Should I Buy A House?

[PowderDay9]

From a financial perspective, this one's easy. Keep renting. You can't afford a $1.2M house. The good news is your rent is very low. Keep saving and investing.

[unwitting_gulag]

A lot of negativity in this thread. But we don't know how much the OP has saved for retirement already, whether local family could help in an emergency, how stable is his and his wife's employment, what's their preferred situation regarding kids, and whether they possibly stand to inherit. While I agree with others, that at the moment, buying is too risky, we have to ask ourselves: if not now, when? Never? Is "never" a reasonable answer?

The key is to save and grow your wealth faster than the real estate market and pounce when you are cash flush. …

What if the local real estate prices rise faster, than the OP can accumulate money, even with maximally aggressive savings? If the OP saves $60K/year, for cash to be set-aside (in addition to Roth IRA, 401K and so on), and the $1.2M house appreciates at 5%/year… that’s a $60K increase just in the first year. Sure, if today the OP has a 20% down payment ($240K), then next year, he’d have $300K for the down payment, plus whatever interest a treasury bill (for example) returns. But is he really that much further ahead? In the second year, the OP has saved another $60K, plus interest on that, and interest on the first year's $60K... but now the house is $1.323M. And so on. The down payment grows nicely, as a percentage of the house's value.. but what if the house appreciates faster, than the OP's income?

So the investment thesis is that outsized returns will continue for the 30 years you'll own the house? And those returns will be better than the stock market?

That depends on which area, and which stock market. Compare the US national housing average to the S&P 500, and the stock-investment wins easily. Compare Los Angeles to a total international index fund over the past 25 years… and real estate wins easily.

[Mustang8307]

I’m in the Bay Area and had a great deal on rent for 12 years. We were outgrowing that very small apartment, and bought in 2022. It’s good that we have more space, but it has hurt our financial outlook significantly.

[MrJones]

A lot of negativity in this thread. But we don't know how much the OP has saved for retirement already, whether local family could help in an emergency, how stable is his and his wife's employment, what's their preferred situation regarding kids, and whether they possibly stand to inherit. While I agree with others, that at the moment, buying is too risky, we have to ask ourselves: if not now, when? Never? Is "never" a reasonable answer?

The key is to save and grow your wealth faster than the real estate market and pounce when you are cash flush. …

What if the local real estate prices rise faster, than the OP can accumulate money, even with maximally aggressive savings? If the OP saves $60K/year, for cash to be set-aside (in addition to Roth IRA, 401K and so on), and the $1.2M house appreciates at 5%/year… that’s a $60K increase just in the first year. Sure, if today the OP has a 20% down payment ($240K), then next year, he’d have $300K for the down payment, plus whatever interest a treasury bill (for example) returns. But is he really that much further ahead? In the second year, the OP has saved another $60K, plus interest on that, and interest on the first year's $60K... but now the house is $1.323M. And so on. The down payment grows nicely, as a percentage of the house's value.. but what if the house appreciates faster, than the OP's income?

+1, great points. This is exactly the analysis I've run over the years for these decisions. Unfortunately, there are no well made and mature calculators online that do this income growth vs real estate growth analysis for you. The NYTimes calculator is very good, but doesn't do this. IMO, more people should run this analysis, especially in VHCOLs and "high-growth" real estate markets when they are operating at the edge of their income levels in buying real estate.

So the investment thesis is that outsized returns will continue for the 30 years you'll own the house? And those returns will be better than the stock market?

That depends on which area, and which stock market. Compare the US national housing average to the S&P 500, and the stock-investment wins easily. Compare Los Angeles to a total international index fund over the past 25 years… and real estate wins easily.

Hehe, you picked your examples wisely. I ran the numbers using this data. The LA market appreciated by 3.5%/year average, from 1990 to 2020, and by 5%/year average from 1980 to 2020. Both way lower than S&P 500 (though probably higher than a total international index fund, I didn't check).

In other words, initial indications seem to be that buying would lose to renting. However, a good analysis would consider secondary and tertiary factors which could actually swing this the other way. Interest rates, inflation (in the face of fixed mortgage payments), rent saved and such.

A tertiary factor is the fact that most of one's wealth can get locked up in a single property, which makes it very difficult to pull a portion of it out for expenses in retirement, compared to liquid investments. Another tertiary factor if one wants to sell is, liquid investments can be sold across years to minimize tax impact, while real estate cannot.

[raisinsaregrapes]

If everyone is waiting till they are cash flush then the prices won’t ever come down. The people that are a bit more cash flush will find a way to make it work. Lots of high income people on the sidelines right now. Who knows what will happen. Prices will crash at some point, but will they go up 100 percent before they crash 40 percent? Or will prices just stagnate for years? Or will it drop 30 percent tomorrow? No one knows. I think owning is really a lifestyle choice over a financial choice, but finances play a huge part. Best of luck to the OP.

[unclescrooge]

... We currently rent at a below market average of $2,300/month.

I have been a landlord when I can generate positive cashflow from rentals, and I have been a renter when a landlord is willing to subsidize my rent. This is how I built a lot of wealth.

If you can rent a house for 1/4th the price of owning it, it would be financially illogical to buy it. That is not how one builds wealth.

[60B4E24B]

Why would you want to sacrifice so much of your life for a house just to lose it in the coming recession?

KlangFool

Oh, has the recession been scheduled? I don’t have it on my calendar.

[toddthebod]

Why would you want to sacrifice so much of your life for a house just to lose it in the coming recession?

KlangFool

Oh, has the recession been scheduled? I don’t have it on my calendar.

You think we'll never have another recession?

[toddthebod]

Main reasons for wanting to buy are to be able to participate in what has been a huge driver of personal wealth for many

Yeah that ship sailed and may never return to port.

Please clarify. Are you suggestIng that home prices may never go up again?

People shop for homes based on monthly payments, not total price. Mortgage rates fell drastically and steadily for forty years which helped drive up house prices. Without that extra boost to home values, rapidly increasing home equity will likely no longer be a "huge driver of personal wealth."

[novolog]

Why would you want to sacrifice so much of your life for a house just to lose it in the coming recession?

KlangFool

Oh, has the recession been scheduled? I don’t have it on my calendar.

You think we'll never have another recession?

it seems entirely possible that housing appreciates substantially prior to the next recession, in which case you could be better off buying now.

it's also possible that housing doesn't doesn't decline during the next recession. in fact if we draw on historical data, you might even say this is the most likely outcome. of course, you still have make sure you keep your job

that said, OP obviously can't afford this house.

buy a house when you need a house and when you can afford a house.

[toddthebod]

Why would you want to sacrifice so much of your life for a house just to lose it in the coming recession?

KlangFool

Oh, has the recession been scheduled? I don’t have it on my calendar.

You think we'll never have another recession?

it seems entirely possible that housing appreciates substantially prior to the next recession, in which case you could be better off buying now.

it's also possible that housing doesn't doesn't decline during the next recession. in fact if we draw on historical data, you might even say this is the most likely outcome. of course, you still have make sure you keep your job

that said, OP obviously can't afford this house.

buy a house when you need a house and when you can afford a house.

If your mortgage payment comprises a substantial portion of your monthly income such that it impedes your savings, and you get laid off, it doesn't really matter what housing prices do. With no income nobody is going to give you a loan to access that equity.

[Bogle-007]

Main reasons for wanting to buy are to be able to participate in what has been a huge driver of personal wealth for many

Yeah that ship sailed and may never return to port.

Please clarify. Are you suggestIng that home prices may never go up again?

People shop for homes based on monthly payments, not total price. Mortgage rates fell drastically and steadily for forty years which helped drive up house prices. Without that extra boost to home values, rapidly increasing home equity will likely no longer be a "huge driver of personal wealth."

Good point. Imagine this scenario: The Fed finally pivots, interest rates fall... massive asset (home/property/stock) results - leading to even higher home prices?

[unwitting_gulag]

... We currently rent at a below market average of $2,300/month.

I have been a landlord when I can generate positive cashflow from rentals, and I have been a renter when a landlord is willing to subsidize my rent. This is how I built a lot of wealth.

If you can rent a house for 1/4th the price of owning it, it would be financially illogical to buy it. That is not how one builds wealth.

As a former owner in a LCOL area, and now a renter in a VHCOL area, I entirely appreciate your point. My rent is lower than just the property tax alone, were the Fairy Real Estate Mother to give me a median local house for absolutely free, just because I'm such a pithy and eloquent poster on financial forums. This isn't strictly apples-to-apples, because the rent is of a studio apartment in a dodgy part of town, whereas the putative purchase would be in a nicer/safer area, of a single-family-house. But the point remains: monthly cost of renting, is stunningly lower than monthly cost of owning.

However... this is short-term. Long-term, everything depends on the housing-price appreciation rate. Play with the NYT buy-vs-rent calculator, and one finds that there exists a certain annual appreciation rate, where pretty much everything works out in favor of owning. Make that rate high enough, and owning comes out ahead, even if renting is $0, but the mortgage interest is 15%, the house-maintenance is 2%/year, and we throw-in a $900/month HOA, just to be irascible. If I make the annual housing appreciation-rate 25%, forever and ever, then nobody would own any stocks! We would all just buy single family houses, have them sit empty, collect $0 rent, pay the property tax and insurance, hire a property-management company, and... sit back, watching how we build wealth.

We've just had a spurt in housing prices, that in aggregate amount makes the dot-com bubble of 1999, look as if it were personally engineered by Robert Shiller. It's going to color our perspectives! It has certainly colored mine. I've seen people buy what look like crack-houses, that have gained in price, more than the likely sum-total of the crack that has ever changed hands in said house. And what has the Russell-2000 done lately? Yeah, FOMO. But can we blame the OP?

[mchampse]

Yes, you should buy a home.

I was in a similar situation in 2005 in the Bay Area. Barely qualified with an interest-only mortgage. Property went down in value shortly thereafter but has appreciated considerably since then. Had a huge jump between paying rent and mortgage, now renting my place out would yield a much higher rent than my original payments which have come down with refinancing.

My accountant who is my parents age told me that he never bought a home because he always had cheap rent. Finally bought for around $1M in the early 2010s a home he could have gotten in the low 100s in the 1980s.

Tough to put a value on the intangible of the place being yours. Don’t listen to the people saying leave for a lower cost of living area. You live where you do for a reason.

[stoptothink]

My accountant who is my parents age told me that he never bought a home because he always had cheap rent. Finally bought for around $1M in the early 2010s a home he could have gotten in the low 100s in the 1980s.

I realize those numbers, without context, make it look like it's a shoe-in for the house, but do the math. If the difference was invested, your accountant may have actually come out ahead by renting.

And, this may all be irrelevant. I'm not sure OP could even get approved for a mortgage for a $1.1M+ home.

[raisinsaregrapes]

7-8k mortgage? Does that include property taxes and insurance? Seems a bit too risky at that income level. Maybe you could make it work if you had a bigger down payment. We recently bought in CA and had to put down a lot to make it feel doable.

There will be unexpected expenses too. Cali insurance is also harder to get these days. I called around to a ton of places, it was all expensive and most weren’t even underwriting their own policies. We found some insurance bought the house and got a letter a month later saying our insurance was going to be cancelled due to fire risk. Pretty annoying, but found a better company after those shenanigans.

[cbs2002]

OP, the main advice I can offer is that while choosing to buy has a financial aspect, it is not solely or even mainly a financial decision. It's a choice about what aspects of your lifestyle and quality of life are most valuable to you and your family. I urge you to try to decouple the math from the lifestyle part, be as clear as possible on the lifestyle goal first, then figure out the math. If you are at the point where you know the lifestyle goals clearly but you can't make the math work, well, you've got some tough choices to make.

Home value appreciation is sort of like a good life insurance policy. It's nice to see the big number on paper, but it's only helpful to you financially if you sell the house (or, in the case of life insurance, you shuffle off...). If you want to stay in the same area, you have to turn around and spend the money from the sale on another property. It's not staying in your investment account and supporting your expenses. The country is filled with people with $1MM+ home values and low net worth and/or low home equity. You can't tell anything about a person's finances just by their home value.

I think what you propose is high risk and I couldn't sleep at night in that position. I'd want a HHI of at least 300K, maybe more.

[novolog]

Why would you want to sacrifice so much of your life for a house just to lose it in the coming recession?

KlangFool

Oh, has the recession been scheduled? I don’t have it on my calendar.

You think we'll never have another recession?

it seems entirely possible that housing appreciates substantially prior to the next recession, in which case you could be better off buying now.

it's also possible that housing doesn't doesn't decline during the next recession. in fact if we draw on historical data, you might even say this is the most likely outcome. of course, you still have make sure you keep your job

that said, OP obviously can't afford this house.

buy a house when you need a house and when you can afford a house.

If your mortgage payment comprises a substantial portion of your monthly income such that it impedes your savings, and you get laid off, it doesn't really matter what housing prices do. With no income nobody is going to give you a loan to access that equity.

correct

[bltn]

Home purchases can also be a huge destroyer of wealth.

If renting is cheaper, RENT. Build up your wealth and buy a house that you can easily afford in a few years. It will be much more satisfying.

The key is to save and grow your wealth faster than the real estate market and pounce when you are cash flush. It's not market timing. It's timing your life to the right decisions.

Agree that a home purchase can be a destroyer of wealth. Particularly in a situation with these numbers. I ve always heard in general home values went up at or slightly above the rate of inflation. We ve experienced a historic rise in home prices recently, but over a long period of time the price change will probably be approximately the inflation rate. Throw in maintenance including insurance and taxes and a home can be a drag on wealth building. However there is the protection against rising rental rates.

With these numbers the op can t afford a home purchase of that size in that area. Maybe a cheaper house a short commute away. With a good school system.

[leland]

In something of a similar situation although not as an extreme spread between current rent and purchase.

For now waiting it out in the rental and building even more purchase funds (a bit more weighted to MMFs & treasuries than my ideal AA as a result), which coincidentally is much nicer than the prospective far more expensive houses that would be in our purchase budget.

Lack of very long term stability and inability to make large changes are real downsides, though. That said it is saving money as we aren't getting higher end furniture while in a rental

[av111]

I always feel people should buy a home when they need it and if it fits in their earning and expenses . This is always a difficult decision. It requires tremendous financial discipline and need to control your expenses early on. But we are generally optimistic about the ability of human ingenuity to push up the economy in long term. So young people are expecting to increase their income as time goes. Yes there are recessions but 85% of people generally retain jobs.

Opinions on this forum should be treated like opinions only. They a result of experiences and mindset of people who have lived life differently and have different desires and experiences from life. No one size fits all.

[unwitting_gulag]

Agree that a home purchase can be a destroyer of wealth. Particularly in a situation with these numbers. ...

My own house was a destroyer of wealth, because I bought a bad house, in a bad neighborhood, in an economically-moribund part of the country. Financially, I could easily afford it, and paid off the mortgage early. I desisted from any vainglorious upgrades, and tried to live frugally. Even so, after decades of ownership, I sold for less than what I'd paid for it.

The point here isn't woe-is-me personal lament, but to observe, that whether a house-purchase is a brilliant or a stupid decision, depends very much on the house and the market. I respectfully dissent, from the broad view that one buys a house in accordance with family-needs, or lifestyle choices. Instead, I aver that buying a house, is very much like picking an individual stock. Did you choose Apple, or Enron? And if you chose Intel, did you choose in 1990, or in 2000?

In other words, if the OP is a savvy shopper, if he knows the area well, if he has effective support in the sense of a trustworthy realtor and an inspector whom he knows and so on, then it makes sense to buy... even if the ratio of house-price to income, is flagrantly fraught. On the other hand, even if the OP were loaded with spare millions in idle cash, it still might be foolish to buy, if the OP were a clueless shopper, and likely to blunder, as I had blundered.

[pseudoiterative]

People shop for homes based on monthly payments, not total price. Mortgage rates fell drastically and steadily for forty years which helped drive up house prices. Without that extra boost to home values, rapidly increasing home equity will likely no longer be a "huge driver of personal wealth."

"the trend is your friend until the end when it bends". The trend has well and truly ended after 2020, per the FRED 30 year fixed rate mortgage graph, but there's latency in the system & it takes time for the consequences of increased cost of borrowing to propagate.

One consequence I've heard of is that people who locked in 30 year fixed mortgages at bargain rates are now heavily incentivized to hold on to their current property and not sell it. This reduces the supply of houses going onto the market, which helps support housing price due to the balance of supply and demand. But at some point this effect will taper off, and the fact that it costs about 3x as much to borrow as it did a few years ago will start to dominate.

Another kind of latency is people's beliefs and behavior --- if people are still in a mindset adapted to the ancien regime of "mortgage rates fall steadily over decades, driving up house prices" and are still operating by the rule of thumb of "house prices always go up, even if you're buying them as investment properties and they're negative cashflow, you'll be able to sell them for more than you bought them in a few years due to market price increases", i.e. a big leveraged momentum trade, it might take a few years until there's enough media coverage & anecdotal cocktail party conversation of investors & homeowners getting wiped out by housing price momentum going in the other way for this mindset and rule of thumb to adjust to the new regime.

[60B4E24B]

Why would you want to sacrifice so much of your life for a house just to lose it in the coming recession?

KlangFool

Oh, has the recession been scheduled? I don’t have it on my calendar.

You think we'll never have another recession?

Clearly there will be, but KlangFool seemed to be implying that one was imminent. Maybe one is! But, like, economists have predicted nine out of the last five recessions, and KlangFool is no economist.

And if KlangFool is so good at predicting the timing of the next recession, why aren't they loading up on SPY puts?

[pseudoiterative]

Clearly there will be, but KlangFool seemed to be implying that one was imminent. Maybe one is! But, like, economists have predicted nine out of the last five recessions, and KlangFool is no economist.

And if KlangFool is so good at predicting the timing of the next recession, why aren't they loading up on SPY puts?

I think we'd all agree that predicting the timing of recessions is very difficult, that's why attempting to trade around it with puts is high risk and likely to have negative expected value.

But it's possible to say "it's plausible there may be a recession some time in the next N years -- and i know it's very difficult for me or anyone to predict the timing before it happens. but, in the event were a recession somewhere in this time period, it would produce a bad outcome for the wealth of my family, if i had bought a house now given the current market".

maybe conversely, people in the grip of "FOMO" who are making highly leveraged bets on "house price always go up, doesn't matter what price you buy at" are very confident in their ability to predict that there will not be a recession during the time horizon they're aiming to make a quick buck by trading around their expected capital gains.

[unwitting_gulag]

Clearly there will be, but KlangFool seemed to be implying that one was imminent. Maybe one is! But, like, economists have predicted nine out of the last five recessions, and KlangFool is no economist.

And if KlangFool is so good at predicting the timing of the next recession, why aren't they loading up on SPY puts?

I think we'd all agree that predicting the timing of recessions is very difficult, that's why attempting to trade around it with puts is high risk and likely to have negative expected value.

But it's possible to say "it's plausible there may be a recession some time in the next N years -- and i know it's very difficult for me or anyone to predict the timing before it happens. but, in the event were a recession somewhere in this time period, it would produce a bad outcome for the wealth of my family, if i had bought a house now given the current market".

maybe conversely, people in the grip of "FOMO" who are making highly leveraged bets on "house price always go up, doesn't matter what price you buy at" are very confident in their ability to predict that there will not be a recession during the time horizon they're aiming to make a quick buck by trading around their expected capital gains.

It's hopefully not controversial to surmise, that there is danger in being too stretched. Suppose that housing prices fall, one loses one's job, and is unable to make payments. Frantic effort to sell, means losing money on the house... the alternative being trashing one's credit, losing one's down payment, and still losing the house. Acknowledging this possibility, gives us pause.

----- However -----

Suppose that one has enough resources to sustain say a year of unemployment in a recession, still making payments without interruption. And suppose that one has the skill and luck to buy a house that will appreciate solidly long-term, even if it dips say 20% in a nasty recession. It then seems to me, that timorous fear over a possible impending recession, would be a silly reason to avoid buying now... just as understanding that occasionally the stock market crashes, would be a silly reason to foreswear investing in stocks.

Where I personally get irritated is in this incessant chorus of don't buy - don't buy - don't buy until you've become galactic emperor and have learned to fly faster than the speed of light, to bend spoons just by thinking about it, and to whistle with your mouth closed. If we erect ridiculous bounds for when, you know, it's finally OK to buy a house, then nobody in a VHCOL area would ever buy a house, until their start-up becomes a deca-unicorn. Is this really a prudent way to live? On second thought, let's make a concerted effort to promulgate such a belief! Why not? If enough people start believing it, then demand will dry-up, prices will fall, and we who are on the B-team, will finally get our chance to buy - if not, you know, the permission.

[Oddball]

OP - have you looked into getting a multi-unit building, living in 1 unit and renting the other(s)? Generally MFH are cheaper that SFH in the same neighborhood, and the rental income can greatly lower your own housing expenses. You will need to qualify for the building as-if it is a SFH, as in you can't add in any rental income for income-2-debt calculations until you have 2 years of that income under your belt.

[WoostaGal]

OP, if you had that very high mortgage payment how would you feel if you or your wife lost your job and were out of work for a year or so? Do you have adequate savings to tide you over in that case? What if you needed to replace one of your cars? These things have happened to some of us. If you have an affluent family you can turn to, that is great, but not all of us can rely on that resource.

[LotsaGray]

My wife and I live in a very high cost of living area, $1.2M median house price. We are mid-30s and have been renting for many years and really would like to buy a house. Main reasons for wanting to buy are to be able to participate in what has been a huge driver of personal wealth for many and we would like to garden and "make the home ours" via ability to remodel/landscape/etc. We have been looking and anything suitable will run approximately $7-$8k/month mortgage. There are a few cheaper options but they need six figure renovations that will just get us back to the $1.1M+ total cost range. We currently rent at a below market average of $2,300/month. The difference in our mortgage and current rent would be significant and would push us to the maximum 42% debt-to-equity the banks will allow. We have never come close to this debt-to-income ratio which makes me nervous but in this market I don't know there is any way around it. We really want to live here given we grew up here and most of our family is in the area. We could move but we would miss our family. We could buy a rental in a lower cost of living area as an investment property so we at least participate in some equity appreciation but then we don't accomplish the "make our house ours" objective. Just curious what your thoughts are. Thanks!

IMO, those numbers just do not work. I think you meant debt to income (not equity). I never got over 32% long ago when I lived in a HCOL (not VHCOL) many years ago when 36% was "the max". Even then DW and I looked for ways to improve. She took part time night job. We skipped/minimized vacations for a couple of years. Deferred a new car (with a loan). Etc. We were happy when back below 30%. I can't imagine what we would do it above 40%. (In our defense, we purchased that house brand new about 15 months after we married and I graduated college and wife was still attending part time. And I borrowed money from my father just to move to my first post college job and get apartment.)

With that said, %-wise that house did far better than any other we ever owned for appreciation rate. In <4 years it appreciated 40% and really set up up house wise for the rest. So it can work great but there are no guarantees it will. Personally (and I don't live in one nor am I an expert) it seems VHCOL areas have or will have to peak or at least drastically slow appreciation simply to have buyers. The super expensive mansions will always have the uber wealthy to buy them. But the median house has to have near median income buyers. I would be afraid to expect the past to repeat in those areas.

TLDR: Even if you can get approved for a mortgage, I don't think the numbers really work and I would not buy at that price with current income. If you can continue renting for $5K+ under mortgage (plus taxes and insurance?) payment (and the rental is safe) you will likely do better renting forever.

[thedaybeforetoday]

My wife and I live in a very high cost of living area, $1.2M median house price. We are mid-30s and have been renting for many years and really would like to buy a house. Main reasons for wanting to buy are to be able to participate in what has been a huge driver of personal wealth for many and we would like to garden and "make the home ours" via ability to remodel/landscape/etc. We have been looking and anything suitable will run approximately $7-$8k/month mortgage. There are a few cheaper options but they need six figure renovations that will just get us back to the $1.1M+ total cost range. We currently rent at a below market average of $2,300/month. The difference in our mortgage and current rent would be significant and would push us to the maximum 42% debt-to-equity the banks will allow. We have never come close to this debt-to-income ratio which makes me nervous but in this market I don't know there is any way around it. We really want to live here given we grew up here and most of our family is in the area. We could move but we would miss our family. We could buy a rental in a lower cost of living area as an investment property so we at least participate in some equity appreciation but then we don't accomplish the "make our house ours" objective. Just curious what your thoughts are. Thanks!

Under the best of circumstances, speaking as a homeowner, my house owns me at least some of the time.
Under the above outlined scenario, your house would own you all the time and put a limit on many other financial options that would typically be available to those with a HHI of 250k/year.
I vote no on the house purchase as described above.