getthatmarshmallow wrote: ↑Wed Jul 21, 2021 8:53 am
KlangFool wrote: ↑Tue Jul 20, 2021 5:40 pm
getthatmarshmallow wrote: ↑Tue Jul 20, 2021 12:39 pm
It just makes a poor rule of thumb, especially for younger couples who have solid incomes and prospects.
Everyone believes that their incomes are solid and their prospects as bright. This only changes after they faced unemployment and major laid off in a recession.
A) Everyone believes that their incomes are solid and prospects are bright.
B) But, in every recessions, many folks lose their jobs ad stay unemployed for a long time. Some are permanently unemployed or under-employed.
(A) and (B) cannot be both correct.
Counting being lucky and bad things could only happen to others is not a good strategy.
I'm not doing that, and I've endured layoffs and similar (the "kids these days" talk is getting old) I just think your rule, intended to ensure that people don't buy too much house, is far too conservative, and would lead most people who have kept their homes during recessions and layoffs to own no home at all, and in some markets, that means being at the mercy of skyrocketing rents.
halfnine wrote: ↑Tue Jul 20, 2021 1:23 pm
First of all, I do not recommend multiple times the property value
. I recommend 2.5x the down payment
which would be half the property value. And, for most people, the only way you can get to 2.5x the down payment is to have cash flow. Your cash flow can disappear in a recession along with your job. If that happens within the first years of home ownership, you are out of luck. You do not have enough liquidity and possibly an underwater house. I guess what happened in 2007/08 is already forgotten as well as the millions of people currently behind their mortgages based on the events of the last 1.5 years. And, if you really are a young couple with solid prospects it is only going to take a few extra years to build up your net worth to a high enough amount.
Fair - got you and KF mixed up. That said - How many people in 2008 who had 20% down on a house that cost under 2.5 times their salary lost their home? How many of those people would have kept
their home if they'd had 50% down? That's the relevant question for your rule of thumb.
Not quite. The rule of thumb is saying have a portfolio of 2.5 times the down payment before buying a house. It’s not asking you to put down 50% to buy the house (that would make things worse in a downturn if you’re strapped for cash).
The rule of thumb is just that. First time I’ve heard it put this way. May have some merit. Am chewing on it.
P.S. I did not follow this rule and survived a storm of negative events (confluence of job losses + medical emergencies) in 2008/9, mainly due to the following precautions:
1. Bought home at less than 2x income.
2. 15 year loan. (When home prices tanked 30%, home equity was still about 30%, never went ‘underwater’). Did not tap home equity or escalate expenses in the years leading up to the crisis.
(Edited to add: Should mention that the home price was down 30% from what we had paid 7 years earlier. The fall in value from the peak was even higher. So it was a severe downturn on all fronts.)
3. Maintained about 12x cash buffer/accessible funds .
4. After relocation, house could be rented and refinanced back to a 30 year loan and made self-sustaining because of equity built up via a 15 year loan. With a 30 year loan in the early years, house would have been ‘underwater’ and refinancing would not have been possible.
So, this rule of thumb can be flouted, yes, but other equivalent measures have to be in place to counter major disruptions to cash flow and normal life.