Rent vs Buy vs My Sanity

[halfling]

Sorry for the melodramatic title. I think I could use a little perspective/a face punch.

I'm about to be 28 and I've been eager to buy a home for the last couple of years, but after rushing to pay off my student loans in early 2020 (lol) I was starting from $0 for down payment savings. In the last 3 years I've been able to save up $100k in cash for a combination of my emergency fund, a down payment, and closing costs. But of course, homes near me have increased in price by more than what I have saved, and rates are what they are.

My partner and I are renting a place for $2700/month right now plus about $200 for all our utilities. We both WFH so we really want a little more space, a yard, and more quiet (we're close to an interstate and multiple major roads right now).

We found a neighborhood that we love and a house for sale in that neighborhood for $550k. It's been wholly renovated with a ton of upgrades done (new 200amp panel, new heat pumps, 700 sqft addition (which means we could get roomies if we needed to), new roof, new tankless water heaters) so I don't think I would need to worry about any short-term expensive emergencies. The owner has been slowly dropping the price over the last couple weeks and I've been thinking of calling an agent to help me draw up an offer.

But, emotionally, I find it challenging to make the leap from our very comfortable $2700 rent to a $4000+ mortgage. It feels extravagant to me, and everyone I know in real life who owns had a more affordable environment surrounding their home purchase so it's been a challenge to get objective opinions. All of my older friends and family think it's way too expensive.

I don't want to bank on lower rates for a future refi, nor do I expect continued exponential home price growth. The rent versus buy math comes out to 10 years break-even with average assumptions if I put $80k down. I don't think I'd want to move in the next 10 years.

We both got raises last year so our take home has increased substantially to about $155k a year after taxes and maxing out our 401Ks.

On the surface, it sounds like we should be absolutely rolling in dough, but I'm very cautious about preparing for potential job loss (I work in finance) and I'm hoping to be FI in about ten years. I'm troubled by how quickly home costs have increased and could continue to increase, and what this may mean for us long-term.

Should I just keep saving for another year and look for a deal next winter? I think I could save another $70k toward the down payment. It would bring down the payments and take the edge off fears of a downturn, in theory, but I am worried that prices could increase just as quickly as they have been for another year. I know no one here can predict the future, I'm just wondering what you'd do if you were me. I have seen posters here advising to "buy when you're ready" but I guess I'm not sure what "ready" feels like today.

[Laura33]

But, emotionally, I find it challenging to make the leap from our very comfortable $2700 rent to a $4000+ mortgage. It feels extravagant to me, and everyone I know in real life who owns had a more affordable environment surrounding their home purchase so it's been a challenge to get objective opinions. All of my older friends and family think it's way too expensive.

I don't want to bank on lower rates for a future refi, nor do I expect continued exponential home price growth. The rent versus buy math comes out to 10 years break-even with average assumptions if I put $80k down. I don't think I'd want to move in the next 10 years.

We both got raises last year so our take home has increased substantially to about $155k a year after taxes and maxing out our 401Ks. By myself, I still take home over $10k/month.

On the surface, it sounds like we should be absolutely rolling in dough, but I'm very cautious about preparing for potential job loss (I work in finance) and I'm hoping to be FI in about ten years. I'm troubled by how quickly home costs have increased and could continue to increase, and what this may mean for us long-term.

Should I just keep saving for another year and look for a deal next winter? I think I could save another $70k toward the down payment. It would bring down the payments and take the edge off fears of a downturn, in theory, but I am worried that prices could increase just as quickly as they have been for another year. I know no one here can predict the future, I'm just wondering what you'd do if you were me. I have seen posters hear advising to "buy when you're ready" but I guess I'm not sure what "ready" feels like today.

One way to judge affordability is to look at those calculators about what percentage of your income you can "afford" to spend on a home.  Looks like a house would be about 1/3 of your take-home, which is reasonable -- below what mortgage companies are willing to lend, above what some historic markers have been. 

The thing to keep in mind, though, is that those numbers are for "normal" people who want to retire at 65 or 70 -- not for people who want to retire in 10 years.  So if that is your priority, saving to hit that target has to come before a house.  See https://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/.  This suggests that a ten-year retirement time frame is about a 65% savings rate (assuming you are starting from scratch).  If you can hit that and then afford the house and all your other bills with the rest, then you are good to go.  If not, then you need to figure out what compromise you can live with.  Could be delaying the house purchase, or delaying the FIRE target, or some combination of the two. 

I'd also encourage you to look at other options to solve the problems that are making you antsy.  You don't need to pop right from renting an apartment to buying your forever home, and framing up your choices in that manner is setting yourself up to miss other options that might get you 80% of what you need without the big hit to the pocketbook.  What about renting a larger place?  Maybe a townhome or a ground-level apartment so you have a spot to garden?  I'm guessing your current rent is high because the location makes for an easy commute; since you both work from home, you don't actually need to pay the premium for that location, and so you might be able to rent a larger place for less money elsewhere.  You need to figure out a way to turn off that nesting-instinct-buy-buy-buyNOW voice in your head and try to look objectively about what is working, what isn't, and what all of the various options might be to address those concerns.

FWIW, FOMO is about the worst possible reason to buy -- it's making decisions out of fear, and fear turns off the rational side of your brain.  You've saved a lot of money in a short amount of time, which will serve you well whenever you decide that buying a home fits within your plans.

[halfling]

You need to figure out a way to turn off that nesting-instinct-buy-buy-buyNOW voice in your head and try to look objectively about what is working, what isn't, and what all of the various options might be to address those concerns.

FWIW, FOMO is about the worst possible reason to buy -- it's making decisions out of fear, and fear turns off the rational side of your brain.  You've saved a lot of money in a short amount of time, which will serve you well whenever you decide that buying a home fits within your plans.

Thanks @Laura33 . We tried to find a larger house/garden apartment near our friends but there were zero homes available when we last had to move. I honestly didn't realize that I was experiencing FOMO... but now that I'm revisiting my own words, that's exactly what it is. I guess it's not surprising given what has gone down the last couple of years. Financial independence is important to me and I don't think the numbers are good with this particular home. We have moved a LOT and for now we would rather stay here than plan for 2 more future moves, so at least we know we don't want to find another rental.

[Laura33]

You need to figure out a way to turn off that nesting-instinct-buy-buy-buyNOW voice in your head and try to look objectively about what is working, what isn't, and what all of the various options might be to address those concerns.

FWIW, FOMO is about the worst possible reason to buy -- it's making decisions out of fear, and fear turns off the rational side of your brain.  You've saved a lot of money in a short amount of time, which will serve you well whenever you decide that buying a home fits within your plans.

Thanks @Laura33 . We tried to find a larger house/garden apartment near our friends but there were zero homes available when we last had to move. I honestly didn't realize that I was experiencing FOMO... but now that I'm revisiting my own words, that's exactly what it is. I guess it's not surprising given what has gone down the last couple of years. Financial independence is important to me and I don't think the numbers are good with this particular home. We have moved a LOT and for now we would rather stay here than plan for 2 more future moves, so at least we know we don't want to find another rental.

I only know all this because I'm a total nester and bought as soon as I had a real job (while bitching about all those people before me who got such great deals).  And then I lost my shirt when life led me to move a few years later, while home prices kept going up in the area I moved to.  As they say, if you can't be a good example, at least be a horrible warning.  ;-)

[Freedomin5]

I don’t know. $550k for a fully renovated house in a great neighborhood sounds like a screaming deal to me, but I live in a place where $550k will buy you a 600 sf condo at the edge of town. I think my question would be whether housing prices in that neighborhood are projected to grow at a faster rate than the market and your salaries? Is there a way to househack and rent out a couple rooms or the basement to cover your mortgage so you can live for “free”? If you decide you don’t want to live there, is it rentable and will the rent cover your entire mortgage? Can you make the math work in your favor, and end up with a beautiful house you love in a neighborhood you love?

[halfling]

You need to figure out a way to turn off that nesting-instinct-buy-buy-buyNOW voice in your head and try to look objectively about what is working, what isn't, and what all of the various options might be to address those concerns.

FWIW, FOMO is about the worst possible reason to buy -- it's making decisions out of fear, and fear turns off the rational side of your brain.  You've saved a lot of money in a short amount of time, which will serve you well whenever you decide that buying a home fits within your plans.

Thanks @Laura33 . We tried to find a larger house/garden apartment near our friends but there were zero homes available when we last had to move. I honestly didn't realize that I was experiencing FOMO... but now that I'm revisiting my own words, that's exactly what it is. I guess it's not surprising given what has gone down the last couple of years. Financial independence is important to me and I don't think the numbers are good with this particular home. We have moved a LOT and for now we would rather stay here than plan for 2 more future moves, so at least we know we don't want to find another rental.

I only know all this because I'm a total nester and bought as soon as I had a real job (while bitching about all those people before me who got such great deals).  And then I lost my shirt when life led me to move a few years later, while home prices kept going up in the area I moved to.  As they say, if you can't be a good example, at least be a horrible warning.  ;-)

I think it's just that, in retrospect, every year of waiting to save up a higher down payment has been a very costly - like, six-figure costly - misstep. So my bias from my own experience is to believe that will continue to be the case, even if it's unlikely.

Can you make the math work in your favor, and end up with a beautiful house you love in a neighborhood you love?

I don't think we could collect enough rent to cover the mortgage if we wanted to, but it would have space for one roommate if we needed one. There aren't any comparable rentals in the neighborhood but I would guess a maximum of $3500/mo if anything were to become available, so I'm not interested in it as an investment, just a home. I don't know if home prices will keep growing so fast. It's a relatively expensive house in a relatively affordable neighborhood that I happen to like. Other people might start noticing how nice and cheap the neighborhood is at any time, but it doesn't have the amazing public schools or uber-walkability that nearby areas have, so maybe not.

[Freedomin5]

Ah, got it. General rule of thumb is to buy the cheapest house in the best neighborhood that you can afford. So if you're looking at an expensive house in a cheaper neighborhood, I'd probably wait until something cheaper comes on the market.

With regard to rentability, it's not about whether or not you're interested in renting it out. It's about potential income streams for the future. No one can predict the future. If you live in a rentable house, that means that if you end up needing to rent out a bedroom, your house is going to be a stronger contender and you will potentially have your pick of better tenants. Or if something happens and you need to move, you have the option of either selling your house or renting it out. Plus, it makes your house more attractive to people who are looking to buy an investment property.

But again, if the numbers aren't good for this particular house, then it's better to pass, but be prepared to jump on one for which the numbers do work. Good luck!

[Laura33]

I think it's just that, in retrospect, every year of waiting to save up a higher down payment has been a very costly - like, six-figure costly - misstep. So my bias from my own experience is to believe that will continue to be the case, even if it's unlikely.

Two things.  First, it wasn't a mistake.  Remember that as house prices were going up, so to did the buying power of your savings.  Assuming 20% down, when you had $50K saved, that would have covered a $250K house.  Now that you have $100K, that will cover a $500K house.  So unless home prices doubled in the interim, you're now ahead of where you were on the downpayment.  Also, affordability goes with mortgage rates.  You've been unlucky enough to hit a big shift from historically low rates to closer to normal rates.  That will very likely not continue to the same degree, so there's no reason to believe that if you wait another few years, houses will be even more out of reach.  I get the fear, but that's why you need to challenge those perceptions.

Second:  it's a mistake until it isn't.  We decided a long time ago to buy a condo in our retirement destination and have a renter pay the mortgage until we were ready to move.  For years, I watched the market go up -- every year was worse.  I was kicking myself for not making an offer on a condo that seemed really expensive at the time but sure looked like a deal five years later.  We decided to postpone the plan, because no way would rents cover those prices.  Then the financial crisis hit, and I thought, aha, here's our chance.  Nope -- for two years, prices were as ridiculous as ever.  And suddenly, in the third year, prices were down by 30 to 40%.  It's like everyone tried to hang on and finally all realize at the same time they couldn't do it any more.  We found a condo in foreclosure and jumped on it for well below the price of the original "one that got away" (1400' in a lovely area for under $200K, and just needed appliances!  I am not making this up.  Was originally on sale for almost $400K).  Waiting allowed us to both do enough research to know a deal when we saw it, and to have all our financial ducks in a row when the opportunity came our way.

Not saying that the heavens will part and the angels will sing hallelujah; lord knows I've been on the wrong side of the equation often enough.  But just because things look bad now doesn't mean they'll look worse in a few years.  And patience, research, and saving will put you in an excellent position to handle whatever does happen.

[Freedomin5]

I think it's just that, in retrospect, every year of waiting to save up a higher down payment has been a very costly - like, six-figure costly - misstep. So my bias from my own experience is to believe that will continue to be the case, even if it's unlikely.

Two things.  First, it wasn't a mistake.  Remember that as house prices were going up, so too did the buying power of your savings.  Assuming 20% down, when you had $50K saved, that would have covered a $250K house.  Now that you have $100K, that will cover a $500K house.  So unless home prices doubled in the interim, you're now ahead of where you were on the downpayment.

Isn’t this only true if your salary has also doubled so that your bank will give you a $400k mortgage (vs. a $200k mortgage)? If your salary hasn’t doubled, you’re only going to be able to afford a $300k house.

[Laura33]

I think it's just that, in retrospect, every year of waiting to save up a higher down payment has been a very costly - like, six-figure costly - misstep. So my bias from my own experience is to believe that will continue to be the case, even if it's unlikely.

Two things.  First, it wasn't a mistake.  Remember that as house prices were going up, so too did the buying power of your savings.  Assuming 20% down, when you had $50K saved, that would have covered a $250K house.  Now that you have $100K, that will cover a $500K house.  So unless home prices doubled in the interim, you're now ahead of where you were on the downpayment.

Isn’t this only true if your salary has also doubled so that your bank will give you a $400k mortgage (vs. a $200k mortgage)? If your salary hasn’t doubled, you’re only going to be able to afford a $300k house.

Yes.  Except that it sounded like in their situation, they were downpayment-limited.  So fretting about the missed opportunities is comparing apples to oranges -- it's always tempting to think that "I could have done XYZ," but that ignores that you couldn't actually have done the same 20% down that is the current plan, because they didn't have it.  They'd have had to do a lower downpayment, which means a higher mortgage and PMI.

Obviously if prices are going haywire, that's not going to make up for the whole difference.  But it does offset the impact some.  And if they continue on track, they will continue to build an even more solid financial position that will give them many options when the opportunity does come up.

[halfling]

Actually because of interest rates combined with price increases, the mortgage and PMI would have been much less putting 3% down 2 years ago compared to putting 20% down now. About $1000/mo cheaper for a median home at an average rate in my state. So it is not quite apples to oranges. It's just strange that saving was the wrong move.

[chasingsnow]

Im going to chime in as someone who was in your spot about 6 months ago and were about the same age so I think the experience is relevant. I also think the economic landscape is also relevant, 5 years ago, in my area houses were 1/2 price compared to what they are now. We also experienced some FOMO and envy for people we knew that bought even 3 years ago for crazy low amounts. We worked really hard to not have that be the catalyst for why we bought.

My SO and I wanted to buy a house, but we wanted to buy a house for a number of reasons, I guess I would encourage you to think really hard about your "why' behind your wanting to buy a house. For us, it was 3 things:

1. We wanted a sense of permanency and to have roots in a community. We have lived in 4 different cities together and had a ton of different roommates throughout our lives, we both have basically moved every year for the last 10 years, across the entire country and through 3 Canadian Provinces. Buying a home for us was about rooting ourselves in a community with friends, family, the neighborhood we liked etc. I can't even begin to tell you after moving every year for the last 10 years how much ease I feel knowing that we are settled and are not going to pick up and move again. Its so nice to have our own space, to have designed it exactly as we want.

2. Affordability and math was in our favor. We were renting a 4-bedroom house where I live for $2,400 and we had two roommates, so we were essentially paying $600 per person or $1,200 for both of us plus utilities, internet, etc. It was crazy cheap, but it wasn't really "affordable" It was because we chose to put up living with two friends, but it wasn't a sustainable plan forever, and our landlords were not super cooperative or prompt about maintenance, so it always felt like we were in borrowed time. We bought our house for $350k with 15% and a mortgage of 4.4% so our monthly payment is around $1,700 and our all in housing cost is about $2k. Our house needed about $100k worth of renovation work that we have done mostly ourselves, but either way its cheaper then the living situation we were in before. As soon as we moved out our landlords hiked the rent to $2,800.

3. We were always a bit scared about being evictied. It kind of relates back to point #1 but no matter where we moved it always felt temporary. Im not sure how it works where you are, but where I live a landlord can essentially decide they need the rental unit back and just give you 2 months notice. It always felt difficult for us at least to build a home and community always knowing in the back of our minds that the housing situation could be temporary.

Im not trying to give you reasons for why YOU should want to buy a house, I just think before you buy its important to have real clarity on what those reasons are. Tbh if we lived in a place where renting was cheaper, and tenancy laws were different (like Europe) where entire generations rent without fear of eviction, then we might have made a different choice. A big part of what played into it is we LOVE where we live and even if our house value dropped 30% I still wouldnt regret it because I love the community and life we have here.

Wishing you best of luck in the decision, its not a small one. But whatever decision you do decide to make, it will all work out, because there is not one "right" decision either.

[halfling]

Thank you @chasingsnow . Hope you get good snow this winter! I have some family my age up in your neck of the woods, I've heard things are bonkers lately. I appreciate you sharing your story.

We have worried about a few truly bad landlords before, but we splurged on our current place for the benefits of a corporate landlord: they'll never ask to move in, they get bulk discounts on great luxuries like pest control and power washing, and they stay mostly out of our hair.

I just looked into an amortization schedule, and we'd be paying more in interest/tax/insurance than we are in rent for the first several years (less than $500 in principal payoff per month!) so it's not an obvious win right now. I think we are going to keep saving to make sure we have a good emergency fund after whatever eventual purchase.

[kite]

Not advice, but perspective:
5600 baby boomers die every day.
There are even a few million who are older, who were born before 1946.  I didn't look up their daily death rate, but suffice it to say the shortage in homes available for sale that artificially props up the sale price isn't going to last forever. Those properties will change hands. It is the biggest transfer of wealth in the history of the world. Do Millenials & GenX want their boomer parents' homes? Are there enough heirs to actually live in those homes? Uh, nope. We haven't had replacement level offspring.


I'm a firm believer in buying to own and buying it when you are young. It's a whole different calculus the older you get. But overpaying is really, really dumb. Really, really, really dumb. It's marrying the wrong partner dumb. It's going deep into college debt for the wrong major dumb. It's dumb, dumb, dumb, dumb, dumb.

When you were 10 years old, people who thought they were missing out started trying to buy by any means at all and prices shot into the stratosphere. Then in 2008, the shit hit the fan. Is there another 2008 in our future?  Put it this way: 5600 baby boomers die every day.

[halfling]

@kite

Interesting perspective. I'm not sure how the demographics shake out for my city but I think there are more young people growing into homeowner age than there are old people passing away.

The high rates are helpful though - they seem to be dissuading flippers from buying up all the little old lady houses which is helping inventory in a different way.

[RetiredAt63]

@kite

Interesting perspective. I'm not sure how the demographics shake out for my city but I think there are more young people growing into homeowner age than there are old people passing away.

The high rates are helpful though - they seem to be dissuading flippers from buying up all the little old lady houses which is helping inventory in a different way.

In a lot of places the older owners are moving to a seniors residence or nursing home or city condo, so the houses should be available even sooner, and before they deteriorate too much with aging owners who stop doing maintenance.

Of course the new owners need to be happy buying massively outdated houses.  If they want the extra bathrooms and granite counter-tops and so on, they likely won't get them in a house owned by a couple in their 70s/80s.

DD and SiL bought one of those houses.  They got outdated wallpaper, an outdated but functional kitchen, an ensuite shower that doesn't drain well, and a massively overgrown yard.  But they got a house they could live in for years at a price they could just barely afford (we are in a very HCOL area).  My DD and SiL get to practice swearing a lot at the previous owner's DIY stuff.

That was also Ex and my's first house.  Fixed the roof leaks, repainted the LR ceiling, replaced LR windows that leaked, fixed the sash window in the DR, fixed the bathroom toilet (replaced the bathroom toilet), cut down a lot of overgrowth, ripped out some of the horrible basement finishing, rebuilt a retaining wall, ripped out the sliding door at the backyard entrance because the sill was rotted, it went on and on.  We were youngish and had way more energy than money it was all DIY.  We also could just about afford it  because we bought in Quebec in 1978, and anyone who knows a bit of Canadian history will understand why houses were going cheap in parts of Montreal Island.  I don't recommend price drops due to political issues as a good reason to buy a house.

[reeshau]

Not advice, but perspective:
5600 baby boomers die every day.
There are even a few million who are older, who were born before 1946.  I didn't look up their daily death rate, but suffice it to say the shortage in homes available for sale that artificially props up the sale price isn't going to last forever. Those properties will change hands. It is the biggest transfer of wealth in the history of the world. Do Millenials & GenX want their boomer parents' homes? Are there enough heirs to actually live in those homes? Uh, nope. We haven't had replacement level offspring.

Both the Millennials and Gen Z are each already bigger than the current Baby Boomer population.  A counteracting effect to what you describe is when these groups enter the 35-44 age group, which is prime time for families and home ownership.  This had been on a downward trend, but is beginning a decade-long projected increase.  Also, add to that the decreasing average family size, including delay in marriage, and the number of households created in the US each year is greater than the population growth implies.

I also read your question on wanting homes a different way: no, lifestyles have changed, so if you're selling a McMansion, that's bad news on price.  But that puts even more pressure on new home prices, as the wanted stock gets built.  It's the inverse of what happened to the prices of tract homes built in the 1950's, which were cheap in the heyday of McMansion building based on both their small size and location.