Author Topic: Home buying in a high cost-of-living market with a modest salary  (Read 1418 times)

kevmattone

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Hello Mustachians ...

I've been intending to post my case study here for some time; it's really cathartic to make this jump, so here's my situation:

HISTORY (not that important - feel free to skip):
I immigrated to the US 8 years ago. In years 1-4, I earned about $45,000 and my wife earned $20,000. We paid $1,500 rent and saved about $50,000. Four years ago, we had a daughter and two years ago, my son was born. Between taking care of the kids and some visa issues, my wife worked very little in that period. Nonetheless, we feel it was worth it, as my kids had (and still have) the "luxury" of Mom-at-home.

My salary increased to $70,000 in 2014, but rent also went up to $1,750. The three years from 2014-2016 cut our savings to about $30,000. 

The NOW:
In mid 2016, I got a full time job in the federal government ($102,000) doing Biomedical Research (which I love) and my wife and I received Green Cards (cost $10,000). My work is difficult to do outside of a well-funded laboratory setting, so I intend to remain in this position. My wife has now returned to work part-time (~10 hr per week). As a result, our situation has improved and in the past year, one year our cash stash has rebounded to ~$50,000. We have no debt.

  • We both really like the area and our jobs.
  • We do not plan to have any more kids.
  • We currently rent a condo close to work.

We would like to buy a home and our priorities are as follows:

Close to work for both of us (either by bike (preferred) or public transit (can get a work subsidy that covers total cost))
Good (but not necessarily “great” schools)
“Nice” neighborhood - I know, this is very subjective.

The problem is that a house that ticks all of these boxes will cost somewhere upwards of $400,000 in this area !!!!! On the upside, we are not in any rush, and can sit tight until we see a bargain. I have established that financing is available based on my income alone, and can get a loan for more than we are comfortable spending ($450k, 30 yr. Conventional @ 4.25%; 5% down-payment). I don’t like getting a 30-year loan OR just putting down 5% but that’s what we can do right now and it leaves us with a $15k cash po. Also, I have no intention of spending this much - I was just testing the waters.

Here are what I see as our options:

1. Continue to rent.
We can probably rent our current home at the same price ($1,750) for another 3 or 4 years. I bike to work and schools are great. In that period, we could probably save or invest $1,500 a month. This may put us in a better position to make a bigger down-payment but mortgage interest rates are climbing.

2. Buy a house now that ticks all the boxes
We saw a great house for $420,000. It exceeds what we would like in every way (small house (950 sq. ft), walkable to schools, neighborhood kids play on the street, only 5 miles to work along bike trails, friendly neighbors, ~15 min walk to my wife’s workplace, two “towns” within walking distance). We would love to live there but feel that we may be over-reaching. The equity gain for the first few years is just $500-600 per month and the total monthly payment including all bills would be >50% of my net income ($2,700). That seems INSANE … but the half that’s left is certainly enough for us to retain our current living standards and continue putting money in my 401k / TSP. Also, in two years when both kids go to school, my wife will likely double her income.

NOTE: An alternate possibility is to take a 5/5 ARM at a rate of 3.3%. This lowers the monthly payment by $200 for the first 5 years. Upper cap is 5.15%, so in 5 years, our mortgage could potentially increase by a maximum of $400.

3. Buy a house that compromises on our “wants”. (outside a 30-min commute distance and/or questionable schools).
Houses in such areas that we think we could tolerate will still cost a lot in this area ($325-$400,000). We are not too excited about this option but are considering it. We have identified one area where lots of homes are being bought at these prices … is it evolving into a “good” neighborhood ??? hmm …

4. Sit tight and wait for a “bargain” home.
This is the most tempting option from my perspective because in the meantime, we revert to option 1 (rent and save). This would allow us to save more for a down-payment and hopefully get a deal when we do make the plunge. On the downside, we have been monitoring the market for 4-5 months and there are very few (if any) such bargains that appear.

Anyhow. Any thoughts on our situation would be very gratefully received. My finances are laid bare below. Could I add that it feels great to open up my finances to others and let them take a cold, hard, objective look !! I had contemplated going to a financial adviser but I do not trust paid financial advisers any more than I do car mechanics …

OK ...

Topic Title: To buy or not to buy ... that is the question ... 

Life Situation: 37 y/o married couple

IRS filing status: married filing jointly

number & ages of dependents: 2 y/o 4y/o

Assets:
Bank                        50,000
401k(TSP)                23,000
2 x Cars:                    4,000; 2008 Mazda 5 ($4,000); 2001 Elantra ($0). We own both.

Gross Salary/Wages:            
Wife: 400-1,200 (per month)
Me:    3,864 (26 pay periods per year)

** Subsequent numbers are for my salary per pay period - Wife's job has few benefits, so not included.

Pre-tax deductions:
401K (TSP)                       193 (5% : max for employer match)
Healthcare                         174
Dental                                  37
FSA                                      21

Taxable wages:                3,439

Paid by employer: (Just for information ; Not counted in any calculations)
401K matching                    193
Health Insurance                 505
Retirement Plan                   460

___________________________________________________________
After tax income (approx monthly):            5,835

Cost of housing: (includes rent, bills, taxes, insurance)
Current monthly rent:          1,750         
$420k house (proposed):2,700In four months, we've found one such house
$400k house (proposed):2,550Hard to find. Perhaps found one in 4 months
$350k house (proposed):2,250Will require persistence and/or luck. Very rare.
Expenses:
Credit cards:           n/a      I have cards but always pay off the entire balance
Car           160Gas, Insurance, Repairs
Groceries    700We eat good food @ home !!
Social activities    300probably more than we really spend
Pre-school (for 2y/o)    200approx. 2,400 for coming year
Phones70    2 phones; Google Fi. Includes $10 per month to pay for one of our phones
Internet & basic cable    75I hate the internet monopoly in this country
Travel    470immigrant tax !! haha … we travel once a year to see family (4 x $700) and each set of parents visits once a year (4 x $700)
Medical (co-pays, etc)60a little high
TOTAL EXPENSES1,970
MONTHLY EXPENSES LAST YEAR:2,911included $6,000 ($500 per month) in costs unique to last year. We also got quite loose with spending because for the first time in years, we had some financial breathing room. We've tightened up again !!

Specific Question(s):
1.   Most importantly, is there a road to Mustachian Nirvana and FI on a combined $110k salary for a family of 4 in a high cost-of-living area. We feel that we live a Mustachian existence but cannot see how to plot a path to financial independence …

2. To buy or not to buy a house. Any thoughts? Buying the $420k house would give us a solid base from which to grow our kids and life, but it seems like it would be a huge chunk of our money that we could be using for something else. On the upside, with that settled, we could work to build new income streams (I guess we could do that either way) ...

Thanks so much in advance for any suggestions.
Kevin
« Last Edit: March 18, 2017, 11:41:55 AM by kevmattone »

Laura33

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Re: Home buying in a high cost-of-living market with a modest salary
« Reply #1 on: March 18, 2017, 04:26:16 PM »
So, first, is there a path to Mustachianism nirvana for you?  Yes.  But it likely doesn't involve a $400K+ house on a $100K income.  It involves cutting expenses, living on a relatively small percent of your post-tax income, and investing the rest.  OTOH, a house can be a decent path to wealth if you are happy to work for 30 years; the leverage and tax deductions the mortgage provides allow you to save and invest.  Your monthly "consumable" expenses are decent, so assuming you can keep saving elsewhere, you should in good stead to retire once the mortgage is paid off.*  But at your current income and home prices, it would be difficult to get there in 10-20 years.  Which, again, there's nothing wrong with that -- if you enjoy your job and are stable, then there's not a damn thing wrong with planning a longer career if it gives you and the family the lifestyle you want.  You just need to figure out the higher priority.

Second:  your wife's potential future income is the wild card here that could change the game.  I wouldn't make decisions on that now -- I'm a big fan of not counting chickens and all that.  At the same time, it means you don't need to rush into this decision, because you might be in a better position in a few more years.  And I do get this feeling of rushing, of borderline panic from your post -- that if you don't grab these opportunities NOW it'll never happen.  This is the kind of feeling that leads to mistakes.  Yes, rates seem to be going up, but you're still going to have the same buyers with the same amount of money trying to buy; people's ability to pay doesn't magically increase when rates do.  Ergo, if rates go up, then either it is because you have a roaring economy (in which case you will likely make more money and be able to afford a higher payment), or else housing prices will need to come down (because no one will be able to afford the higher payments and so anyone who actually wants to sell will need to drop the price).  Sure, it doesn't happen right away, and there is a delay as thing switch from a sellers' market to a buyers' market, but if you have a longer-term perspective and have cash in hand waiting for the right time, you will be able to find something.  Note that I'm also not saying that it's a bad idea to buy now -- just that you need to evaluate it without that sense that this is your last chance ever.

Also, how secure is your job?  Given the change in Administration, I'd be a little worried that a federal government research position might be less stable now than it seemed last year.  That might argue for waiting another year or so while things shake out.

If you do decide to buy now:  it looks like you can "afford" the $420K house if you are comfortable with your current savings rates and budgets.  I note you do have significant slack in your budget given some of the costs for cable, phones, groceries, etc. (which is good if things get tight).  But also think about the extra upkeep with the house -- you will need a fund for repairs (I've heard 1-2%/yr), as well as a plan for cleaning, mowing, seasonal maintenance (e.g., caulking/weatherstripping, getting rid of leaves), etc.  Also, check the property tax assumptions -- many areas re-set the tax assessment to the new sale price, which can lead to a big jump in taxes owed.  And is this really everything in your budget?  It's a pretty short list; what about life insurance, periodic Home Depot or Target runs, clothing, etc.?  I'd be 100% sure of that budget before locking in on a house.

If you decide to look for cheaper housing options, I would strongly encourage you to not even consider a longer commute; I know people who do that and are fine with it, but you really seem to value and appreciate your commute, so don't discount the quality of life that gives you.  So I would limit your other options to the "less-good" nearby neighborhoods.  Or what about a duplex?  Many, many Mustachians have used rental real estate to reach FI.  A duplex might address some of the financial concerns by giving you some income to offset the high cost of housing in your area.

In the end, owning a home is frequently as much an emotional decision as a financial one.  There is no "right" or "wrong" answer here, as long as you go into the decision fully understanding and accepting the tradeoffs involved in each alternative.

* It looks like you are only saving to get the full match.  This is not going to be sufficient if you want to retire in 30 years, unless you have a pension or some other source of funds to make up the difference.  However, I note that you have 26 pay periods, which means two months of the year, you get three paychecks, not two.  I would strongly encourage you set up your budget based on 2 paychecks/month and treat those as extra checks as savings, which should help make up the difference.   
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lhamo

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Re: Home buying in a high cost-of-living market with a modest salary
« Reply #2 on: March 18, 2017, 05:41:41 PM »
I think the problem is that you don't really have enough of a down payment saved up to buy a 420k house comfortably.   Ramp up your savings until you have at least enough to put 20% down -- that will both eliminate PMI and reduce your monthly mortgage payment.  It will also show you what you can REALLY live on when you are focused.   Since you mentioned you got fast and loose with things last year, do your best to really reign things in this year and see if you can save 3k/month toward your house downpayment.   If you can, then absorbing slightly larger housing costs once you buy should still leave you with plenty of wiggle room.
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Ocinfo

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Re: Home buying in a high cost-of-living market with a modest salary
« Reply #3 on: March 18, 2017, 06:12:22 PM »
My initial reaction is that purchasing a home now is too much risk but I'm not big on buying in HCOL areas. You've come a long ways in a fairly short time period. Federal government and especially research are going through upheaval and since your income is the main source, I would be focusing on saving for the foreseeable future.

Are the schools for your current rental decent? This could be a deciding factor but might lead to renting something else rather than buying.


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Hargrove

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Re: Home buying in a high cost-of-living market with a modest salary
« Reply #4 on: March 18, 2017, 06:17:11 PM »
I think the problem is that you don't really have enough of a down payment saved up to buy a 420k house comfortably.   Ramp up your savings until you have at least enough to put 20% down -- that will both eliminate PMI and reduce your monthly mortgage payment.  It will also show you what you can REALLY live on when you are focused.   Since you mentioned you got fast and loose with things last year, do your best to really reign things in this year and see if you can save 3k/month toward your house downpayment.   If you can, then absorbing slightly larger housing costs once you buy should still leave you with plenty of wiggle room.

+1.

If you stop traveling for one year, and work just a little bit on that grocery bill, you could easily get to 20% down in one year (84k). You could then start looking for a house and make your emergency fund while you search.

420k for 950sqft... woo.

Dee18

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Re: Home buying in a high cost-of-living market with a modest salary
« Reply #5 on: March 18, 2017, 08:18:41 PM »
Keep in mind that a house brings many additional expenses...such as lawn care, exterior maintenance, higher insurance, desire for more furniture, etc.  it also eats up a lot of time.  Your location now sounds great.  Stay there a couple more years to amass that down payment.  And do remember that housing prices can go down as well as up.

kevmattone

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Re: Home buying in a high cost-of-living market with a modest salary
« Reply #6 on: March 19, 2017, 06:07:06 AM »
Good morning Mustachians and thank you so much! I can't believe that you took time out of your day to read and respond to my question so extensively !! ... anyway, thank you.

This Mustachian FACE PUNCH was exactly what I needed !!

We've decided NOT to do the INSANE thing and buy the $420k house. In fact, we've decided instead to go for hardcore savings until we reach @ least 20% of our future home price. That will bring any monthly payment down close to the price of rent. It also allows us to sit out the administration for a while to see how secure my job really is. FYI, the elementary school and pre-school near our rental condo are amazing and just a 5-min walk ... throw in the luxury of a shared condo pool in the summer months and I don't know why we'd want to leave !!! haha !!

I do have two remaining questions ...

1. TSP or save?
By getting serious, we can free up @ least 2k per month for savings. Although I would like to save this for a house deposit, I would also like to max out my TSP ($800 more per month). My inclination is to max out the TSP first, establish that as our baseline expenses, then build a cash stash for a home purchase from there. That would lengthen the path to our 20% deposit but that's OK ... Any thoughts on how best to do that split ?

2. Short-term investment strategy to fight inflation
Of course, having a pile of cash just sitting around in a low (no) interest savings account seems a little silly. Are there any short-term investment vehicles that you would recommend to make this money work for me at least a little? A 24-month CD yields 1.3% - thoughts if could do better?

Cheers,
Mattone


Hargrove

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Re: Home buying in a high cost-of-living market with a modest salary
« Reply #7 on: March 19, 2017, 06:18:07 AM »
1. TSP or save?
By getting serious, we can free up @ least 2k per month for savings. Although I would like to save this for a house deposit, I would also like to max out my TSP ($800 more per month). My inclination is to max out the TSP first, establish that as our baseline expenses, then build a cash stash for a home purchase from there. That would lengthen the path to our 20% deposit but that's OK ... Any thoughts on how best to do that split?

Lowering your cash before lowering your spending is like buying really nice workout clothes and a gym membership before you start exercizing. The hard (and relevant) part for you now is lowering your spending. If you succeed at that, you will automatically have cash to save. If it's really helpful for you to see the cash vanish first, put it in the TSP, but don't ever raid that TSP! The challenge people have with this if they don't lower their spend first is that they spend themselves into a problem and can no longer easily get the cash back. If you're anxious to get that house quickly and you'll be gnashing your teeth over it, having the money available to do so won't take you a huge amount of time if you save for it first. I would max the TSP first, but I don't have a wife and kids, so that's a personal decision. How quickly do you want "Buy House" as an option?

Quote
2. Short-term investment strategy to fight inflation
Of course, having a pile of cash just sitting around in a low (no) interest savings account seems a little silly. Are there any short-term investment vehicles that you would recommend to make this money work for me at least a little? A 24-month CD yields 1.3% - thoughts if could do better?

Sure. VBTLX and/or (VBTLX 60% - VTABX 40%) in a Vanguard account. Over 10k gets to start with Admiral Shares. Any safer than that and inflation is kicking its butt.
« Last Edit: March 19, 2017, 06:21:25 AM by Hargrove »

lhamo

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Re: Home buying in a high cost-of-living market with a modest salary
« Reply #8 on: March 19, 2017, 09:43:34 AM »
Your rental really sounds ideal for your current family situation, at a good price, and like it will be stable and good for your work/commute/kids school situation for the net few years at least -- I would focus on maxing out your TSP and keeping expenses as low as possible in other areas so that you can build the house fund on the side.   Things might change a lot in 3-4 years. 

Your food costs seem really high to me with kids your age.   We spend around $600/month to feed two adults and two teens (who both eat like adults).  Try budgetbytes.com and the Good and Cheap cookbook for great ideas on lower-cost recipes.  I bet you can bring your food spending down considerably with a little effort.
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