Just passed on buying a house, and I'm curious what folks here think.
We were anxious to buy because we've started to get the impression that the Denver real estate "bubble" is not a bubble. Its just the new reality. So many people are moving here now from the Bay Area (with TONS of money), and its just getting outrageous. For example, we lost out on two houses before we found this one, to people with higher offers than us.... oh, and they were ALL CASH OFFERS! On houses >$700k! These houses were only on the market for 2 days! We feel worried that if we don't buy now, we'll be priced out forever. :(
The house we wanted to buy (aka big house) was $740k, and we could rent out the basement for $1k a month. It was in our ideal neighborhood; practically downtown Denver, walking distance to everything, on frequent bus lines, near bike lanes & paths, great schools. It was double the size of our current house (aka small house), but not crazy big. (Small house is 900 sqft, big house was 2000 sqft.) Monthly obligation would have been about $3,400 (including taxes and insurance), with mortgage rate of 4.5%, and a starting mortgage balance of $572k.
We'd planned on buying the big house, and renting out both the basement and the small house. Small house is on a 15 yr mortgage, w/ a $1k/month obligation. We could easily rent it at $1.5k/month. There is a ton of new redevelopment going on in our area, so we wanted to hang onto the house for a few more years, because we anticipate we'd get a better return once more of the new infrastructure is already built.
A couple notes about our finances:
- $10k/month after tax take home pay
- Small house mortgage is $1k/month
- Daycare bill is $1,785/month
- All other expenses are $500-$1k/month
- 401ks/Roth IRAs are maxed, and everything else goes into mutual funds
- We have no debt other than our small house $107k mortgage
- We have about $200k in equity on the small house
- We have enough to cover 20% down on the big house, earnest money, closing costs, etc without having to sell the small house (but it would nearly wipe us out of our taxable investments
We did the math multiple times, and felt we had several backup plans if things went south. We could always move back to the small house after a year, if the big house was too much. We could sell the small house and roll the profit into the massive big house mortgage. We could cover the cost of both mortgages if we had no renters.
However, as soon as we went under contract, we started regretting it. We felt sick and were sleepless at night, thinking about being obligated to pay $3,400 for the next 30 YEARS. The thought of being IN DEBT for OVER HALF A MILLION dollars felt completely insane and reckless, not to mention holding 2 mortgages. And, as the higher salaried partner, I felt for the first time the pressure of being a "breadwinner". We can support our current lifestyle on either one of our salaries, but if we bought the big house, we couldn't support ourselves for long if I lost my job (and we had no renters). (This exact thing actually happened to my parents, so I've always been afraid of that kind of leverage.)
After a few days we terminated the contract. A huge weight was lifted off our shoulders. Sheer terror and dread are gone (yay!), but have now been placed with a melancholy sadness. The house was great in so many ways!
So I'm wondering if it wasn't really *that* bad of a financial leverage... Maybe it just felt that way because we've been living so frugally for the past 10+ years? Maybe I'm hyper sensitive because my parents never quite recovered when things went south for them in a similar situation?
Or perhaps buying the house really would have been an awful idea? Cashing out almost all of our taxable investments and putting them into the house, and being over half a million in debt felt pretty darn dumb. Also maybe we are suffering from Tiny Details Exaggeration Syndrome? Our current house is still in Denver proper, 25 minute bike ride into city center, and we only use our car on the weekends. We've got a double lot so we can build an addition if we want more space.
On the other hand, the schools are pretty bad in our current neighborhood, and I'd love to have a long term home that's in an extremely walkable area in Denver.
Anyway, is it face-punchy to have a mortgage over half a million? Is it face-punchy to have terminated the contract?