support you buying vs renting. Depending on how low your current expenses are, your withdrawal rate may still keep you in FI territory despite the $500K net loss in portfolio size. Is trading a $500K in your portfolio for the larger place a good idea? That's for you to decide. In my case, I'd be buying a house identical to the one I am renting.

A huge (financial) bonus for you (and for me) would be the income and asset diversification from the stock and bond markets, and the inflation protection it brings.

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Re: House Value & Mortgage as a Percentage of Net Worth

Post by supalong52 » Mon Aug 13, 2018 4:30 pm

bligh wrote:
Mon Aug 13, 2018 3:27 pm
supalong52 wrote:
Mon Aug 13, 2018 11:54 am
I have thought about making a new thread, but I figure my situation fits in well with the topic of this thread. We are in our 30's and I consider ourselves FI with a total NW of say 2-3M (with annual spend of $55k). I left my high paying job a few years ago, took time off, and now consult part time for low 6 figs. My wife also works part time so say we make 250k a year now. Hopefully we will have kids soon, but not yet.

We live in So Cal and want to buy a home. We actually nearly bought a townhouse a year ago (2/2 with 960 sqft), but backed out due to inspection issues. It was cheap @ $425k and would have allowed us to continue being financially independent. After we canceled the contract, I felt a huge wave of relief as I realized that the townhouse would have been too small for us in the future if we do have kids.

Around here, we could buy a 3-4BR SFR for $800-950k or a 3 BR townhouse for $600-700k + HOA of $300/mo. The monthly nut would be $3800 to $5000. We currently rent a 2 BR condo for $2250.

I'm torn by how much house to buy because:

1. We do not know whether we can or will have kids. So don't know how much room we need. As long as we have a first, we can probably assume we will need more space.
2. Our income is variable as I am consulting and one or both of us could decide to quit at any time.
3. Our taxable net worth is still approaching $2M so a $900k house seems like a large amount (we would probably still finance). Probably would drop us out of being financially independent.

Any suggestions on rules of thumb given our 1) higher than average net worth and 2) the fact that we are intentionally limiting our income?
OP here, I can see why the topic of this thread fits well for you. Your situation is very similar to mine! The two things that are different are:
1) I have a family with kids.
2) I have a lower net worth, so am not FI yet.. But I am only a few years away from it if things go well.

I have the similar concern about its impact to my path to FI. In my case, I do not have enough taxable funds to buy the house outright. I'd have to take on a 50-80% mortgage.

In your case, if you do decide to up buy a $900K house in cash your monthly expenses would be restricted to Taxes and Insurance (assuming you can pull off no HOA/Mello Roos). On a 900K house that should work out to about $1K/month. So your annual expenses would drop by ~$15K/ year ((2250 Rent - 1000 Taxes & Insurance) * 12). That works out to about $400K less in assets needed to maintain FI (Due to lower expenses) so your net impact is -$500K to support you buying vs renting. Depending on how low your current expenses are, your withdrawal rate may still keep you in FI territory despite the $500K net loss in portfolio size. Is trading a $500K in your portfolio for the larger place a good idea? That's for you to decide. In my case, I'd be buying a house identical to the one I am renting.

A huge (financial) bonus for you (and for me) would be the income and asset diversification from the stock and bond markets, and the inflation protection it brings.
Thanks OP. We were looking at it that way too. One reason why we wanted to buy the townhouse is because it would have been a wash in terms of financial independence.

I think for now we will just wait to see what happens on the kid front and then also keep an eye out in our local market. Maybe visit some open houses and new neighborhoods to see what catches our eye so we can be prepared to pull the trigger once we want to buy. We both work remotely and don't have family nearby, so we have some flexibility there. We are not like the Needham poster in the other thread who had to own in a particular neighborhood.

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Re: House Value & Mortgage as a Percentage of Net Worth

Post by jharkin » Wed Aug 15, 2018 7:21 am

So the OP originally asked whats a safe percentage, but now it seems that OP likely has a 7 figure net worth so probably any percentage is 'safe'....

Anyway, for those of us who are not FI, this is my thoughts on rules of thumb:

1 - A starting point is the conventional mortgage limit of 28%, but I always felt that was way to risky. In our dual income household my comfort limit is 28% of one salary. In practice buying at that level meant starting out around 20% of household and steadily dropping, we are now about 10% of household after 10 years.

This rule also conveniently kept the mortgage starting principle balance below 2.5 years salary at recent interest rates - another common rule of thumb around here.

2 & 3 - I don't see how you can create a rule for this. Any rule, especially a rule like KlangFools would mean that the vast majority of families wouldn't buy until they hit their 40s or later. Likely the entire real estate market would collapse from lack of buyers. Guess it would make for some smoking deals for the already FI crowd, maybe thats why they often propose this "rule" ;) .......
Last edited by jharkin on Wed Aug 15, 2018 11:28 am, edited 1 time in total.

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Re: House Value & Mortgage as a Percentage of Net Worth

Post by getthatmarshmallow » Wed Aug 15, 2018 9:22 am

I don't think percentage of net worth matters nearly as much as percentage of income and the comparison with renting, especially if one is buying a house relatively early in life. (Different calculation, maybe, if you're thinking of *spending* a large percentage of your net worth to buy the house outright.) I was two years out of graduate school when we bought our house, and the selling price of our house was two times our net worth, but PITI was 15% of our income.

More importantly, however, was that we really thought ahead. We're a dual income family, but we had plans to drop to one income for a while, so we were very conservative with the house purchase -- on one income, PITI was about 25%. With raises (and refinancing to a 15-year term), it's now just over 10%. So we have a house that we can afford even if one of us unexpectedly loses a job, and the low fixed expense makes a 30% retirement savings rate a breeze.

The rest goes to daycare and apparently feeding my five-year-old endless peanut butter sandwiches. :beer

So consider life changes -- are you going to have kids? will someone quit their job or go part time to care for them? Do you value mobility in your career?

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Re: House Value & Mortgage as a Percentage of Net Worth

Post by KlangFool » Wed Aug 15, 2018 7:25 pm

jharkin wrote:
Wed Aug 15, 2018 7:21 am
So the OP originally asked whats a safe percentage, but now it seems that OP likely has a 7 figure net worth so probably any percentage is 'safe'....

Anyway, for those of us who are not FI, this is my thoughts on rules of thumb:

1 - A starting point is the conventional mortgage limit of 28%, but I always felt that was way to risky. In our dual income household my comfort limit is 28% of one salary. In practice buying at that level meant starting out around 20% of household and steadily dropping, we are now about 10% of household after 10 years.

This rule also conveniently kept the mortgage starting principle balance below 2.5 years salary at recent interest rates - another common rule of thumb around here.

2 & 3 - I don't see how you can create a rule for this. Any rule, especially a rule like KlangFools would mean that the vast majority of families wouldn't buy until they hit their 40s or later. Likely the entire real estate market would collapse from lack of buyers. Guess it would make for some smoking deals for the already FI crowd, maybe thats why they often propose this "rule" ;) .......
jharkin,

<<Any rule, especially a rule like KlangFools would mean that the vast majority of families wouldn't buy until they hit their 40s or later. Likely the entire real estate market would collapse from lack of buyers.>>

1) Actually, that is not true. It is better for me if folks do not listen to me. The real estate market could not collapse if folks are not buying in the first place. The builder would not build the houses. It is when the builder overbuilt and the buyers overstretch their finances to buy the houses, folks like me can come in and find a great deal.

2) It is in everyone's interest except the buyer to overspend on housing, college education, and so on. It subsidizes those folks that know how to shop around and pick up the bargains. If no one is paying the full retail price, then, there is no discount/sell for the bargain shopper.

3) Rent could be cheap due to accidental landlords.

<<2 & 3 - I don't see how you can create a rule for this.>>

4) Anyone could create any rules as long as it makes sense and works for them. My rule allowed me to pay off the mortgage with a 50% stock market drop and move if necessary.

KlangFool

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Re: House Value & Mortgage as a Percentage of Net Worth

Post by unclescrooge » Wed Aug 15, 2018 7:53 pm

KlangFool wrote:
Sun Aug 12, 2018 8:45 pm

I live in the Northern VA/DC Metro area.

KlangFool
For some reason, I always assumed you lived in Phoenix. :mrgreen:

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Re: House Value & Mortgage as a Percentage of Net Worth

Post by KlangFool » Wed Aug 15, 2018 8:06 pm

unclescrooge wrote:
Wed Aug 15, 2018 7:53 pm
KlangFool wrote:
Sun Aug 12, 2018 8:45 pm

I live in the Northern VA/DC Metro area.

KlangFool
For some reason, I always assumed you lived in Phoenix. :mrgreen:
unclescrooge,

The air is too dry for me. I need more humidity.

KlangFool

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Re: House Value & Mortgage as a Percentage of Net Worth

Post by jharkin » Thu Aug 16, 2018 7:04 am

KlangFool wrote:
Wed Aug 15, 2018 7:25 pm
[
jharkin,

<<Any rule, especially a rule like KlangFools would mean that the vast majority of families wouldn't buy until they hit their 40s or later. Likely the entire real estate market would collapse from lack of buyers.>>

1) Actually, that is not true. It is better for me if folks do not listen to me. The real estate market could not collapse if folks are not buying in the first place. The builder would not build the houses. It is when the builder overbuilt and the buyers overstretch their finances to buy the houses, folks like me can come in and find a great deal.

2) It is in everyone's interest except the buyer to overspend on housing, college education, and so on. It subsidizes those folks that know how to shop around and pick up the bargains. If no one is paying the full retail price, then, there is no discount/sell for the bargain shopper.

3) Rent could be cheap due to accidental landlords.

<<2 & 3 - I don't see how you can create a rule for this.>>

4) Anyone could create any rules as long as it makes sense and works for them. My rule allowed me to pay off the mortgage with a 50% stock market drop and move if necessary.

KlangFool
First off, I think I was maybe a bit too harsh on you... I know your plan works well for you, and it is definitely a very safe plan. Based on our discussions if I had the career experiences you did I would probably follow your plan as well. I just think it is too conservative to be used universally.

Just like investing I think home-buying is a risk tolerance question and we all have different risk tolerances - in my case I knew my career was fairly secure and was buying at what we thought was the "bottom" (turns out the bottom was about a year later but in the long run that is not significant) and I ended up making out like a bandit for taking on some risk.

Think back to the Millionaire next door (and Millionaire Mind). People point out the low housing ratio in that book, but also remember there is a whole chapter on "courage and wealth" talking about how smart risk taking is a differentiator of the truly wealthy as well.


BTW, when I joked about the RE market collapsing I was not just thinking about new construction... I am also thinking about owners of existing, old stock homes. Where I live still the majority of families live in old stock (I have never in my life lived in a home built newer than the 1980s) and if nobody was buying all these existing owners homes would have no value... so the owners would be trapped and find it very difficult to sell/move.

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Re: House Value & Mortgage as a Percentage of Net Worth

Post by Jags4186 » Thu Aug 16, 2018 7:25 am

I love these threads. A few things to point out:

While renting is less risky than buying, some of the things KF points out as advantages for renting are not necessarily advantages, or at least, not disadvantages of buying

For example:

If you lost your job and needed to move to a less expensive rental, how would you get a new rental without any income?

If rents increased dramatically and you decided to move to a cheaper place, it’s unlikely that rents increased dramatically on your unit but not the area as a whole. Are you certain that you’d be able to find a similar cheaper rental that allows you to keep proximity to your job?

In a catastrophic situation, if you bought a home, lost your job, went through all of your resources, and could not get out of the house, you can simply stop paying your mortgage and continue to live there until foreclosure. I don’t know how quickly it happens today, but the people who lived across the street from my parents stopped paying on their property and lived there for 2 years before they were foreclosed and evicted. You could then claim bankruptcy and wipe out all of these issues while protecting all of your 401k/IRA assets.

I’m also curious what happens to KF’s plan when the situation changes mid stream. Today he says he pays $1850/mo for housing on units that rent for $2300. What happens if the housing market turns, his townhouse drops from $450k value to $350k value and rentals in his complex drop to $1750/mo. Does KF sell his property at a loss because he can rent cheaper now that it is to buy?

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Re: House Value & Mortgage as a Percentage of Net Worth

Post by KlangFool » Thu Aug 16, 2018 7:33 am

jharkin wrote:
Thu Aug 16, 2018 7:04 am
KlangFool wrote:
Wed Aug 15, 2018 7:25 pm
[
jharkin,

<<Any rule, especially a rule like KlangFools would mean that the vast majority of families wouldn't buy until they hit their 40s or later. Likely the entire real estate market would collapse from lack of buyers.>>

1) Actually, that is not true. It is better for me if folks do not listen to me. The real estate market could not collapse if folks are not buying in the first place. The builder would not build the houses. It is when the builder overbuilt and the buyers overstretch their finances to buy the houses, folks like me can come in and find a great deal.

2) It is in everyone's interest except the buyer to overspend on housing, college education, and so on. It subsidizes those folks that know how to shop around and pick up the bargains. If no one is paying the full retail price, then, there is no discount/sell for the bargain shopper.

3) Rent could be cheap due to accidental landlords.

<<2 & 3 - I don't see how you can create a rule for this.>>

4) Anyone could create any rules as long as it makes sense and works for them. My rule allowed me to pay off the mortgage with a 50% stock market drop and move if necessary.

KlangFool
First off, I think I was maybe a bit too harsh on you... I know your plan works well for you, and it is definitely a very safe plan. Based on our discussions if I had the career experiences you did I would probably follow your plan as well. I just think it is too conservative to be used universally.

Just like investing I think home-buying is a risk tolerance question and we all have different risk tolerances - in my case I knew my career was fairly secure and was buying at what we thought was the "bottom" (turns out the bottom was about a year later but in the long run that is not significant) and I ended up making out like a bandit for taking on some risk.

Think back to the Millionaire next door (and Millionaire Mind). People point out the low housing ratio in that book, but also remember there is a whole chapter on "courage and wealth" talking about how smart risk taking is a differentiator of the truly wealthy as well.


BTW, when I joked about the RE market collapsing I was not just thinking about new construction... I am also thinking about owners of existing, old stock homes. Where I live still the majority of families live in old stock (I have never in my life lived in a home built newer than the 1980s) and if nobody was buying all these existing owners homes would have no value... so the owners would be trapped and find it very difficult to sell/move.
jharkin,

<<Based on our discussions if I had the career experiences you did I would probably follow your plan as well. I just think it is too conservative to be used universally. >>

But, is my experience unique and special?

A lot of people lose their jobs and their houses during

Houston Oil Bust, Texas Saving & Loan Crisis, Asian Currency Crisis, Telecom Bust, 2008/2009 recession.

And, some folks never recover. They are permanently unemployed or under-employed. Those folks do not survive and they do not post on Boglehead forum.

This is a personal finance forum. We are not an economist. We are not a statistic. We could not be 3% unemployed. We are either part of the 3% or the 97%.

<<talking about how smart risk taking is a differentiator of the truly wealthy as well.>>

That chapter has nothing to do with overspending on housing expenses.

<<Just like investing I think home-buying is a risk tolerance question and we all have different risk tolerances >>

As in all financial behavior discussion in term of risk tolerance, folks are over-confident in their ability to handle risk and their job security. The problem with "House Poor" folk is they will lose it all with this mistake. It is a very long-term commitment. They should proceed with extreme caution.

But, folks in their 30s believe that their lives will be sunny all the way. Hence, they committed to an expensive house. Then, the first major laid off happened. They found that their jobs are not as secured as they think.

KlangFool

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Re: House Value & Mortgage as a Percentage of Net Worth

Post by KlangFool » Thu Aug 16, 2018 7:42 am

Jags4186 wrote:
Thu Aug 16, 2018 7:25 am
I love these threads. A few things to point out:

While renting is less risky than buying, some of the things KF points out as advantages for renting are not necessarily advantages, or at least, not disadvantages of buying

For example:

If you lost your job and needed to move to a less expensive rental, how would you get a new rental without any income?

If rents increased dramatically and you decided to move to a cheaper place, it’s unlikely that rents increased dramatically on your unit but not the area as a whole. Are you certain that you’d be able to find a similar cheaper rental that allows you to keep proximity to your job?

In a catastrophic situation, if you bought a home, lost your job, went through all of your resources, and could not get out of the house, you can simply stop paying your mortgage and continue to live there until foreclosure. I don’t know how quickly it happens today, but the people who lived across the street from my parents stopped paying on their property and lived there for 2 years before they were foreclosed and evicted. You could then claim bankruptcy and wipe out all of these issues while protecting all of your 401k/IRA assets.

I’m also curious what happens to KF’s plan when the situation changes mid stream. Today he says he pays $1850/mo for housing on units that rent for $2300. What happens if the housing market turns, his townhouse drops from $450k value to $350k value and rentals in his complex drop to $1750/mo. Does KF sell his property at a loss because he can rent cheaper now that it is to buy?
Jags4186,

1) I do not know how long that you can stop paying property tax.

<<If you lost your job and needed to move to a less expensive rental, how would you get a new rental without any income?>>

2) I guess that you are assuming the person is living in the same area. I am assuming the worst case where the person has to move to a different area and/or country.

<<Today he says he pays $1850/mo for housing on units that rent for $2300. What happens if the housing market turns, his townhouse drops from $450k value to $350k value and rentals in his complex drop to $1750/mo. >>

3) I do not care whatever happened to the rental market and housing market now. My goal of buying the house is to fix my housing expense at $1,800 per month over the next 30 years.

<<I don’t know how quickly it happens today, but the people who lived across the street from my parents stopped paying on their property and lived there for 2 years before they were foreclosed and evicted. >>

4) At my income level, there are only jobs in a certain part of the country. If there are no jobs in this area, I will have to move elsewhere. In some cases like the Asian Currency Crisis, it has to be a different country. Staying at an area where thousands of your peers are laid off is not useful.

KlangFool

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Re: House Value & Mortgage as a Percentage of Net Worth

Post by Jags4186 » Thu Aug 16, 2018 8:04 am

KlangFool wrote:
Thu Aug 16, 2018 7:42 am
Jags4186 wrote:
Thu Aug 16, 2018 7:25 am
I love these threads. A few things to point out:

While renting is less risky than buying, some of the things KF points out as advantages for renting are not necessarily advantages, or at least, not disadvantages of buying

For example:

If you lost your job and needed to move to a less expensive rental, how would you get a new rental without any income?

If rents increased dramatically and you decided to move to a cheaper place, it’s unlikely that rents increased dramatically on your unit but not the area as a whole. Are you certain that you’d be able to find a similar cheaper rental that allows you to keep proximity to your job?

In a catastrophic situation, if you bought a home, lost your job, went through all of your resources, and could not get out of the house, you can simply stop paying your mortgage and continue to live there until foreclosure. I don’t know how quickly it happens today, but the people who lived across the street from my parents stopped paying on their property and lived there for 2 years before they were foreclosed and evicted. You could then claim bankruptcy and wipe out all of these issues while protecting all of your 401k/IRA assets.

I’m also curious what happens to KF’s plan when the situation changes mid stream. Today he says he pays $1850/mo for housing on units that rent for $2300. What happens if the housing market turns, his townhouse drops from $450k value to $350k value and rentals in his complex drop to $1750/mo. Does KF sell his property at a loss because he can rent cheaper now that it is to buy?
Jags4186,

1) I do not know how long that you can stop paying property tax.

<<If you lost your job and needed to move to a less expensive rental, how would you get a new rental without any income?>>

2) I guess that you are assuming the person is living in the same area. I am assuming the worst case where the person has to move to a different area and/or country.

<<Today he says he pays $1850/mo for housing on units that rent for $2300. What happens if the housing market turns, his townhouse drops from $450k value to $350k value and rentals in his complex drop to $1750/mo. >>

3) I do not care whatever happened to the rental market and housing market now. My goal of buying the house is to fix my housing expense at $1,800 per month over the next 30 years.

<<I don’t know how quickly it happens today, but the people who lived across the street from my parents stopped paying on their property and lived there for 2 years before they were foreclosed and evicted. >>

4) At my income level, there are only jobs in a certain part of the country. If there are no jobs in this area, I will have to move elsewhere. In some cases like the Asian Currency Crisis, it has to be a different country. Staying at an area where thousands of your peers are laid off is not useful.

KlangFool
Re: Property tax

I don’t know either, but go ahead and pay your property tax. You’ve lowered your monthly outlay from $1800 to $350ish or so using your numbers.

Re: Moving to a less expensive rental

Doesn’t matter either way. If you move to a new area most landlords still require you to provide income. How can you prove income if you have no job, or even if you have a new job in a new area that hasn’t started paying you yet?

Re: not caring post purchase

You say you don’t care but if we plucked you out of the situation then you made a bad buy. You say you make your money on the buy. You’ve quickly lost the money you made on the buy and are now losing buy owning. I don’t see how you’re okay buying under your rules but not reevaluating when they no longer continue to be true.

Re: Asian currency crisis

This is your weakest argument IMO. Picking up and moving to another country is simply not an option for the overwhelming majority of Americans. It’s not like you can just hop on a plane, show up in Sweden, and get an engineering job. America is at the top of wages in the world anyway, so you gain nothing by leaving. Perhaps you move to another city, but at what point do you make that decision? How long do you wait it out where you are? It costs enormous financial and emotional capital to pick up and move, especially for a non gurranteed situation.

The biggest issue with your rules is that on one side of your mouth you say they are required in your situation based on what’s actually happened to you. On the other side you tell people to follow them. Most people are not going to fall into continuous series of black swan events you have.

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Re: House Value & Mortgage as a Percentage of Net Worth

Post by KlangFool » Thu Aug 16, 2018 8:25 am

Jags4186 wrote:
Thu Aug 16, 2018 8:04 am

Re: Property tax

I don’t know either, but go ahead and pay your property tax. You’ve lowered your monthly outlay from $1800 to $350ish or so using your numbers.

Re: Moving to a less expensive rental

Doesn’t matter either way. If you move to a new area most landlords still require you to provide income. How can you prove income if you have no job, or even if you have a new job in a new area that hasn’t started paying you yet?

Re: not caring post purchase

You say you don’t care but if we plucked you out of the situation then you made a bad buy. You say you make your money on the buy. You’ve quickly lost the money you made on the buy and are now losing buy owning. I don’t see how you’re okay buying under your rules but not reevaluating when they no longer continue to be true.

Re: Asian currency crisis

This is your weakest argument IMO. Picking up and moving to another country is simply not an option for the overwhelming majority of Americans. It’s not like you can just hop on a plane, show up in Sweden, and get an engineering job. America is at the top of wages in the world anyway, so you gain nothing by leaving. Perhaps you move to another city, but at what point do you make that decision? How long do you wait it out where you are? It costs enormous financial and emotional capital to pick up and move, especially for a non gurranteed situation.

The biggest issue with your rules is that on one side of your mouth you say they are required in your situation based on what’s actually happened to you. On the other side you tell people to follow them. Most people are not going to fall into continuous series of black swan events you have.
Jags4186,

1) Housing Expense

When I bought the house, my housing expense is $1,800 and it was 20% to 30% lowered than the rental. That was my safety margin. I fixed my housing expense at $1,800 per month over 30 years. So, are you claiming that it is not a good bet over the long run?

Please note that the conventional wisdom is more aggressive. It assumes that the house's value appreciates. I don't. I only assume that the rental price does not drop 20% to 30% and stay at that lowered value over the whole 30 years.

I save 20% to 30% of my housing expense every year. I make money every year. So, even if I have to sell the house later, I had made my money from all the years that I lived in the house.

<<Picking up and moving to another country is simply not an option for the overwhelming majority of Americans. >>

2) This is a personal finance forum. It is personal. Who cares whether it is relevant to others? The only relevant question is whether it applies to you. In my area, the jobs are globalized. It helps and hurts. We are being outsourced all over the world. On the other hand, we could take on the job globally too. In some cases, location matters. In other cases, location does not matter.

For example,

A) I was telecommuting from Asia for my US job.

B) I am working from home now for my current job while designing network globally.

<<America is at the top of wages in the world anyway,>>

But, I do not have to be physically in the USA for my US job. In fact, even for my current job, as long as I deliver my work, the employer does not care where I am.

<< On the other side you tell people to follow them.>>

I am offering my set of rules as a counterpoint to the common wisdom. Whether folks should follow them, they have to make their own decision. But, it is given that most folks will not follow this set of rules.

<< Most people are not going to fall into continuous series of black swan events you have.>>

1) Many people did not survive any single one of those events.

2) They are not black swan events. It (recessions and economic crisis) occurred regularly.

KlangFool

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jharkin
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Location: Boston suburbs

Re: House Value & Mortgage as a Percentage of Net Worth

Post by jharkin » Thu Aug 16, 2018 9:58 am

KlangFool wrote:
Thu Aug 16, 2018 7:33 am

jharkin,

<<Based on our discussions if I had the career experiences you did I would probably follow your plan as well. I just think it is too conservative to be used universally. >>

But, is my experience unique and special?

A lot of people lose their jobs and their houses during

Houston Oil Bust, Texas Saving & Loan Crisis, Asian Currency Crisis, Telecom Bust, 2008/2009 recession.

And, some folks never recover. They are permanently unemployed or under-employed. Those folks do not survive and they do not post on Boglehead forum.

This is a personal finance forum. We are not an economist. We are not a statistic. We could not be 3% unemployed. We are either part of the 3% or the 97%.

<<talking about how smart risk taking is a differentiator of the truly wealthy as well.>>

That chapter has nothing to do with overspending on housing expenses.

<<Just like investing I think home-buying is a risk tolerance question and we all have different risk tolerances >>

As in all financial behavior discussion in term of risk tolerance, folks are over-confident in their ability to handle risk and their job security. The problem with "House Poor" folk is they will lose it all with this mistake. It is a very long-term commitment. They should proceed with extreme caution.

But, folks in their 30s believe that their lives will be sunny all the way. Hence, they committed to an expensive house. Then, the first major laid off happened. They found that their jobs are not as secured as they think.

KlangFool
I get all that... but again, I stretched and bought a house with 10% down when I had very little other assets - but i had a stable job and houses where selling at a steep discount after the housing bubble burst. Today I pay about 1200 mortgage (1800 total PITI) for that house. In my local market it would cost 2500+ to rent something similar, and I would not be building any equity. The math says that taking the risk on the house paid off handsomely for me.

If I had been renting all those years my net worth would be 6 figures lower today.


Thats all I'm trying to say.

KlangFool
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Re: House Value & Mortgage as a Percentage of Net Worth

Post by KlangFool » Thu Aug 16, 2018 1:23 pm

jharkin wrote:
Thu Aug 16, 2018 9:58 am
KlangFool wrote:
Thu Aug 16, 2018 7:33 am

jharkin,

<<Based on our discussions if I had the career experiences you did I would probably follow your plan as well. I just think it is too conservative to be used universally. >>

But, is my experience unique and special?

A lot of people lose their jobs and their houses during

Houston Oil Bust, Texas Saving & Loan Crisis, Asian Currency Crisis, Telecom Bust, 2008/2009 recession.

And, some folks never recover. They are permanently unemployed or under-employed. Those folks do not survive and they do not post on Boglehead forum.

This is a personal finance forum. We are not an economist. We are not a statistic. We could not be 3% unemployed. We are either part of the 3% or the 97%.

<<talking about how smart risk taking is a differentiator of the truly wealthy as well.>>

That chapter has nothing to do with overspending on housing expenses.

<<Just like investing I think home-buying is a risk tolerance question and we all have different risk tolerances >>

As in all financial behavior discussion in term of risk tolerance, folks are over-confident in their ability to handle risk and their job security. The problem with "House Poor" folk is they will lose it all with this mistake. It is a very long-term commitment. They should proceed with extreme caution.

But, folks in their 30s believe that their lives will be sunny all the way. Hence, they committed to an expensive house. Then, the first major laid off happened. They found that their jobs are not as secured as they think.

KlangFool
I get all that... but again, I stretched and bought a house with 10% down when I had very little other assets - but i had a stable job and houses where selling at a steep discount after the housing bubble burst. Today I pay about 1200 mortgage (1800 total PITI) for that house. In my local market it would cost 2500+ to rent something similar, and I would not be building any equity. The math says that taking the risk on the house paid off handsomely for me.

If I had been renting all those years my net worth would be 6 figures lower today.


Thats all I'm trying to say.
jharkin,

We should agree that our job situation (security and insecurity) may not apply to someone else.

KlangFool

Dagwood
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Re: House Value & Mortgage as a Percentage of Net Worth

Post by Dagwood » Fri Aug 17, 2018 5:59 am

My grandfather, a child of the Depression, mentioned to me that your mortgage should generally be no more than twice your annual income. Interest rates were generally higher in his time, and my parents’ time, so I could definitely see people going above that a bit, as none of this is scientific. That being said, my wife and I followed the rule of thumb when we bought our current home and now we are in our early to mid 40s. With raises and what not and even with the addition of two kids, we are comfortable, save more than adequately (well into seven figures), and the loss of one of our jobs would not endanger our ability to meet our monthly bills.

Had we done what many people in our cohort due and buy a more expensive home and/or moved when our income went up, it is doubtful to me we would enjoy the financial security we now enjoy. Moreover, debt and leverage has that destructive quality on your finances in the sense that when you are too stretched, those unexpected expenses occur (there should be nothing unexpected about them other than what they will be for) and you wind up either going down the credit card debt route or negatively impacting savings. That is how a lot of folks, in my view, wind up behind the proverbial 8 ball.

People tie up all sorts of emotion in housing, but the reality is that it provides walls and shelter to live in and raise a family. It is a box that sits out in the weather and deteriorates continuously, albeit slowly. If your neighborhood is safe and the home suits your needs it is sufficient. It is when people tie up other things in a house that poor financial decisions are made.

SQRT
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Joined: Sat Feb 05, 2011 9:44 am

Re: House Value & Mortgage as a Percentage of Net Worth

Post by SQRT » Fri Aug 17, 2018 7:21 am

Dagwood wrote:
Fri Aug 17, 2018 5:59 am

Had we done what many people in our cohort due and buy a more expensive home and/or moved when our income went up, it is doubtful to me we would enjoy the financial security we now enjoy. Moreover, debt and leverage has that destructive quality on your finances in the sense that when you are too stretched, those unexpected expenses occur (there should be nothing unexpected about them other than what they will be for) and you wind up either going down the credit card debt route or negatively impacting savings. That is how a lot of folks, in my view, wind up behind the proverbial 8 ball.

People tie up all sorts of emotion in housing, but the reality is that it provides walls and shelter to live in and raise a family. It is a box that sits out in the weather and deteriorates continuously, albeit slowly. If your neighborhood is safe and the home suits your needs it is sufficient. It is when people tie up other things in a house that poor financial decisions are made.
I generally agree with this point of view. Real estate is housing,a place to live your life. Pretty important though. Owning, a house gives you more control over your life(assuming you don’t spend more than you can afford). So ownership can have advantages over renting.

The issue often relates to younger people starting out. Most have to stretch to buy that first house with the idea that future career/job advancement will ease things somewhat. Obviously, things may not go according to plan and affordability issues could arise.

I have never viewed my personal use real estate as an investment, rather a consumable. That is, something that increases my expenses. However, on the plus side, real estate is something I get to enjoy. Lifestyle related. Obviously, you can pay more than you can afford(like anything else).

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jharkin
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Re: House Value & Mortgage as a Percentage of Net Worth

Post by jharkin » Fri Aug 17, 2018 7:54 am

KlangFool wrote:
Thu Aug 16, 2018 1:23 pm

jharkin,

We should agree that our job situation (security and insecurity) may not apply to someone else.

KlangFool
Agreed. And I would think that could be for both of us. You plan for 5 year unemployment stretches, but I don't think that is typical. I am hoping for a 35-40 year career in tech, and that is not average either. Most folks will be somewhere in between and thus shouldn't plan for either extreme.

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