Housing Bubble plus Inflation? How to save for down payment now?

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Nsu0000
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Housing Bubble plus Inflation? How to save for down payment now?

Post by Nsu0000 »

I won't get into details on whether or not inflation is coming or if we're in an actual housing bubble or not, but it's clear that housing prices are going up rapidly in many markets, savings accounts pay very low interest and there are some concerns that inflation is rising.

My question is if I happen to be at a stage where I was saving for a down payment on a house in cash, should I do anything different right now? Seems like a terrible time to buy with potentially inflated prices but also a terrible time to leave a lot of my assets in cash just to see if the housing market settles down.

As far as timing I was expecting to purchase sometime between this fall and next spring.
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leeks
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Re: Housing Bubble plus Inflation? How to save for down payment now?

Post by leeks »

Save more cash if you can.
Last edited by leeks on Wed Jun 09, 2021 9:17 am, edited 1 time in total.
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Nate79
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Re: Housing Bubble plus Inflation? How to save for down payment now?

Post by Nate79 »

Nsu0000 wrote: Wed Jun 09, 2021 7:37 am I won't get into details on whether or not inflation is coming or if we're in an actual housing bubble or not, but it's clear that housing prices are going up rapidly in many markets, savings accounts pay very low interest and there are some concerns that inflation is rising.

My question is if I happen to be at a stage where I was saving for a down payment on a house in cash, should I do anything different right now? Seems like a terrible time to buy with potentially inflated prices but also a terrible time to leave a lot of my assets in cash just to see if the housing market settles down.

As far as timing I was expecting to purchase sometime between this fall and next spring.
Save more.
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leeks
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Re: Housing Bubble plus Inflation? How to save for down payment now?

Post by leeks »

And response to inflation in general would be to increase your income.
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retired@50
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Re: Housing Bubble plus Inflation? How to save for down payment now?

Post by retired@50 »

Welcome to the forum. :happy

Sorry about your predicament. Economics lessons are sometimes painful.

Regards,
This is one person's opinion. Nothing more.
Valuethinker
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Re: Housing Bubble plus Inflation? How to save for down payment now?

Post by Valuethinker »

Nsu0000 wrote: Wed Jun 09, 2021 7:37 am I won't get into details on whether or not inflation is coming or if we're in an actual housing bubble or not, but it's clear that housing prices are going up rapidly in many markets, savings accounts pay very low interest and there are some concerns that inflation is rising.

My question is if I happen to be at a stage where I was saving for a down payment on a house in cash, should I do anything different right now? Seems like a terrible time to buy with potentially inflated prices but also a terrible time to leave a lot of my assets in cash just to see if the housing market settles down.

As far as timing I was expecting to purchase sometime between this fall and next spring.
Your choices are really totally safe assets like bank CDs within FDIC limits, or investing in equities.

If the next housing price downturn coincides with the next bear market in stocks, investing your downpayment in stocks would not have been a good strategy.

So:

- the real solution is to save more, there's no way around that

My own view, and I think Bill McBride of Calculated Risk Blog (who correctly called both the 2006 peak and the 2012 bottom of the US housing market) thinks this, is that the US is not in a housing bubble (Canada is). What you have is a shortage of supply due to Covid-19 factors, and a surge in demand due to Millennials reaching that 28+ year age plus Covid-related savings (not spending) plus lowest mortgage rates, ever.

There may be local bubbles - I don't know. But generally, the outlook might be for lower price inflation in the future (and there's been a shift, partly Covid related, away from downtown condos towards suburban and exurban homes) as price gains fall back to what's reasonable in terms of real income growth. I can't rule out it getting out of hand in the way it appears to be doing in Canada, however.

- you can invest some of that money in equity. It's always worth thinking in equity when you invest is that a bear market can bring 20-50% fall in value. And you have to have a mental strategy for what you do about that, and how you would feel. Equities are a great game, but they are a long term game - by which we mean 10 years+. At least 3 decades in the past 100 years were not great for stocks: 1930-40, 1970-80, 2000-10.

December 2018 saw about a 20% drop from memory. Covid-19 saw a 30-35% drop in the space of about a month. 2008-09 saw an over 40% drop (depends on which index and which market, I am doing this from memory) and I can tell you that anyone involved in banking or finance never, ever, wants to live through that again. The literal case, put to the Chancellor (Treasury Secretary) was that "if we don't do something, by Monday morning there will be no money left in the bank machines (ATMs)" as they contemplated the insolvency of what was the world's 4th (?) largest bank by assets (Royal Bank of Scotland - owned Citizens Bank in USA).

Waking up to find that Saddam Hussein had occupied Kuwait City was not a great day, either (August 1990).

Further back, many of us remember October 1987. In which the markets dropped something like 30% over 2 trading days. Many brokers were in fact trading insolvent at that time, but fortunately there wasn't real time information, and the Fed worked behind the scenes to make sure that the brokers got short term liquidity (cash) to cover their immediate outgoings.

So you have to be mentally ready for those moments. Stock market euphoria, like we've experienced last April, is balanced by the sickening lurches downwards. In in 2000-03 (the dot com bubble blow) it went down, and down... minus 35% in something like 30 months. I gather the 1970s bear market was like that too (I wasn't really paying attention, then).

Therefore

Put 25% of your downpayment in equities? Enough to "juice" your returns, but if you lose half of it, it's not disastrous?
chassis
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Re: Housing Bubble plus Inflation? How to save for down payment now?

Post by chassis »

Prices won’t be lower or more tolerable 6-12 months from now.

Save in a combination of a high yield savings account and equities in a taxable account. Equities are going higher.
campy2010
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Re: Housing Bubble plus Inflation? How to save for down payment now?

Post by campy2010 »

Same boat. My timeline is flexible and live in a HCOL area so downpayments are big chunks of cash. Therefore, I mostly save in a taxable account. I was listening to Boglehead advice about cash for near term purchases and got tired of having so much cash sitting around and invested it during one of the low points last year. No regrets.
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leeks
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Re: Housing Bubble plus Inflation? How to save for down payment now?

Post by leeks »

chassis wrote: Wed Jun 09, 2021 10:28 am Prices won’t be lower or more tolerable 6-12 months from now.

Save in a combination of a high yield savings account and equities in a taxable account. Equities are going higher.
We don't know if prices will change, but there could (hopefully) be increased supply next year making it easier to obtain a suitable property. In the areas I follow, there have been so few houses for sale this year that I think it is worth waiting just in the hopes of getting a wider selection. Some neighborhoods have had almost no turnover so a buyer with specific location and house criteria must wait.
exodusNH
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Re: Housing Bubble plus Inflation? How to save for down payment now?

Post by exodusNH »

Nsu0000 wrote: Wed Jun 09, 2021 7:37 am I won't get into details on whether or not inflation is coming or if we're in an actual housing bubble or not, but it's clear that housing prices are going up rapidly in many markets, savings accounts pay very low interest and there are some concerns that inflation is rising.

My question is if I happen to be at a stage where I was saving for a down payment on a house in cash, should I do anything different right now? Seems like a terrible time to buy with potentially inflated prices but also a terrible time to leave a lot of my assets in cash just to see if the housing market settles down.

As far as timing I was expecting to purchase sometime between this fall and next spring.
With that timeline, you need to save as much as you can. Sometimes credit unions have weird term CDs (e.g.) 7 months that will pay a bit more. I have an online account with Vio Bank that's paying 0.57%. HMBradley offers great rates if you can jump through a few hoops. Those funds are held at Hatch Bank. (You can search the forum for more info.) Other banks offer checking accounts with high rates if you do direct deposit and perform a certain number of transactions on the associated debit card. (They make money on debit card fees that merchants pay.)
jastevenson
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Re: Housing Bubble plus Inflation? How to save for down payment now?

Post by jastevenson »

Renter here.

How much does one typically need for a down payment? My understanding is that you can go super low as long as you are willing to pay PMI.

Or are there other downsides I don’t know of vs having the whole 20% down payment in cash?
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Re: Housing Bubble plus Inflation? How to save for down payment now?

Post by DarkHelmetII »

Harry Browne Permanent Portfolio
RXfiles
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Re: Housing Bubble plus Inflation? How to save for down payment now?

Post by RXfiles »

I'm investing half of my "down payment" money. Wife and I both have stable jobs that are pretty recession proof. If it crashes, we'll just wait 6 more months or so.
KlangFool
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Re: Housing Bubble plus Inflation? How to save for down payment now?

Post by KlangFool »

Nsu0000 wrote: Wed Jun 09, 2021 7:37 am
My question is if I happen to be at a stage where I was saving for a down payment on a house in cash, should I do anything different right now?
Nsu0000,

If you need to save for a house down payment, you are buying a house that you cannot afford. So, there is no reason to save for a house down payment.

If you disagree, please list down

A) Your current annual savings

B) Your current rent

C) Your current emergency fund size

D) The price of the house that you plan to buy.

If you go through the numbers, you will find that you are planning to buy a house that you cannot afford to keep. You cannot afford to buy that house.

I do not save for a house down payment. Between my annual savings and my emergency fund, I have the money for the 20% down payment to buy my house.

KlangFool
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Re: Housing Bubble plus Inflation? How to save for down payment now?

Post by DVMResident »

jastevenson wrote: Wed Jun 09, 2021 11:50 am Renter here.

How much does one typically need for a down payment? My understanding is that you can go super low as long as you are willing to pay PMI.

Or are there other downsides I don’t know of vs having the whole 20% down payment in cash?
It might be blasphemous to say on this board, but you’re correct. You don’t need to have 20% down. Most Americans only put down an average of 11% and median of 5%.

The downside beyond PMI is your rate and principle will be a bit higher. A higher rate, higher principle balance, and PMI (with nonFHA PMI typically only lasts 5 years or until an equity build up is enough) all contribute to a higher costs and greater strain on your monthly cash-flow. It may or may not be affordable depending on your income.

A minor aside is your purchase application can be as less competitive as someone with a higher down payment.
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Strifey
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Re: Housing Bubble plus Inflation? How to save for down payment now?

Post by Strifey »

KlangFool wrote: Wed Jun 09, 2021 2:29 pm
Nsu0000 wrote: Wed Jun 09, 2021 7:37 am
My question is if I happen to be at a stage where I was saving for a down payment on a house in cash, should I do anything different right now?
Nsu0000,

If you need to save for a house down payment, you are buying a house that you cannot afford. So, there is no reason to save for a house down payment.

If you disagree, please list down

A) Your current annual savings

B) Your current rent

C) Your current emergency fund size

D) The price of the house that you plan to buy.

If you go through the numbers, you will find that you are planning to buy a house that you cannot afford to keep. You cannot afford to buy that house.

I do not save for a house down payment. Between my annual savings and my emergency fund, I have the money for the 20% down payment to buy my house.

KlangFool
That seems highly dependent on area... I save alot and have income to afford a place but I live in SoCal and a 2bd 1100 sq ft. condo is $550-$600K so I need to actively set aside money for a downpayment... so I have $90K in a HYSA earning .5% interest. That being said I didn't save directly into the HYSA, I saved into a taxable brokerage throughout my 20s knowing that I didn't have a strict timeline on home ownership and liquidated a portion of it in my 30s now that I've been looking to buy a starter condo. So maybe that's a bit different in this case? But the fact is a have a decent chunk of money that is basically doing nothing for me currently.

I make $126K gross base (~140K with profit share), I have emergency funds of $10K, brokerage/401K/Roth IRA of ~$800K, and save $30-$40K annually but primarily into 401K, Roth IRA, and mega-backdoor Roth IRA.

I know that technically you don't need 20%, but in this market (from first hand experience) people aren't even counter offering under 20% because of waived appraisal contingencies. One of the condos I ended up losing had 12 offers, but they only counter offered 8 people who at least had 20% down which I was one of.
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Re: Housing Bubble plus Inflation? How to save for down payment now?

Post by KlangFool »

Strifey wrote: Wed Jun 09, 2021 3:33 pm
KlangFool wrote: Wed Jun 09, 2021 2:29 pm
Nsu0000 wrote: Wed Jun 09, 2021 7:37 am
My question is if I happen to be at a stage where I was saving for a down payment on a house in cash, should I do anything different right now?
Nsu0000,

If you need to save for a house down payment, you are buying a house that you cannot afford. So, there is no reason to save for a house down payment.

If you disagree, please list down

A) Your current annual savings

B) Your current rent

C) Your current emergency fund size

D) The price of the house that you plan to buy.

If you go through the numbers, you will find that you are planning to buy a house that you cannot afford to keep. You cannot afford to buy that house.

I do not save for a house down payment. Between my annual savings and my emergency fund, I have the money for the 20% down payment to buy my house.

KlangFool
That seems highly dependent on area... I save alot and have income to afford a place but I live in SoCal and a 2bd 1100 sq ft. condo is $550-$600K so I need to actively set aside money for a downpayment. I'm in a similar boat as OP where I tried to buy in June 2020 but have lost a few offers and now feel like the market is too crazy... so I have $90K in a HYSA earning .5% interest. That being said I didn't save directly into the HYSA, I saved into a taxable brokerage throughout my 20s knowing that I didn't have a strict timeline on home ownership and liquidated a portion of it in my 30s now that I've been looking to buy a starter condo. So maybe that's a bit different in this case? But the fact is a have a decent chunk of money that is basically doing nothing for me currently.

I make $126K gross base (~140K with profit share), I have emergency funds of $10K, brokerage/401K/Roth IRA of ~$800K, and save $30-$40K annually but primarily into 401K, Roth IRA, and mega-backdoor Roth IRA.

I know that technically you don't need 20%, but in this market (from first hand experience) people aren't even counter offering under 20% because of waived appraisal contingencies. One of the condos I ended up losing had 12 offers, but they only counter offered 8 people who at least had 20% down which I was one of.
Strifey,

<<I make $126K gross base (~140K with profit share), I have emergency funds of $10K, brokerage/401K/Roth IRA of ~$800K, and save $30-$40K annually but primarily into 401K, Roth IRA, and mega-backdoor Roth IRA.>>

<<I live in SoCal and a 2bd 1100 sq ft. condo is $550-$600K >>

If you want to take the challenge, list down your

A) Current rent

B) The PITI of the 550K to 600K condo with 20% down payment and 30 years mortgage and the HOA/Condo fee of that condo

Being in SoCal does not change the calculation of whether you have enough current annual saving to handle the increase in housing expense when you buy a house.

KlangFool
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rich126
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Re: Housing Bubble plus Inflation? How to save for down payment now?

Post by rich126 »

Really the best hope is for the prices to calm down which will eventually happen. Whether the "correction" will bring them below today's level no one knows. I know I've lived through this previously with everyone claiming no correction would occur but it did, and in my area, it was extreme (50%+).

Back to the original question, unless you are a very highly paid person, housing costs right now are increasing much faster than most people can save for. A $500K house that goes up 10% is 50K. You aren't going to be able to save that in a year while maxing out other savings.

When I was starting out, I did what others mentioned here, put as little down as possible (maybe 5%). Then lived in it for a while and the price appreciation is basically leverage on your initial investment. There certainly is risk in that the house may not appreciate, you may be forced to sell in a bad market due to a job situation, etc.

I find investing and people's comments on it similar to fans talking about sports. A team wins a few games and people think they are going to the playoffs and may not lose again, if it loses a few games, it is doom and gloom. We just went through this ~15 months ago when the market "crashed" and the world was ending. Look at it now. Right now housing won't ever drop again and people are falling all over themselves bidding on a place simply to live w/o any guarantee they will be able to stay there long term (few will stay in the same job forever and many companies are pulling people back into offices).

I'm sure it is stressful for those considering to buy.
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Re: Housing Bubble plus Inflation? How to save for down payment now?

Post by mutedbytes »

KlangFool wrote: Wed Jun 09, 2021 2:29 pm
Nsu0000 wrote: Wed Jun 09, 2021 7:37 am
My question is if I happen to be at a stage where I was saving for a down payment on a house in cash, should I do anything different right now?
Nsu0000,

If you need to save for a house down payment, you are buying a house that you cannot afford. So, there is no reason to save for a house down payment.

If you disagree, please list down

A) Your current annual savings

B) Your current rent

C) Your current emergency fund size

D) The price of the house that you plan to buy.

If you go through the numbers, you will find that you are planning to buy a house that you cannot afford to keep. You cannot afford to buy that house.

I do not save for a house down payment. Between my annual savings and my emergency fund, I have the money for the 20% down payment to buy my house.

KlangFool
KlangFool, you often appear in down payment discussions with this idea and I can never quite understand where you are coming from. It almost seems as if you are implying that, you can accumulate an emergency fund without calling it a down payment and then one day it reaches critical mass and all of a sudden you can recharacterize it as a down payment. Don't mean to hijack the thread but I would very much like to understand exactly your thoughts because I don't understand it enough to agree/disagree and believe you clearly have some wisdom behind it.
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Re: Housing Bubble plus Inflation? How to save for down payment now?

Post by KlangFool »

mutedbytes wrote: Wed Jun 09, 2021 4:28 pm
KlangFool wrote: Wed Jun 09, 2021 2:29 pm
Nsu0000 wrote: Wed Jun 09, 2021 7:37 am
My question is if I happen to be at a stage where I was saving for a down payment on a house in cash, should I do anything different right now?
Nsu0000,

If you need to save for a house down payment, you are buying a house that you cannot afford. So, there is no reason to save for a house down payment.

If you disagree, please list down

A) Your current annual savings

B) Your current rent

C) Your current emergency fund size

D) The price of the house that you plan to buy.

If you go through the numbers, you will find that you are planning to buy a house that you cannot afford to keep. You cannot afford to buy that house.

I do not save for a house down payment. Between my annual savings and my emergency fund, I have the money for the 20% down payment to buy my house.

KlangFool
KlangFool, you often appear in down payment discussions with this idea and I can never quite understand where you are coming from. It almost seems as if you are implying that, you can accumulate an emergency fund without calling it a down payment and then one day it reaches critical mass and all of a sudden you can recharacterize it as a down payment. Don't mean to hijack the thread but I would very much like to understand exactly your thoughts because I don't understand it enough to agree/disagree and believe you clearly have some wisdom behind it.
mutedbytes,

Ask yourself the first question first?

A) Is your goal to buy and keep the house?

Or,

B) Buy the house and lose the house to the bank in a few years if you are unemployed?

If your answer is (B), don't you need

1) Enough annual saving to pay and keep the house after you bought it?

2) Enough emergency fund to pay for the increased annual expense with the new housing expense

Do your own calculation and run through the numbers. It would be highly educational.

<<if you are implying that, you can accumulate an emergency fund without calling it a down payment and then one day>>

Someone that are buying a house that they can afford.

A) Has enough annual savings to handle the increased housing expense from buying the house.

B) Has enough emergency fund plus annual savings to handle the 20% down payment.

C) Has enough emergency fund after buying the house to keep the house if they are unemployed for a while.

KlangFool
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1789
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Re: Housing Bubble plus Inflation? How to save for down payment now?

Post by 1789 »

KlangFool wrote: Wed Jun 09, 2021 2:29 pm
Nsu0000 wrote: Wed Jun 09, 2021 7:37 am
My question is if I happen to be at a stage where I was saving for a down payment on a house in cash, should I do anything different right now?
Nsu0000,

If you need to save for a house down payment, you are buying a house that you cannot afford. So, there is no reason to save for a house down payment.

If you disagree, please list down

A) Your current annual savings

B) Your current rent

C) Your current emergency fund size

D) The price of the house that you plan to buy.

If you go through the numbers, you will find that you are planning to buy a house that you cannot afford to keep. You cannot afford to buy that house.

I do not save for a house down payment. Between my annual savings and my emergency fund, I have the money for the 20% down payment to buy my house.

KlangFool
KlangFool

Annual savings - what is this? If my annual savings is 50% which goes to 401ks/Roth Iras/HSA/529s do you mean one can stop those and put that money for a house downpayment?
"My conscience wants vegetarianism to win over the world. And my subconscious is yearning for a piece of juicy meat. But what do i want?" (Andrei Tarkovsky)
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Re: Housing Bubble plus Inflation? How to save for down payment now?

Post by KlangFool »

1789 wrote: Wed Jun 09, 2021 6:13 pm
KlangFool wrote: Wed Jun 09, 2021 2:29 pm
Nsu0000 wrote: Wed Jun 09, 2021 7:37 am
My question is if I happen to be at a stage where I was saving for a down payment on a house in cash, should I do anything different right now?
Nsu0000,

If you need to save for a house down payment, you are buying a house that you cannot afford. So, there is no reason to save for a house down payment.

If you disagree, please list down

A) Your current annual savings

B) Your current rent

C) Your current emergency fund size

D) The price of the house that you plan to buy.

If you go through the numbers, you will find that you are planning to buy a house that you cannot afford to keep. You cannot afford to buy that house.

I do not save for a house down payment. Between my annual savings and my emergency fund, I have the money for the 20% down payment to buy my house.

KlangFool
KlangFool

Annual savings - what is this? If my annual savings is 50% which goes to 401ks/Roth Iras/HSA/529s do you mean one can stop those and put that money for a house downpayment?
1789,

It is the amount that you save every year. If you have ZERO annual saving, how do you pay for the increased housing expense?

<<If my annual savings is 50% which goes to 401ks/Roth Iras/HSA/529s do you mean one can stop those and put that money for a house downpayment?>>

For down payment and the increased housing expense.

KlangFool
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rockstar
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Re: Housing Bubble plus Inflation? How to save for down payment now?

Post by rockstar »

Looks like you need some after tax savings and a good emergency fund. I would aim for 5% down plus closing fees plus first year of repairs. You'll have stuff break on you for sure the first two years. The home warranty won't handle everything. Some things will be cheap like light bulbs. Others will be expensive like plumbing. You're also going to want to furnish it. It will also take your first year to get a handle on your expected utility bills.

I'd start a taxable investment account.

I have no clue what's going to happen with home prices or inflation.
nydoc
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Re: Housing Bubble plus Inflation? How to save for down payment now?

Post by nydoc »

I am in exact same situation. I have saved 20-25% for down payment in cash which is staying at HYSA. I will likely need to buy a house in 1-2 years but worried that prices will
Keep going up, inflation will go up and mortgage rates will rise. I may buy a smaller house close to my workplace for these couple of years just to lock some assets in at current price and rates.
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Strifey
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Re: Housing Bubble plus Inflation? How to save for down payment now?

Post by Strifey »

KlangFool wrote: Wed Jun 09, 2021 3:43 pm Strifey,

<<I make $126K gross base (~140K with profit share), I have emergency funds of $10K, brokerage/401K/Roth IRA of ~$800K, and save $30-$40K annually but primarily into 401K, Roth IRA, and mega-backdoor Roth IRA.>>

<<I live in SoCal and a 2bd 1100 sq ft. condo is $550-$600K >>

If you want to take the challenge, list down your

A) Current rent

B) The PITI of the 550K to 600K condo with 20% down payment and 30 years mortgage and the HOA/Condo fee of that condo

Being in SoCal does not change the calculation of whether you have enough current annual saving to handle the increase in housing expense when you buy a house.

KlangFool
Current rent $2K, PITI on $550K with 20% down is ~$2.8K depending on HOA in my area.

I'm not disagreeing about having savings to handle the increase in housing expense. I know I have enough savings because I save $30-$40K/yr as mentioned but it's primarily into retirement accounts.

The part that has me hung up is this comment "If you need to save for a house down payment, you are buying a house that you cannot afford."

Especially in this market it's highly unlikely to get a house without a 20% downpayment. Most people aren't going to have an emergency fund or annual savings that supports a $110K downpayment for a starter 2bd condo in a HCOL, thus they need to save for a downpayment (and ideally more) before considering purchasing a home.

For myself it meant I wasn't ready for home ownership until my 30s. Because I still wanted to balance 401K, Roth IRA, and then saving for something like a downpayment first. So that means putting in 401K up to match, maxing my Roth IRA, and putting some savings into a taxable brokerage throughout my 20s so I could balance having liquid savings and retirement funds. I have the income to support PITI on a $440K mortgage, but it meant I also had to save for a $110K down payment in my 20s.
Lee_WSP
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Re: Housing Bubble plus Inflation? How to save for down payment now?

Post by Lee_WSP »

Earn more and save more or down size your house wants. Sorry, but that’s just the math. I wish I had a better answer.
LittleMaggieMae
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Re: Housing Bubble plus Inflation? How to save for down payment now?

Post by LittleMaggieMae »

jastevenson wrote: Wed Jun 09, 2021 11:50 am Renter here.

How much does one typically need for a down payment? My understanding is that you can go super low as long as you are willing to pay PMI.

Or are there other downsides I don’t know of vs having the whole 20% down payment in cash?
As has been noted you don't need 20% down. And you may have a higher interest rate on a bigger principle (the higher interest rate isn't a given. You might get a very good low competitive rate - I think it depends on other things like your debt to income ratio for instance.)

Another possible issue is that you might not have a lot of "cash" for AFTER you purchase - especially if you were looking for change in the couch cushions in order to scrape together a minimal down payment OR if it took you a long time to build up that minimal down payment OR if you did some extreme belt tightening to get the down payment money. The first year or two after a house purchase comes with a lot of expenses (moving, buying new stuff for the house, and the obligatory "oh no! something broke or stopped working!".) If you don't have an EF or don't have some Cash Reserved for after the purchase you may wind up in consumer debt (Credit Card). Along with that bigger mortgage payment. You can see where that might lead.

(FWIW: I have young relatives who, in the last 5 years, put down 3%, 5%, or 10% on houses that were $300K or less, they had cash reserves for after the purchase, and were able to 're-fi' their mortgage after 2 or 3 years and have PMI removed. They groused about how they had to "pay" to have PMI removed - either thru the refinance costs (which weren't that bad - lower interest rates and a house that went up in value.) or thru having to pay for an appraisal/and a fee to have it removed (house went up in value - and ROI on the cost to remove PMI was usually 12 months or less. In the long run it was worth it to have it removed. )
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Nsu0000
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Re: Housing Bubble plus Inflation? How to save for down payment now?

Post by Nsu0000 »

I realize some of my original post was maybe misleading, but I'm not concerned about saving the money (I actually have more than a 20% down payment in cash now, I just won't be in a position to actually move/purchase the home until about 6 to maybe 18 months at the top end due to a bunch of factors I won't go into, this is maybe more like nydoc' s situation. The location may also change slightly so I can't buy early).

I'm more concerned about keeping all that cash just sitting around for the next year or so while it potentially becomes worth less more rapidly due to inflation. I'm also concerned about buying a house at these prices if they are still artificially high come fall. I own a home now (bought in 2016) in a neighborhood built in 2004. I've seen all of the foreclosures and people struggling who bought at inflated prices then.

Anyway, some good advice in this thread, even if it seems like the best option is to basically do nothing. I may hedge a bit and move a smallish percentage to VTSAX or something similar and just accept the risk (buy less house, etc.) and hold the index fund if it drops between now and then. It's definitely possible this will back fire though and I may just stay with cash.

One other thought I had (that wouldn't apply to first time buyers) is to pay down my current mortgage (at 2.35% interest) with my down payment cash and take out a home equity line of credit to use as my down payment money (assuming I would immediately pay of the HELOC when I can sell my current home and move).
Flannelbeard
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Re: Housing Bubble plus Inflation? How to save for down payment now?

Post by Flannelbeard »

Nsu0000 wrote: Wed Jun 09, 2021 7:37 am it's clear that housing prices are going up rapidly in many markets
House prices have already gone up. Nobody knows if it will continue, reverse, or stall.
mutedbytes
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Re: Housing Bubble plus Inflation? How to save for down payment now?

Post by mutedbytes »

KlangFool wrote: Wed Jun 09, 2021 4:54 pm
mutedbytes wrote: Wed Jun 09, 2021 4:28 pm
KlangFool wrote: Wed Jun 09, 2021 2:29 pm
Nsu0000 wrote: Wed Jun 09, 2021 7:37 am
My question is if I happen to be at a stage where I was saving for a down payment on a house in cash, should I do anything different right now?
Nsu0000,

If you need to save for a house down payment, you are buying a house that you cannot afford. So, there is no reason to save for a house down payment.

If you disagree, please list down

A) Your current annual savings

B) Your current rent

C) Your current emergency fund size

D) The price of the house that you plan to buy.

If you go through the numbers, you will find that you are planning to buy a house that you cannot afford to keep. You cannot afford to buy that house.

I do not save for a house down payment. Between my annual savings and my emergency fund, I have the money for the 20% down payment to buy my house.

KlangFool
KlangFool, you often appear in down payment discussions with this idea and I can never quite understand where you are coming from. It almost seems as if you are implying that, you can accumulate an emergency fund without calling it a down payment and then one day it reaches critical mass and all of a sudden you can recharacterize it as a down payment. Don't mean to hijack the thread but I would very much like to understand exactly your thoughts because I don't understand it enough to agree/disagree and believe you clearly have some wisdom behind it.
mutedbytes,

Ask yourself the first question first?

A) Is your goal to buy and keep the house?

Or,

B) Buy the house and lose the house to the bank in a few years if you are unemployed?

If your answer is (B), don't you need

1) Enough annual saving to pay and keep the house after you bought it?

2) Enough emergency fund to pay for the increased annual expense with the new housing expense

Do your own calculation and run through the numbers. It would be highly educational.

<<if you are implying that, you can accumulate an emergency fund without calling it a down payment and then one day>>

Someone that are buying a house that they can afford.

A) Has enough annual savings to handle the increased housing expense from buying the house.

B) Has enough emergency fund plus annual savings to handle the 20% down payment.

C) Has enough emergency fund after buying the house to keep the house if they are unemployed for a while.

KlangFool
KlangFool,

Thanks for the response. I think I can understand the spirit of your point. Just like we maintain X amount of months or years of living expenses in an emergency fund, this should remain true even the moment after making such a purchase for all the conditions that arise as a result of that purchase.

In regards to the questions you put forth:
One would hope that the portion of annual savings towards a down payment + current annual rent would at least match the annual ownership cost post purchase.
Are you suggesting that if 1) one amasses an "emergency fund" or savings large enough that removing 20% of the cost of a home leaves enough emergency fund left over that still covers X amount of time/expenses of the new home in combination with 2) a current annual savings rate that, along with current rent cost, is equal or greater than the total cost of ownership of the new home that one can actually afford that purchase?
Though it isn't clear why "saving for a down payment" and meeting the presented conditions are mutually exclusive.
KlangFool
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Re: Housing Bubble plus Inflation? How to save for down payment now?

Post by KlangFool »

Strifey wrote: Wed Jun 09, 2021 7:45 pm
KlangFool wrote: Wed Jun 09, 2021 3:43 pm Strifey,

<<I make $126K gross base (~140K with profit share), I have emergency funds of $10K, brokerage/401K/Roth IRA of ~$800K, and save $30-$40K annually but primarily into 401K, Roth IRA, and mega-backdoor Roth IRA.>>

<<I live in SoCal and a 2bd 1100 sq ft. condo is $550-$600K >>

If you want to take the challenge, list down your

A) Current rent

B) The PITI of the 550K to 600K condo with 20% down payment and 30 years mortgage and the HOA/Condo fee of that condo

Being in SoCal does not change the calculation of whether you have enough current annual saving to handle the increase in housing expense when you buy a house.

KlangFool
Current rent $2K, PITI on $550K with 20% down is ~$2.8K depending on HOA in my area.

I'm not disagreeing about having savings to handle the increase in housing expense. I know I have enough savings because I save $30-$40K/yr as mentioned but it's primarily into retirement accounts.
Strifey,

1) Let's assume that you earn 140K per year and save 40K per year.

2) Your current rent = 24K per year.

3) Let's assume your total tax = 30K per year.

4) Your current expense excluding rent = 140K - 40K (saving) - 30K (taxes) - 24K (rent) = 46K per year.

5) Your current annual expense including rent = 46K + 24K = 70K

6) Your future annual expense including the condo = 46K + 12 X 2.8K = 46K + 33.6K = 79.6K

7) Your future annual savings = 40K - 9.6K = 29.4K

8) Let's use 6 months of expense as your standard EF,

Your EF before buying the house= 35K
Your EF after buying the house = 39.8K

9) 20% of the down payment = 110K

10) Amount of money needed to buy the house = 20% down payment + additional EF after buying the house = 110K + 4.8K ~ 114.8K.

11) 114.8K / 40K ~ 3 years of annual saving.

So, in your case, you cannot get the down payment with your EF with 1 to 2 years of annual savings. I was wrong! From your cash flow point of view, you can afford the house. But, your annual savings reduce from 40K to 30.4K without accounting for any other extra house maintenance. Whether you are comfortable with that, it is up to you.

KlangFool
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Re: Housing Bubble plus Inflation? How to save for down payment now?

Post by KlangFool »

mutedbytes wrote: Wed Jun 09, 2021 8:49 pm
In regards to the questions you put forth:
One would hope that the portion of annual savings towards a down payment + current annual rent would at least match the annual ownership cost post purchase.
Are you suggesting that if 1) one amasses an "emergency fund" or savings large enough that removing 20% of the cost of a home leaves enough emergency fund left over that still covers X amount of time/expenses of the new home in combination with 2) a current annual savings rate that, along with current rent cost, is equal or greater than the total cost of ownership of the new home that one can actually afford that purchase?
Though it isn't clear why "saving for a down payment" and meeting the presented conditions are mutually exclusive.
mutedbytes,

<<One would hope that the portion of annual savings towards a down payment + current annual rent would at least match the annual ownership cost post purchase.>>

Why? I would only buy a house when the PITI is 20% to 30% lower than renting. Aka, only buy a house when it is cheaper than renting. Aka, lowering your housing expense by buying. I bought my house under this condition.

<<Are you suggesting that if 1) one amasses an "emergency fund" or savings large enough that removing 20% of the cost of a home leaves enough emergency fund left over that still covers X amount of time/expenses of the new home in combination with 2) a current annual savings rate that, along with current rent cost, is equal or greater than the total cost of ownership of the new home that one can actually afford that purchase?>>

If a person's annual saving plus EF can pay for 20% of the house, the person is definitely buying a house that the person can afford.

For example, if someone saves 50K per year and has 50K of EF and buy a 400K house (80K down payment), why do the person need to save for down payment? The person can accumulate the down payment in less than 1 year.

KlangFool
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Re: Housing Bubble plus Inflation? How to save for down payment now?

Post by mutedbytes »

KlangFool wrote: Wed Jun 09, 2021 9:08 pm mutedbytes,

<<One would hope that the portion of annual savings towards a down payment + current annual rent would at least match the annual ownership cost post purchase.>>

Why? I would only buy a house when the PITI is 20% to 30% lower than renting. Aka, only buy a house when it is cheaper than renting. Aka, lowering your housing expense by buying. I bought my house under this condition.

<<Are you suggesting that if 1) one amasses an "emergency fund" or savings large enough that removing 20% of the cost of a home leaves enough emergency fund left over that still covers X amount of time/expenses of the new home in combination with 2) a current annual savings rate that, along with current rent cost, is equal or greater than the total cost of ownership of the new home that one can actually afford that purchase?>>

If a person's annual saving plus EF can pay for 20% of the house, the person is definitely buying a house that the person can afford.

For example, if someone saves 50K per year and has 50K of EF and buy a 400K house (80K down payment), why do the person need to save for down payment? The person can accumulate the down payment in less than 1 year.

KlangFool
What I mean is that one's current rent and current annual savings needs to greater than or equal to the expected ownership cost after purchase. For example, if current rent is $1000 and PITI/expenses is $3000 monthly, one should have at least $2000 monthly excess savings right now. To your point, a low cost of current rent may imply less than desirable living conditions or living conditions which may not persist forever (need of larger home for sanity, children).
Further, my point is that why can't this $2000 (or hopefully more) current savings go towards a down payment for a future purchase in the course of greater than a year? Why in this situation would one not be able to afford a purchase in the future, in which one were in the process of saving for a down payment?
getthatmarshmallow
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Re: Housing Bubble plus Inflation? How to save for down payment now?

Post by getthatmarshmallow »

Not to derail, but I don't see how you're not just performing an exceedingly idiosyncratic bit of mental accounting, Klangfool. If my annual savings includes a house down payment, I've saved for a down payment on a house. If it takes me a few years to accrue the down payment while continuing my normal savings, I can't see that entailing that I bought too much house.

OP, there's a couple things to consider. The market in my neck of the woods is cash offers over list, and waived contingencies. Local real estate agents expect the price wars will slow as inventory comes on the market, but that prices will stabilize rather than come down.
KlangFool
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Re: Housing Bubble plus Inflation? How to save for down payment now?

Post by KlangFool »

mutedbytes wrote: Wed Jun 09, 2021 9:26 pm
What I mean is that one's current rent and current annual savings needs to greater than or equal to the expected ownership cost after purchase. For example, if current rent is $1000 and PITI/expenses is $3000 monthly, one should have at least $2000 monthly excess savings right now. To your point, a low cost of current rent may imply less than desirable living conditions or living conditions which may not persist forever (need of larger home for sanity, children).
Further, my point is that why can't this $2000 (or hopefully more) current savings go towards a down payment for a future purchase in the course of greater than a year? Why in this situation would one not be able to afford a purchase in the future, in which one were in the process of saving for a down payment?
mutedbytes,

<<What I mean is that one's current rent and current annual savings needs to greater than or equal to the expected ownership cost after purchase. For example, if current rent is $1000 and PITI/expenses is $3000 monthly, one should have at least $2000 monthly excess savings right now.>>

You should be aware that buying a house costs a lot more than the PITI. And, this represents no safety margin. Hence, as per your example, it is not good enough.

<<To your point, a low cost of current rent may imply less than desirable living conditions or living conditions which may not persist forever (need of larger home for sanity, children).>>

No. I am doing an apple to apple comparison. Buying versus renting the same house. I decide where to stay. Then, I decide whether renting or buying make more sense.

<<Why in this situation would one not be able to afford a purchase in the future, in which one were in the process of saving for a down payment?>>

If a person needs to save for a down payment, it means that the person's normal annual expense is high enough that the person has to do something explicit (reducing normal lifestyle) to save the money. This may not be sustainable after the person bought the house.

KlangFool
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Re: Housing Bubble plus Inflation? How to save for down payment now?

Post by KlangFool »

getthatmarshmallow wrote: Wed Jun 09, 2021 9:36 pm Not to derail, but I don't see how you're not just performing an exceedingly idiosyncratic bit of mental accounting, Klangfool. If my annual savings includes a house down payment, I've saved for a down payment on a house. If it takes me a few years to accrue the down payment while continuing my normal savings, I can't see that entailing that I bought too much house.
getthatmarshmallow,

<<I can't see that entailing that I bought too much house.>>

If you want an objective view of whether you bought too much house, please state your house's purchase price as a multiple of your gross household income. Is it more than 3.5X?

KlangFool
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mutedbytes
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Re: Housing Bubble plus Inflation? How to save for down payment now?

Post by mutedbytes »

KlangFool wrote: Wed Jun 09, 2021 9:41 pm mutedbytes,

<<What I mean is that one's current rent and current annual savings needs to greater than or equal to the expected ownership cost after purchase. For example, if current rent is $1000 and PITI/expenses is $3000 monthly, one should have at least $2000 monthly excess savings right now.>>

You should be aware that buying a house costs a lot more than the PITI. And, this represents no safety margin. Hence, as per your example, it is not good enough.

<<To your point, a low cost of current rent may imply less than desirable living conditions or living conditions which may not persist forever (need of larger home for sanity, children).>>

No. I am doing an apple to apple comparison. Buying versus renting the same house. I decide where to stay. Then, I decide whether renting or buying make more sense.

<<Why in this situation would one not be able to afford a purchase in the future, in which one were in the process of saving for a down payment?>>

If a person needs to save for a down payment, it means that the person's normal annual expense is high enough that the person has to do something explicit (reducing normal lifestyle) to save the money. This may not be sustainable after the person bought the house.

KlangFool
Then that may be exactly the point where we are divergent and the discussion would likely have been of little use. I am considering (and I would imagine this is also the thought process of most first home buyers?) the case where one is planning for a future purchase of a home not equivalent to one's current place of rent; the case where the smaller/cheaper rented home suffices in the present, but will not suffice by the time the purchase needs to be made. This creates a current smaller necessary expense (compared to expected future) allowing for a high savings rate, which is exactly saving for a down payment. I cannot understand why this is called anything other than "saving for a down payment" in this situation. Obviously the buy/rent trade always needs to be taken into account.
KlangFool
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Re: Housing Bubble plus Inflation? How to save for down payment now?

Post by KlangFool »

mutedbytes wrote: Wed Jun 09, 2021 9:58 pm
Then that may be exactly the point where we are divergent and the discussion is likely of little use. I am considering (and I would imagine this is also the thought process of most first home buyers?) the case where one is planning for a future purchase of a home not equivalent to one's current place of rent; the case where the smaller/cheaper rented home suffices in the present, but will not suffice by the time the purchase needs to be made. This creates a current smaller necessary expense (compared to expected future) allowing for a high savings rate, which is exactly saving for a down payment. I cannot understand why this is called anything other than "saving for a down payment" in this situation. Obviously the buy/rent trade always needs to be taken into account.
mutedbytes,

<<I am considering (and I would imagine this is also the thought process of most first home buyers?)>>

And, that should alert you that it is the WRONG way to think about this. Average American saves less than 5% of their gross income. It is thinking like this that get them into trouble.

<<but will not suffice by the time the purchase needs to be made. >>

But, why would you buy the house when it is significantly cheaper to rent?

<<This creates a current smaller necessary expense (compared to expected future) allowing for a high savings rate, >.

With current high saving rate plus emergency fund, the person cannot afford to pay for 20% of the house, is the person buying too much house?

By the way, average American buy a house at 3.5 times or greater than their gross household income. And, average American saves less than 5% of their gross income.

In summary, if most people do it, it must be wrong.

Be rich or be average. Pick one or the other. You cannot be both.

KlangFool
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mutedbytes
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Re: Housing Bubble plus Inflation? How to save for down payment now?

Post by mutedbytes »

KlangFool wrote: Wed Jun 09, 2021 10:07 pm mutedbytes,

<<I am considering (and I would imagine this is also the thought process of most first home buyers?)>>

And, that should alert you that it is the WRONG way to think about this. Average American saves less than 5% of their gross income. It is thinking like this that get them into trouble.

<<but will not suffice by the time the purchase needs to be made. >>

But, why would you buy the house when it is significantly cheaper to rent?

<<This creates a current smaller necessary expense (compared to expected future) allowing for a high savings rate, >.

With current high saving rate plus emergency fund, the person cannot afford to pay for 20% of the house, is the person buying too much house?

By the way, average American buy a house at 3.5 times or greater than their gross household income. And, average American saves less than 5% of their gross income.

In summary, if most people do it, it must be wrong.

Be rich or be average. Pick one or the other. You cannot be both.

KlangFool
I don't agree that future planning, family planning, and affordable upgrades are the wrong way to think in general. I don't think this thought process implies a low savings rate either, both can seemingly be accomplished.
Like already mentioned, buy vs rent trade always has to be considered. It may not be the case that the needed larger home is cheaper to rent.
It is still not clear about your statement that one should not save for a down payment, or that the action of doing so implies the inability to afford a future purchase.
getthatmarshmallow
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Re: Housing Bubble plus Inflation? How to save for down payment now?

Post by getthatmarshmallow »

KlangFool wrote: Wed Jun 09, 2021 9:45 pm
getthatmarshmallow wrote: Wed Jun 09, 2021 9:36 pm Not to derail, but I don't see how you're not just performing an exceedingly idiosyncratic bit of mental accounting, Klangfool. If my annual savings includes a house down payment, I've saved for a down payment on a house. If it takes me a few years to accrue the down payment while continuing my normal savings, I can't see that entailing that I bought too much house.
getthatmarshmallow,

<<I can't see that entailing that I bought too much house.>>

If you want an objective view of whether you bought too much house, please state your house's purchase price as a multiple of your gross household income. Is it more than 3.5X?

KlangFool
I wasn't asking because I know I didn't, but no, it wasn't. (About 1.6 IIRC.) It wasn't cheaper to rent. I had an emergency fund, a good savings rate, and a downpayment that was accumulated over a couple of years. Even if the mortgage is cheaper than rent, one still needs the money down; the bank isn't going to give you a mortgage without the downpayment. So it's quite possible to have an affordable home yet need to save for a down payment. Where is the downpayment coming from in your scenario? You're just cashflowing it? Draining the emergency fund but not calling it "accumulating a down payment"?
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