Author Topic: Buying a house in a HCOL area - Am I making a mistake?  (Read 4478 times)

m8547

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Buying a house in a HCOL area - Am I making a mistake?
« on: September 22, 2017, 10:34:26 AM »
I work in Boulder, CO, and I'm thinking about buying a house here. Am I making a mistake?

I'm 28, and I have about $200k in assets, mostly index funds, including retirement and non retirement accounts. My annual income is $95,000. I don't have any debt.

I found a townhouse for $450,000. It has more than enough space: 3 bedrooms, 1350 square feet, and a garage. Most smaller places are condos with insane HOA fees ($400 a month is common for condos here), don't have a garage, etc. Plus, condos haven't held their value quite as well as townhouses and detached housed.

That's insanely expensive (a friend in a suburb on the east coast bought a similar place for 1/3 the price), but prices have never fallen in Boulder in the past few decades, and the population of the front range of Colorado is expected to continue growing quickly. The open space, bike paths, and nice weather make it a desirable place to live, and the draconian building restrictions contribute to high housing prices. The only macroeconomic things I can think of that would cause it to lose value would be if interest rates rise significantly, if we have a period of deflation, or if incomes fall for some reason. And if I lose my job I'd be burning through savings quickly until I can find another source of income and/or sell.

If I buy this, my mortgage will be about $2400 a month (including property tax, HOA fee ~$200 a month, insurance), and let's say utilities are $200 a month (it should be less, but I'm not sure.). Deducting mortgage interest and property tax should save me about $300 a month on taxes compared to my current situation.

I'll have to run the numbers on savings rate later, but if I buy this my savings rate will fall to around 33%. It was just below 50% for a while, but I recently paid off my car loan and got a raise, and I haven't recalculated recently, so it is probably higher right now. 33% doesn't look good for FIRE, but there's no reason I need to retire in this house. If I'm not working I could easily live in Longmont or a similar area with lower cost of housing.

So in terms of cash flow, buying this house will be detrimental to early retirement, but can I justify it if I think of it as an investment?

Boulder vs Alternatives
The benefits of living here are a 10 minute bike ride to work, and I can easily bike to various stores. Living just outside of Boulder it's a 30-40 minute bike ride or 15-30 minute drive to work. Free time is important to me, so having an extra 40+ minutes a day is worth something, and being able to bike 3-5 days a week is really relaxing. Right now I'm living just outside of Boulder, and I've been able to bike less than once a week because of various things I need to do after work that are not near where I live

One alternative is I could find a job somewhere cheaper to live, but I do enjoy living here, and my job now is fairly good. Another alternative would be living in Longmont and working in Boulder, but that would be a commute of at least 30 minutes each way, which sounds miserable.

Rent vs Buy
Similar houses rent for $1900-2200 a month, and according to the NYT rent vs buy calculator, if I stay for 3 years, renting is better only if rent is less than $1900 a month. If I was renting I could probably live with a little less space, so I could rent a 1 bedroom apartment for $1300-1500 a month. If I stay for 5-9 years then buying is (slightly) better than renting at $1300-1500. There's a lot of uncertainty in the assumption about future appreciation, rents, and investment returns, but this is with reasonable values (not conservative or aggressive). So by that metric at least it's not a bad deal.



honeybbq

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Re: Buying a house in a HCOL area - Am I making a mistake?
« Reply #1 on: September 22, 2017, 10:51:15 AM »
Boulder is a niche market. I have family that lives there. There house has appreciated considerably. I'd consider it a sound investment. Your savings rate may fall, but I think the appreciation in house value will compensate.

nexus

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Re: Buying a house in a HCOL area - Am I making a mistake?
« Reply #2 on: September 22, 2017, 11:10:53 AM »
Short answer: Might be a mistake, but I need more details. Here are my questions:
Do you really need 3 bedrooms?
What is your current rent?
How much would your down payment be?
Is homeownership something you really want/need/value?

If yes...
Can you offset the mortgage by renting out a room or two, or will those rooms be occupied by your family?

The first half of the lifespan of your mortgage mostly goes to interest, so also keep that in mind if you're not set on staying for decade(s).

Other things to possibly consider
I'm in a similar situation with respect to your age & income, except you have a little over 2x what I have in assets. I would never consider buying a 3 bedroom house and increasing my monthly expenses if it's just going to be me living there all by my lonesome and having to cover all the bills.

The only way I would move/buy is if I had some sort of big life event like cohabitation, getting married, or losing my current job. As it stands my rent is $1,175 compared to the $1,400-$1,500 new tenants are paying for the same thing. Houses here are even more expensive, starting at $500k for some shoddy pads. Even though it's not the nicest place, it is centrally located and allows me to maintain a high savings rate.

Not sure if it helps, but since FI is pretty high on my list of priorities my plan is to reach my semi retirement number or full retirement number ASAP, then relocate to a LCOL area and probably buy something there while working part-time or travelling. So, I plan to make as much money as I can as fast as I can in a high income/(typically)HCOL area while keeping my expenses as low as possible, then cash out and move elsewhere. Ideally I'd have a mortgage payment roughly equal to what I currently pay in rent. For me, going from ~$1,200/month to anything over $2k seems unfathomable unless I have spouse or roommate covering the difference.
« Last Edit: September 22, 2017, 11:14:12 AM by nexus »

joonifloofeefloo

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Re: Buying a house in a HCOL area - Am I making a mistake?
« Reply #3 on: September 22, 2017, 11:18:49 AM »
I'm in a similar exploration. HCOLA, niche area, expected to increase, rentals scarce and highly priced, etc.

In this thread https://forum.mrmoneymustache.com/real-estate-and-landlording/buy-the-biggermore-expensive-house/msg1705697/#msg1705697, consensus seems to be: plan for no increase in value. That certainly changes my spreadsheet and my NYT buy vs rent inputs.

It's hard for me to let go of the speculation. When I input my sense of what prices will do -even a 5% increase vs the 20% I anticipate- buying is definitely the way to go. When I remove value increases, renting is definitely the way to go.

Question: In your area, do townhouses not have strata fees? (Ours do, same as the condos.)
« Last Edit: September 22, 2017, 11:22:53 AM by jooniFLORisploo »

bigalsmith101

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Re: Buying a house in a HCOL area - Am I making a mistake?
« Reply #4 on: September 22, 2017, 11:31:15 AM »
I can only say, that if you are making a mistake, I've fully committed to making the exact same one.

I live north of Seattle, a very impressively intense housing market. My wife and I have an income similar to yours, and are buying a home for the same price ($450k). We close on the 27th should it all go as planned.

Our savings rate will drop from 55% to about 25-30%. However, like you, we're buying in an area that has a massive growth potential, and is considered one of the nicest neighborhoods in our rapidly growing city. Rents are sky high.

Our new home is way bigger than we need (4bed 2.5bath, 2250sqft). But we're faced with the fact that homes that are of the size range I would prefer, that are $100k cheaper, are also the homes that are most affordable in our area, which drives up the price of the home. A 1400sqft, 3b 2bth home will cost $350k+ or $250/sqft, where as a 2250sqft 4bd, 2.5bth home will cost $450k or $200/sqft. The home per dollar value is simply much more enticing at that higher price.

Further more, in an area like ours (and yours) that is expecting continued growth due to the technology boom in the Seattle market, our home prices are rising significantly, pushing up the risk of being priced out. Interest rates are very low right now (we locked in 3.625% fixed 30yr), and your leverage on the value of your home will allow for interesting financial options in the future.

You'll be the one that has to make that decision for yourself. You're at a pretty awesome spot in terms of net worth vs. age. If you like your job, are confident in it, and happy with the opportunities, then you're probably on a pretty solid footing to succeed with the home.

Rubic

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Re: Buying a house in a HCOL area - Am I making a mistake?
« Reply #5 on: September 22, 2017, 11:36:57 AM »
So you plan to have two roommates, each paying $1000/month rent?  ;-)

m8547

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Re: Buying a house in a HCOL area - Am I making a mistake?
« Reply #6 on: September 22, 2017, 11:52:01 AM »
Short answer: Might be a mistake, but I need more details. Here are my questions:
Do you really need 3 bedrooms?
What is your current rent?
How much would your down payment be?
Is homeownership something you really want/need/value?

If yes...
Can you offset the mortgage by renting out a room or two, or will those rooms be occupied by your family?

The first half of the lifespan of your mortgage mostly goes to interest, so also keep that in mind if you're not set on staying for decade(s).

Other things to possibly consider
I'm in a similar situation with respect to your age & income, except you have a little over 2x what I have in assets. I would never consider buying a 3 bedroom house and increasing my monthly expenses if it's just going to be me living there all by my lonesome and having to cover all the bills.

The only way I would move/buy is if I had some sort of big life event like cohabitation, getting married, or losing my current job. As it stands my rent is $1,175 compared to the $1,400-$1,500 new tenants are paying for the same thing. Houses here are even more expensive, starting at $500k for some shoddy pads. Even though it's not the nicest place, it is centrally located and allows me to maintain a high savings rate.

Not sure if it helps, but since FI is pretty high on my list of priorities my plan is to reach my semi retirement number or full retirement number ASAP, then relocate to a LCOL area and probably buy something there while working part-time or travelling. So, I plan to make as much money as I can as fast as I can in a high income/(typically)HCOL area while keeping my expenses as low as possible, then cash out and move elsewhere. Ideally I'd have a mortgage payment roughly equal to what I currently pay in rent. For me, going from ~$1,200/month to anything over $2k seems unfathomable unless I have spouse or roommate covering the difference.

No, I don't need 3 bedrooms, but I have a lot of outdoor gear (skis, backpacking stuff, bikes, etc), and I enjoy working on my car any my bike, so 2 bedrooms and a garage is a good size. The third bedroom in this place is tiny, about 9'x10' or even a little smaller. It's more than I need, but I could see myself staying here longer than a smaller place, and staying longer before I sell may be better than trying to upgrade in a few years.

I could rent out one of the larger bedrooms and probably get about $700-$800 a month for it, which would be a big help with monthly cash flow. I'm tired of living with people and want some privacy, but I'm definitely considering renting out one of the rooms because financially it's hard to justify not doing it.

Right now I'm renting a room for $700 a month, but I live with a couple people and their dogs, so it's quite crowded. I can't see myself living here long-term, so even though my savings rate living here is probably over 60%, I wouldn't want to retire if a room in a crowded house is all I can afford to rent.

Earlier this year I was renting for $1000 a month, had a $450 a month car payment, plus I was putting $500 a month into the company stock purchase plan mainly to save for a down payment. I was doing fine with that (adds up to $1950 a month), and my income was about $10k lower since I got a promotion this year, too.

My down payment will be 10%.

I do value owning a house. I want a space that I can make my own. I want to do some updates to the place myself to make it nice. I like to cook, so I want to have a good kitchen, and the vast majority of rentals have fairly basic kitchens. I'm not planning on spending a lot of money on it, but I'm thinking I'll put in a gas stove, new countertop, paint the cabinets, add some better lighting, and add a microwave. Besides the kitchen, I plan to paint the walls and trim and replace most of the flooring (mostly myself, except carpet which I'll have someone else install). It will need new windows at some point in the near future, which could be a significant expense.

Another reason I'm trying to buy something is that I'm worried if I don't get into the market now I'll never be able to afford anything a reasonable distance from work. For the past few years property in Boulder has been increasing at 10% per year or more. It's expected to level off for a while, but no one really knows when that will happen or for how long. In the past there have been alternating periods of extreme growth and periods of level prices. But even when prices were "level" they were still increasing a couple percent per year in boulder. Housing here had been going up faster than my income, so I want to lock in my costs now.

m8547

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Re: Buying a house in a HCOL area - Am I making a mistake?
« Reply #7 on: September 22, 2017, 11:58:03 AM »
I'm in a similar exploration. HCOLA, niche area, expected to increase, rentals scarce and highly priced, etc.

In this thread https://forum.mrmoneymustache.com/real-estate-and-landlording/buy-the-biggermore-expensive-house/msg1705697/#msg1705697, consensus seems to be: plan for no increase in value. That certainly changes my spreadsheet and my NYT buy vs rent inputs.

It's hard for me to let go of the speculation. When I input my sense of what prices will do -even a 5% increase vs the 20% I anticipate- buying is definitely the way to go. When I remove value increases, renting is definitely the way to go.

Question: In your area, do townhouses not have strata fees? (Ours do, same as the condos.)

I'm assuming the default 3% per year in the rent vs buy calculation. If it was located anywhere else I would assume 0-1%, which definitely favors renting, but I think we could still see 3% per year here even long-term, unless there is some major economic change. Appreciation is really the only thing that makes spending $2400 a month on a mortgage cheaper in the long run than renting for $1300-1900 a month.

There is $200 a month HOA fee which covers insurance for the exterior of the building, trash pickup, snow removal, yard maintenance, exterior and roof maintenance. If it was a detached house I'd be paying at least $100 a month for insurance, trash, and maintenance, so it's not a bad deal.  Most of the smaller condos have higher fees, typically $400 a month, which seems unreasonably high.

m8547

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Re: Buying a house in a HCOL area - Am I making a mistake?
« Reply #8 on: September 22, 2017, 12:16:50 PM »
I can only say, that if you are making a mistake, I've fully committed to making the exact same one.

I live north of Seattle, a very impressively intense housing market. My wife and I have an income similar to yours, and are buying a home for the same price ($450k). We close on the 27th should it all go as planned.

Our savings rate will drop from 55% to about 25-30%. However, like you, we're buying in an area that has a massive growth potential, and is considered one of the nicest neighborhoods in our rapidly growing city. Rents are sky high.

Our new home is way bigger than we need (4bed 2.5bath, 2250sqft). But we're faced with the fact that homes that are of the size range I would prefer, that are $100k cheaper, are also the homes that are most affordable in our area, which drives up the price of the home. A 1400sqft, 3b 2bth home will cost $350k+ or $250/sqft, where as a 2250sqft 4bd, 2.5bth home will cost $450k or $200/sqft. The home per dollar value is simply much more enticing at that higher price.

Further more, in an area like ours (and yours) that is expecting continued growth due to the technology boom in the Seattle market, our home prices are rising significantly, pushing up the risk of being priced out. Interest rates are very low right now (we locked in 3.625% fixed 30yr), and your leverage on the value of your home will allow for interesting financial options in the future.

You'll be the one that has to make that decision for yourself. You're at a pretty awesome spot in terms of net worth vs. age. If you like your job, are confident in it, and happy with the opportunities, then you're probably on a pretty solid footing to succeed with the home.

It's reassuring to read about other people in a similar situation. Of my peers and co-workers, I can only think of two who have spent so much on housing.

There is definitely some non-linearity in pricing. Spending relatively little more seems to be a better value in terms of space and quality.

The Colorado front range has a critical mass of people to make it a good place for businesses and technology companies to move, which in turn brings even more people. I don't anticipate that changing any time soon, though a recession could slow things down for a while. The weather and outdoor activities make it a desirable place to live (that's why I'm here), and Boulder is one of the most desirable (and most expensive) areas for reasons I mentioned in my original post.  There's not a lot of land left to develop near existing towns, and there is practically none in Boulder, so new development isn't likely to increase the supply of housing very much. Anything new usually sells for a premium anyway. I found one developer that is advertising 1100sf condos in Louisville (about 15 minutes out of Boulder) for mid 400s.

Cranky

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Re: Buying a house in a HCOL area - Am I making a mistake?
« Reply #9 on: September 22, 2017, 12:18:12 PM »
I think the question is - are you really in Boulder for the long haul?

m8547

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Re: Buying a house in a HCOL area - Am I making a mistake?
« Reply #10 on: September 22, 2017, 12:31:09 PM »
In this thread https://forum.mrmoneymustache.com/real-estate-and-landlording/buy-the-biggermore-expensive-house/msg1705697/#msg1705697, consensus seems to be: plan for no increase in value. That certainly changes my spreadsheet and my NYT buy vs rent inputs.

It's hard for me to let go of the speculation. When I input my sense of what prices will do -even a 5% increase vs the 20% I anticipate- buying is definitely the way to go. When I remove value increases, renting is definitely the way to go.

I had some more thoughts about price appreciation. I believe it is true that on average housing matches inflation, but I don't know if it's necessarily valid to use an average when you own one particular house.

Some background about the area. Major economic centers are Denver, Boulder, and the highway 36 corridor (between Denver and Boulder). I'll focus on Boulder and the highway 36 corridor. There's not a lot of land left to develop, as I mentioned, but there is plenty of space for development to sprawl out to the east near I-25.

As far as I know they are doing very little to improve the east-west roads, and most of them are just county roads with one or two lanes each way. There is one highway, but it's a toll road with extremely high tolls (something like $4 each way between I-25 and Highway 36, about 9 miles). Unless you're near the toll road, living out near I-25 would make for a miserable commute if you work in Boulder or somewhere along highway 36, and I don't see how it will ever get better. Boulder is notoriously opposed to expanding any roads into or out of Boulder. So housing out east is relatively inexpensive, and when you average it in with housing farther west you might get a number that roughly matches inflation, but I think a house closer to an economic center could still beat inflation in the long run.

Laura33

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Re: Buying a house in a HCOL area - Am I making a mistake?
« Reply #11 on: September 22, 2017, 12:32:18 PM »
So in terms of cash flow, buying this house will be detrimental to early retirement, but can I justify it if I think of it as an investment?

No.  A rental property that makes you money every month is an investment; a home that you want to buy so you can enjoy living in it is a consumption choice; and the hope that said home might increase in value is speculation.

That doesn't mean you shouldn't do it.  The whole point is to build a life that you want to live (I'd give up the house before I'd trade the location and short commute, because spending an hour in traffic every day is misery).  Socking extra money away and then quitting so you can live in a shared house that makes you miserable makes no sense.  OTOH, locking in a big mortgage on a house that is far bigger than you actually need, and rationalizing that decision because "XX has never had a crash!" is just flat-out stupid. 

The question is what is the optimal choice given your current dissatisfaction and your desire to FIRE.  Do you want to maintain the flexibility to move for your job, or pitch it all and travel, or whatever?  Then just keep renting.  Or if you're ready to commit to Boulder for @7-10 years and really love the townhouse, maybe you can rent out the extra space, either permanently or through AirBnB or the like.  If you are really sick of living with other people, then maybe you look for a 1 Br condo with a garage.  Etc. 

What you don't want to do is to rationalize yourself into thinking that this particular townhouse is an optimal choice as-is, just because that's what you want the answer to be.  Recognize that you are making a lifestyle choice, accept the tradeoffs that that requires for your savings rate, and then do what you can to minimize that hit while still giving you whatever amount of space and privacy you really need to be happy.

m8547

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Re: Buying a house in a HCOL area - Am I making a mistake?
« Reply #12 on: September 22, 2017, 12:34:40 PM »
I think the question is - are you really in Boulder for the long haul?

As long as I work here, yes. Otherwise I'd either live close to work, or somewhere cheaper if retired. I do want to stay in Colorado for the foreseeable future, and I think I'd like to get married at some point.

Laura33

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Re: Buying a house in a HCOL area - Am I making a mistake?
« Reply #13 on: September 22, 2017, 12:43:10 PM »
The Colorado front range has a critical mass of people to make it a good place for businesses and technology companies to move, which in turn brings even more people. I don't anticipate that changing any time soon, though a recession could slow things down for a while. The weather and outdoor activities make it a desirable place to live (that's why I'm here), and Boulder is one of the most desirable (and most expensive) areas for reasons I mentioned in my original post.  There's not a lot of land left to develop near existing towns, and there is practically none in Boulder, so new development isn't likely to increase the supply of housing very much. Anything new usually sells for a premium anyway. I found one developer that is advertising 1100sf condos in Louisville (about 15 minutes out of Boulder) for mid 400s.

OK, so as counterpoint:

We moved to the CO front range in the mid-'90s.  I could have said all of the above.  Part of the reason we chose it was because there were 6 plants that did what my DH did, so even if he didn't like this job, there were many others.

The first tech crash decimated that industry.  We had to move out of state for him to get a comparable new job, and the value of our home plummeted by almost $75K before we got it sold.  Friends of his who were tied to the area and refused to move were literally delivering pizza several years later, because the industry didn't come back when the economy did -- it moved on to other, more desirable areas.  Like, say, Boulder and Seattle.

I am not suggesting the same thing will happen to Boulder.  But the reality is that a lot of the development in CO over the past decade has been from oil and gas bringing a ton of money into the state.  That market tends to be extremely volatile.  And the secondary tech business is as well, as we've experienced first-hand.  OTOH, you at least have the benefit of a major public institution that brings people and money to town on a consistent basis.

So, again:  look at the whole picture, not just what you want it to be.  Confirmation bias is the most powerful force in the universe; your job is to look for the holes in your own arguments so you can fairly evaluate both the upside potential and the downside risk of your choices.

joonifloofeefloo

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Re: Buying a house in a HCOL area - Am I making a mistake?
« Reply #14 on: September 22, 2017, 12:47:47 PM »
a home that you want to buy so you can enjoy living in it is a consumption choice; and the hope that said home might increase in value is speculation.

That doesn't mean you shouldn't do it.

This, yes.

When we talk about where the roads are good, where a community appears to be laying in infrastructure, where Amazon might put its newest location, etc, we're investing on speculation. Which we're allowed to do. But do we want to?

Some people do want to. They're willing to take a risk with a huge chunk of change: pick a stock, or buy a house per anticipation of increased value. While most of us on the forum do index funds, some pick stocks based on due diligence and are confident in their pick. We get to do that. But generally, we're advised to diversify, simply because it's impossible to know what's actually going to happen.

Buying a house per anticipated increase in value is picking a stock. We can do that if we want. We'd be wise not to put more into it than we can afford to lose/throw away if our speculation is wrong.

This has been a tough one for me. I was ::this close:: to finally buying again. I only opted out because of issues demonstrated in strata minutes, inspection, etc. But the fact is, I would have been picking a stock -justifying the purchase per anticipated gains- which may or may not manifest. It's still hard for me to not "pick the stock" of a house in that area. But, I also don't have anywhere near the incomes some folks on this thread due, and have extenuating circumstances to consider, so I need to consider this piece carefully. As confident as I am that this particular stock is going to surge, how much of my hard-earned assets can I afford to place on that bet?

mm1970

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Re: Buying a house in a HCOL area - Am I making a mistake?
« Reply #15 on: September 22, 2017, 05:18:43 PM »
This is a tough one.  I would also agree with whomever said "plan for no increase".

I live in a similar niche market housing area.  (Santa Barbara, CA).  We aren't quite as expensive as the Bay Area, but we have similar slow growth/ no growth policies.  So housing crunch.  On top of that, there aren't a huge amount of high paying jobs here - a lot of service jobs.  So we have a lot of retirees, a fair number of people who bought houses before 2000.  Pretty much everyone else is dual-career couples in tech or finance. (We are both engineers.)

So.  We bought during the last run up.  Because we were ready to buy.  Who knew it was going to crash so far?  Not me.  We paid a bit less than $800k for a 2BR, 1BA, 1100 sf single family home with no garage, in the single worst elementary school district from Goleta to Carpinteria.  The peak of the market?  $870k.  The bottom of the market?  $500k.  (I know this because that's what the homes on either side of my house sold for, in 2006 and 2011).

So now where are we?  I'd say that more than a decade later, our  house would FINALLY sell for what we paid for it.  Of course we've put a lot of money into it (new roof, new windows, central heat, insulation, redo back yard, re do the wood floors).  Do I regret buying it?  Well, that's also tough.  I like my house (but it's kinda small because since we bought it we had 2 kids).  Hindsight being 20/20, I'd have waited until 2011.  Or would I?  By then kid #1 was in school, would I have moved then?  Our mortgage + prop tax is about equal to rent right now.  It's a roof, and it's stable.

Ironically, my spouse's company is looking to open a third office, and one of the requirements is "has to be cheaper than other 2 locations, which are DC and SB".  So, the one option they came up with was Boulder.  I looked up the housing prices, which are as bad as here.  Well, not quite - probably same square footage for 2/3 the price.

It's nice to have a place, and be stable, but recognize you might take a bath on it.  The people next door who paid $870k went into foreclosure, and current neighbor paid $575k.  A lot of that happened in my neighborhood.  Sometimes the bank took the bath, sometimes the owner.

spjulep

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Re: Buying a house in a HCOL area - Am I making a mistake?
« Reply #16 on: September 22, 2017, 10:43:39 PM »
You sound like you really want the house. Like Laura said above, it's a choice, to spend ~50% of your net pay on housing. Also did you include maintenance in your calculations? 

3BD sounds like a lot for a single person. I appreciate wanting to own a place and renovate it. But you say you want to get married; what if this person doesn't want to live there/has a place of their own/gets an amazing job offer outside of Boulder?

Is there any option in between renting a place with people and their dogs and sinking so much into one property--like a nice 1 BD rental in a bike-able part of town?

It could be the right move for you, but I would base it more on how much it fits your current life than how much you speculate it would appreciate in the future. Good luck!

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Re: Buying a house in a HCOL area - Am I making a mistake?
« Reply #17 on: September 22, 2017, 11:34:11 PM »
I have questions:

1) Are you sure there hasn't been a housing slump in Boulder in "decades"? Really?

2) How many bathrooms are there in this place? If the answer is anything less than 1.75, I see a big red flag.

3) Are the reserves fully funded?

4) Has there ever been a Special Assessment?

5) Is there a SA being considered in the near future?

6) HOA fees almost always go up. (I actually did live in a place where the dues went down for a few years, partly because I was on the board.) Can you handle it when the dues are $300 or more?

7) Are you going to be paying MI?

8) If #7 is yes, how much?

9) Are you going to resent the MI because you didn't put 20% down?

I have expereince and I'm totally willing to help you decide, but I can't answer your question without answers to my questions.

EarthSurfer

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Re: Buying a house in a HCOL area - Am I making a mistake?
« Reply #18 on: September 23, 2017, 04:52:43 AM »
I have questions:

1) Are you sure there hasn't been a housing slump in Boulder in "decades"? Really?

I was a Bouldite for almost 20 years, and had several rentals in town in the 2000s.

There are a few unique things about the Boulder real estate market. 

First, due to the Danish Development plan, the city is surrounded by a green belt and is not opening new land for development. That means new housing stock is built on old housing or converted commercial land.

Due to the desirable lifestyle, there are a number of people lined up and waiting for the slightest dip or pull-back in real estate values in order to "buy in."

Additionally, there are a huge number of kiddie condo purchases related to the University that keep the "lower" price condo market active.  Many are purchased with cash. If the market softens, owners will convert to rentals until the price appreciation returns.

The Boulder market was a bit flat from the 2001 crash until the early 2010s, but there was no significant rollback in values, although poor quality properties may sit for a while and sell at a discount.

Because of the limited development, the Boulder housing stock is considered "old." In the past renovations location trumped renovation as the driver of price.  I still have friends living in $1,000,000 1,200 sqft  single family homes on the west side of town with 1970s bathrooms and kitchens.

At present I would say Boulder is in something of a frenzy since Google has established a campus in the town, and other tech companies have moved operations into the downtown area rather on the usual eastern side of town. This has driven housing in the western half of the city to new heights. 

I chose to leave "the bubble" and divest of my Boulder rentals (increased property value lowered the ROA) in order to retire.

Cranky

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Re: Buying a house in a HCOL area - Am I making a mistake?
« Reply #19 on: September 23, 2017, 05:24:43 AM »
And I feel guilty about Boulder, because I actually voted for that green belt plan when I lived there, and I think it has in many ways spoiled Boulder. I loved it when it was shabby and alternative, and now it's just expensive.

But I think a condo there would have great resale potential because of the university. I don't think I'd buy if I was there on a temporary contract, because buying and selling does cost money, and I'd look at whether condos really appreciate in value in that market (as opposed to actual houses.)

But I'd never have predicted that Longmont would appreciate in value, either!

terran

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Re: Buying a house in a HCOL area - Am I making a mistake?
« Reply #20 on: September 23, 2017, 09:36:17 AM »
A number of people are recommending not to plan for an increase, which seems prudent. I assume this meant to assume an increase equal to inflation? Given that, does anyone know whether the the NYT rent vs buy return assumptions are before or after inflation? If before inflation, I'm thinking Home price increase should probably be reduced to the 2% inflation assumption (or an argument could be made for both to be 3% as that's closer to the long term average inflation), and rent growth rate and investment return should also probably be increased.

joonifloofeefloo

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Re: Buying a house in a HCOL area - Am I making a mistake?
« Reply #21 on: September 23, 2017, 09:40:41 AM »
I'm not sure, but I think their increase is "before" inflation...because it gives you another line to input anticipated inflation rate.

frugaliknowit

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Re: Buying a house in a HCOL area - Am I making a mistake?
« Reply #22 on: September 23, 2017, 12:08:08 PM »
I think the question is - are you really in Boulder for the long haul?

+1

m8547

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Re: Buying a house in a HCOL area - Am I making a mistake?
« Reply #23 on: September 24, 2017, 10:40:14 PM »
If I assume housing cost only matches inflation then I think I still do OK (as long as there is some inflation and no long-term deflation). The mortgage will stay the same, but when I sell the proceeds will be higher. And my salary will presumably increase with inflation, so every year the mortgage payment will be a smaller percentage of my income. Of course, utilities, property tax, insurance, etc. will likely increase with inflation too, but those are only a portion of the payment. I don't think the NYT calculator correctly accounts for inflation, or the home price growth rate includes inflation. If I set inflation to 10%, the net proceeds doesn't change. It could be showing present dollars, but even then the net proceeds should change. For example assume I buy a $1 house and get a $1 mortgage and make no payments. If inflation is 0% then my proceeds if I sell it in one year are $0. But if inflation is 100%, my proceeds in one year are $1 since I'll sell the house for $2, so the proceeds are $0.50 in present dollars.

I'll likely do lender paid PMI and take a slightly higher interest rate on the loan. That works out to about $60 a month, and it never goes away (unlike PMI). The break-even time is about 8-9 years, so if I have the loan for longer than that, the total I'll pay will be more than traditional monthly PMI after that point. The extra $45,000 invested should give me $150 a month assuming a 4% return after inflation. When I consider the $60 a month from the higher interest rate, plus the difference in principal and interest from having a 10% smaller loan, the difference is $270 a month between 10% or 20% down payment. I think it still makes sense to leave my investments invested, but having a 20% down payment is a significant savings. It would take something like 10 years to reinvest that much using the savings on the monthly mortgage payment.

And I feel guilty about Boulder, because I actually voted for that green belt plan when I lived there, and I think it has in many ways spoiled Boulder. I loved it when it was shabby and alternative, and now it's just expensive.

But I think a condo there would have great resale potential because of the university. I don't think I'd buy if I was there on a temporary contract, because buying and selling does cost money, and I'd look at whether condos really appreciate in value in that market (as opposed to actual houses.)

But I'd never have predicted that Longmont would appreciate in value, either!

The greenbelt is cool. I'm sure Boulder is much different now, but it's still unique.

I have questions:

1) Are you sure there hasn't been a housing slump in Boulder in "decades"? Really?

2) How many bathrooms are there in this place? If the answer is anything less than 1.75, I see a big red flag.

3) Are the reserves fully funded?

4) Has there ever been a Special Assessment?

5) Is there a SA being considered in the near future?

6) HOA fees almost always go up. (I actually did live in a place where the dues went down for a few years, partly because I was on the board.) Can you handle it when the dues are $300 or more?

7) Are you going to be paying MI?

8) If #7 is yes, how much?

9) Are you going to resent the MI because you didn't put 20% down?

I have expereince and I'm totally willing to help you decide, but I can't answer your question without answers to my questions.

  • Yes, in the past few downturns Boulder has been flat.
  • 1 + 0.75 + 0.5, so 2.25 bathrooms? Two of the bedrooms are weird, but I think all of them are generally intended to be bedrooms. One is extremely small, as I mentioned, and the other is sort of a loft upstairs with no door, from the stairs, but two closets and its own bathroom.
  • For the HOA? They used up most of the reserves painting the buildings last year, but hey are saving them back up.
  • I don't know?
  • No
  • I expect the fees to go up. There are limits somewhere in the bylaws, but I think I skimmed past that section.
  • See above
  • See above
  • Not sure now that I think about it, but I probably won't regret leaving some money in index funds for diversification, rather than putting it all in this house

You sound like you really want the house. Like Laura said above, it's a choice, to spend ~50% of your net pay on housing. Also did you include maintenance in your calculations? 

3BD sounds like a lot for a single person. I appreciate wanting to own a place and renovate it. But you say you want to get married; what if this person doesn't want to live there/has a place of their own/gets an amazing job offer outside of Boulder?

Is there any option in between renting a place with people and their dogs and sinking so much into one property--like a nice 1 BD rental in a bike-able part of town?

It could be the right move for you, but I would base it more on how much it fits your current life than how much you speculate it would appreciate in the future. Good luck!

I've considered maintenance. There's not much maintenance it will need that I can think of, but there are some renovations/updates I would like to do, and I think I can make it work. Like most of Boulder, this place hasn't been updated since it was built in the 70's.

I could rent a one bedroom place in Boulder for maybe $1500-1900 a month, or outside of Boulder for maybe $1200-$1300 a month (much less bikeable).For this mortgage I'll be paying about $600 a month in principal and $1800 a month on interest and everything else, so $1800 in expenses is not too much worse than renting for $1500 a month. Of course there are other costs like transaction fees and maintenance that the rent vs buy calculator covers. 

joonifloofeefloo

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Re: Buying a house in a HCOL area - Am I making a mistake?
« Reply #24 on: September 24, 2017, 10:52:33 PM »
You sound intent on buying :)

A few cautions as you proceed...

In the few years I owned, property taxes and insurance (without claims or changes) tripled. As noted, strata/HOA fees can also increase, special levies can be applied, big things can break, etc. Factor these kinds of things in. I'm very wary when it comes to third parties determining my annual costs, how often insurance doesn't come through, etc. (On the other hand, one neighbour had lots of bizarre things happen to his property...and he says he made a killing via insurance!)

Be sure to get an inspection done, by a reputable third party you select. Don't remove subjects until that's complete and you like what's noted. Mine just saved my butt.

Things that appear to be easy renos can get quite complicated depending on what's inside the walls.

Penelope Vandergast

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Re: Buying a house in a HCOL area - Am I making a mistake?
« Reply #25 on: September 25, 2017, 09:15:32 AM »
Maybe I missed it, but I didn't see how many other places you looked at before this one, or how long you have been looking. Is this the first or second house you've seen? If so, I might hesitate to pull the trigger.

I ask because spending a nice long time "just looking" in a particular housing market can give you a much better idea of what is worth buying and what isn't. You could find a very similar townhouse next week for $25K cheaper -- or you could learn that $450K is actually a good price.

Looking for a while will also show you that there is always another house...

Also I have no idea what your area is like re neighborhoods, but I have done well in HCOL areas by buying in the neighborhood next to the one where "everyone" wants to live. Because in a few years, when people can't afford that neighborhood anymore they will move to yours, and prices go up. Sometimes a LOT. You can also protect yourself a little because you are probably not buying at the top of the market for that neighborhood. Probably.

Also, if the market in this neighborhood is very hot, you might have to pay above asking to get the house or use more aggressive tactics. And are you approved for a loan already? In very hot markets houses sell in days, and if you don't move on what you want immediately -- as in, at the open house -- you can miss it.
If this is the case, think about how a process like this plays on your emotions -- it's like an Ebay auction where everyone pounces at the last second and you are way more likely to bid more than you would have, if there wasn't this sense of time running out.

So if you really want to buy in this kind of market, you need to think about how far over asking you'd be willing to go in any scenario, and think about whether you have the willpower to stop when it's time to go over budget. (A buyer's agent might or might not be helpful for this -- I personally don't get how they help, though, since their commission is based on the price of the house and thus they have little incentive to keep it low.)

I agree with others that going into this by justifying it as an "investment" is maybe not the best. If you really do want to think of it that way, you should be looking for ways to keep your costs lower -- that is, something based in actual facts -- not imagining how much it might appreciate, which is fantasy. (Not saying it couldn't appreciate, or appreciate by a lot. It could! I've seen it happen. But.)


Dee18

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Re: Buying a house in a HCOL area - Am I making a mistake?
« Reply #26 on: September 25, 2017, 09:53:39 AM »
The loft upstairs with no door makes the place less attractive to families who might be future purchasers.  Friends of mine built a master suite in their house that ended up not being allowed to have a door due to fire codes.  It substantially reduced the value of the house when they tried to sell it.

m8547

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Re: Buying a house in a HCOL area - Am I making a mistake?
« Reply #27 on: September 25, 2017, 01:29:46 PM »
Maybe I missed it, but I didn't see how many other places you looked at before this one, or how long you have been looking. Is this the first or second house you've seen? If so, I might hesitate to pull the trigger.

I ask because spending a nice long time "just looking" in a particular housing market can give you a much better idea of what is worth buying and what isn't. You could find a very similar townhouse next week for $25K cheaper -- or you could learn that $450K is actually a good price.

Looking for a while will also show you that there is always another house...

Also I have no idea what your area is like re neighborhoods, but I have done well in HCOL areas by buying in the neighborhood next to the one where "everyone" wants to live. Because in a few years, when people can't afford that neighborhood anymore they will move to yours, and prices go up. Sometimes a LOT. You can also protect yourself a little because you are probably not buying at the top of the market for that neighborhood. Probably.

Also, if the market in this neighborhood is very hot, you might have to pay above asking to get the house or use more aggressive tactics. And are you approved for a loan already? In very hot markets houses sell in days, and if you don't move on what you want immediately -- as in, at the open house -- you can miss it.
If this is the case, think about how a process like this plays on your emotions -- it's like an Ebay auction where everyone pounces at the last second and you are way more likely to bid more than you would have, if there wasn't this sense of time running out.

So if you really want to buy in this kind of market, you need to think about how far over asking you'd be willing to go in any scenario, and think about whether you have the willpower to stop when it's time to go over budget. (A buyer's agent might or might not be helpful for this -- I personally don't get how they help, though, since their commission is based on the price of the house and thus they have little incentive to keep it low.)

I agree with others that going into this by justifying it as an "investment" is maybe not the best. If you really do want to think of it that way, you should be looking for ways to keep your costs lower -- that is, something based in actual facts -- not imagining how much it might appreciate, which is fantasy. (Not saying it couldn't appreciate, or appreciate by a lot. It could! I've seen it happen. But.)

I've been looking for a couple months, and I've probably toured about 10 places, mostly in the surrounding  suburbs. I've been considering buying for a while before that, so I would look at what's on the market periodically. And I've lived in Boulder for about 3 years, so I know many of the neighborhoods. It's priced about right compared to similar places that have sold recently.

The neighborhood it's in is less desirable than near downtown Boulder, but I prefer it to being near downtown boulder. It's still more expensive and desirable than the towns/ suburbs that surround Boulder.


The loft upstairs with no door makes the place less attractive to families who might be future purchasers.  Friends of mine built a master suite in their house that ended up not being allowed to have a door due to fire codes.  It substantially reduced the value of the house when they tried to sell it.

It doesn't have the modern layout where there's a big master suite and each bedroom has its own bathroom.  But as someone else mentioned, the housing stock in boulder is old, so there are not a lot of newer choices. Just about anything is going to be built 30+ years ago and have some weird things about it.