What % of NW Should Be Wrapped Up in Your House?

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getthatmarshmallow
Posts: 918
Joined: Mon Dec 04, 2017 9:43 am

Re: What % of NW Should Be Wrapped Up in Your House?

Post by getthatmarshmallow »

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.
getthatmarshmallow,

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.

KlangFool
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.
EnjoyIt
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Joined: Sun Dec 29, 2013 8:06 pm

Re: What % of NW Should Be Wrapped Up in Your House?

Post by EnjoyIt »

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.
getthatmarshmallow,

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.

KlangFool
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.
"Rule of thumb:" I think these types of rules should be more of a guideline and not a definitive strategy. Some people really do have more reliable jobs such as nurses, doctors, and certain government employees. Those people can take on some additional risk. If one has a more risky employment such as freelance photographer or artist, maybe buying a house with little finances to back them up is a dangerous idea.

This is similar to how the 4% withdrawal rate is not a rule of thumb. It is a guideline to figure out where one should start their retirement withdrawal thinking and adjust based on one's risks, health, life expectancy, ability to have more income, pensions, Social Security, etc.

I think having a general guideline of not letting someone be house poor is a pretty good one.
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manuvns
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by manuvns »

not more than 5-10% unless it's your first house .
Ollie123
Posts: 141
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by Ollie123 »

I always find the range of views in these discussions interesting.

Personally, I think a more holistic approach that includes consideration of some "soft" factors makes sense - job stability being a big one. While unemployment can happen to anyone at any time, I would certainly feel more comfortable taking on a mortgage based on presumption of continued income even with less net worth cushion if it was a dual-income household of tenured teachers in different school districts who both have disability insurance than I would as a single-income household in oil & gas (to pick a random field with a reputation for boom/bust cycles and widespread layoffs). I don't see that come up in discussion very often, but to me that would make a huge difference in how I approached things. Not that it means the oil & gas employee absolutely can't own a home or the teachers making 60k apiece should buy a million dollar house, but it certainly would sway any decisions I'm making within the general bounds of reasonableness.

Other factors matter too, job stability was just an example.

Edit:
Apparently EnjoyIt and I think alike.
lurkman
Posts: 63
Joined: Tue Mar 04, 2014 7:16 pm

Re: What % of NW Should Be Wrapped Up in Your House?

Post by lurkman »

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.
getthatmarshmallow,

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.

KlangFool
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.
Last edited by lurkman on Wed Jul 21, 2021 10:40 am, edited 1 time in total.
KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: What % of NW Should Be Wrapped Up in Your House?

Post by KlangFool »

getthatmarshmallow wrote: Wed Jul 21, 2021 8:53 am
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.
getthatmarshmallow,

I disagreed.

If someone does not earn enough to live a good life at a certain area,

A) If they rent, they can move to some place else.

B) If they buy a house, they are stuck there.

So, no one is at the mercy of sky rocketing rent.

KlangFool
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JackoC
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by JackoC »

seajay wrote: Mon Jul 19, 2021 5:44 pm
London wrote: Sat Jul 17, 2021 11:07 am So if your house appreciates quickly, you should sell to “rebalance” your house to net worth ratio?
It's a option. Owning several homes and selling one when prices are relatively high to add to stocks and/or bonds, maybe buying another when prices are low relative to stocks/bonds. The ancient Talmud advocated a third each land, commerce, reserves, on that measure 33% of NW.
More commonly, one might even do this with a single house. If over a long period a house appreciates so much as to remain a large % of NW, not just when a 'first time home buyer in expensive area', that concentration of risk is among the reasons a person might sell and move to a lower housing cost area in retirement. It's 'rebalancing', just at a much lower frequency and higher threshold of change than for highly divisible and liquid assets like stocks.

This is true of some people in my neighborhood. They thought of us, 'those yuppie idiots, they'll pay anything!' when we bought for X in the 1990's, since they or parents had bought for perhaps X/3 or less. Now it's 6X. Often these people do not have incomes or financial asset portfolio's typical of BH's, that house is their golden goose. Of course some may have borrowed heavily against it over the years, but not to digress into criticism of 'other people'. The point is, they have a big asset concentration, not from *buying* too much house, but because of subsequent market movement. Some people we know realized it, cashed in and moved on, to 'rebalance'.
2tall4economy
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by 2tall4economy »

Topic comes up on this board all the time but I find it interesting to comment each time :)

1. The best financial decision is renting, not buying (caveat -- assumes market rents match the market price and you aren't living in an over-rent or under-buy sort of market. If you are living somewhere that rent is far more expense than buying -- which is NOT the vast majority of the USA right now -- then skip this and go to 2.)

2. The next best decision is interest only loan and minimal downpayment.

3. 30 year loan isn't great, but if you must...

4. 15 year loan is a terrible idea financially.

If you value security and peace of mind over financial decisions, you should probably flip the order of the above.

In any case your concern should be on P&L (expenses) not Balance Sheet (net worth).

Once your assets support your expenses, you can incrementally save as much as you want and put that entirely into the house (with additional savings to cover higher taxes, insurance and maintenance). There is only the limit of what you're willing to exchange your time on earth for!
You can do anything you want in life. The rub is that there are consequences.
EnjoyIt
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by EnjoyIt »

2tall4economy wrote: Wed Jul 21, 2021 10:40 pm Topic comes up on this board all the time but I find it interesting to comment each time :)

1. The best financial decision is renting, not buying (caveat -- assumes market rents match the market price and you aren't living in an over-rent or under-buy sort of market. If you are living somewhere that rent is far more expense than buying -- which is NOT the vast majority of the USA right now -- then skip this and go to 2.)

2. The next best decision is interest only loan and minimal downpayment.

3. 30 year loan isn't great, but if you must...

4. 15 year loan is a terrible idea financially.

If you value security and peace of mind over financial decisions, you should probably flip the order of the above.

In any case your concern should be on P&L (expenses) not Balance Sheet (net worth).

Once your assets support your expenses, you can incrementally save as much as you want and put that entirely into the house (with additional savings to cover higher taxes, insurance and maintenance). There is only the limit of what you're willing to exchange your time on earth for!
Great list. I couldn't agree more. I see it as minimizing living expenses while investing the rest. Baring some rare and lucky massive real estate appreciation, over long term, investing in equities will outperform home ownership.
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seajay
Posts: 222
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by seajay »

2tall4economy wrote: Wed Jul 21, 2021 10:40 pm Topic comes up on this board all the time but I find it interesting to comment each time :)

1. The best financial decision is renting, not buying (caveat -- assumes market rents match the market price and you aren't living in an over-rent or under-buy sort of market. If you are living somewhere that rent is far more expense than buying -- which is NOT the vast majority of the USA right now -- then skip this and go to 2.)

2. The next best decision is interest only loan and minimal downpayment.

3. 30 year loan isn't great, but if you must...

4. 15 year loan is a terrible idea financially.

If you value security and peace of mind over financial decisions, you should probably flip the order of the above.

In any case your concern should be on P&L (expenses) not Balance Sheet (net worth).

Once your assets support your expenses, you can incrementally save as much as you want and put that entirely into the house (with additional savings to cover higher taxes, insurance and maintenance). There is only the limit of what you're willing to exchange your time on earth for!
Owner occupiers have liability matched 'rent', imputed rent, where they are both landlord and tenant so irrelevant if rents soar or collapse. Renting and if rents soar when investment income/rewards collapse you have to find/pay the difference.

If you can lock into fixed rate 30 year mortgage at low rates, then there's potential for both inflationary debt erosion and inflationary uplift of the house value (and the imputed rent benefit on top, not having to find/pay rent to others).

Owning a home can also serve as late life care home costs cover.

I'd advocate the other way around, look to buy a home first, even if small/low value, and then invest/save in stocks/bonds.
59Gibson
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by 59Gibson »

seajay wrote: Thu Jul 22, 2021 9:45 am
2tall4economy wrote: Wed Jul 21, 2021 10:40 pm Topic comes up on this board all the time but I find it interesting to comment each time :)

1. The best financial decision is renting, not buying (caveat -- assumes market rents match the market price and you aren't living in an over-rent or under-buy sort of market. If you are living somewhere that rent is far more expense than buying -- which is NOT the vast majority of the USA right now -- then skip this and go to 2.)

2. The next best decision is interest only loan and minimal downpayment.

3. 30 year loan isn't great, but if you must...

4. 15 year loan is a terrible idea financially.

If you value security and peace of mind over financial decisions, you should probably flip the order of the above.

In any case your concern should be on P&L (expenses) not Balance Sheet (net worth).

Once your assets support your expenses, you can incrementally save as much as you want and put that entirely into the house (with additional savings to cover higher taxes, insurance and maintenance). There is only the limit of what you're willing to exchange your time on earth for!
Owner occupiers have liability matched 'rent', imputed rent, where they are both landlord and tenant so irrelevant if rents soar or collapse. Renting and if rents soar when investment income/rewards collapse you have to find/pay the difference.

If you can lock into fixed rate 30 year mortgage at low rates, then there's potential for both inflationary debt erosion and inflationary uplift of the house value (and the imputed rent benefit on top, not having to find/pay rent to others).

Owning a home can also serve as late life care home costs cover.

I'd advocate the other way around, look to buy a home first, even if small/low value, and then invest/save in stocks/bonds.
+1 I agree. At some point you need to take some off the table- I think having a paid for house as a backstop is important. I would not want everything riding on how the stock mkt performs. There is already enough riding on my living expenses, don't need it for my shelter too.. It's a logical diversification for people who've retired/and or built up a significant portfolio. Other metrics may work during accumulation and younger years with more time and less at risk.
ponyboy
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by ponyboy »

Our house represents 15% of our net NW. Most people are house poor.
fyre4ce
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by fyre4ce »

First, you need to be clear whether you are talking about house price or house equity. The same price house can be bought with maximum equity (paying cash), zero equity (interest-only mortgage, 0% down), or anywhere in between.

But regardless, I think correlating housing costs to income is much more useful. Housing is a consumption item. This discussion frequently happens about cars, and while there can be some loose correlation between NW and the "appropriate" value of cars one should own, it's too dependent on someone's phase of life and personal circumstances to be useful. The correlation to income is much stronger, and therefore more useful as a rule of thumb.

I feel the same way about housing. Housing costs vary dramatically by part of the country (and world). First, someone should look at their income and overall budget, and the housing options that are available in the area, and decide roughly what budget should be allocated to housing. Then, depending on a variety of factors (expected time in the area, job stability, etc.) they should decide whether renting or buying makes more sense. If/when a house is purchased, the decision to pay down the mortgage or invest can be made based on the usual factors (comfort with debt, market interest rate, etc.). That will get investors to a reasonable housing decision. Trying to correlate to net worth will much more frequently come with unreasonable answers.
Reamus294
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Joined: Wed Jul 24, 2019 8:54 am

Re: What % of NW Should Be Wrapped Up in Your House?

Post by Reamus294 »

Like others have said, there are way too many variables for a standardized answer. Probably better looking at income and housing costs. But even then, location, age, current retirement savings and expected retirement date could drastically change an answer.

The equity in our home is about 60% of our net worth, but most of that wasn’t by choice. We are still relatively early in our retirement savings and our house has tripled in value over the past 12 years. I wouldn’t move to make sure my home to nw ratio is within a certain range. I would move if our other housing expenses (taxes and utilities) increased more than we were comfortable with though.

When we bought, we made it a requirement to be able to pay our expenses if we had to take low paying jobs. I don’t consider us house poor because our mortgage and house expenses are very low.
sls239
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Re: What % of NW Should Be Wrapped Up in Your House?

Post by sls239 »

The important thing is you don’t want to be upside - down. A 20% down payment generally takes care of that.

Financially speaking I would consider a “nicer house” to be more of a spending choice than an asset allocation choice.
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