Author Topic: Trouble understanding how housing is possible  (Read 2167 times)

onlypretending

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Trouble understanding how housing is possible
« on: May 14, 2018, 12:52:44 PM »
I've been living in my parents' rental house (the house I grew up in) for over 20 years. I share the three bedroom house with two roommates: a high school friend and my cousin. I pay $300 in rent--utilities included. It's an amazing deal. I make $70,000/year. Currently, I'm able to invest $2,000 a month--half of my take-home pay. I'm looking to move, though. I want my own space. I want to start a family.

From the other threads I've read, a lot of users are renting with roommates to become financially independent. I'm confused about what the plan is once financially independent. Are you saving 25x your current expenses (including the cheap rent because of multiple tenants) or are you saving 25x your expected expenses with your own home/mortgage?

Assuming I'm not talked out of moving, I've seen advice that I should purchase a house where the expense is 25% or less of my take-home pay, or $1,000, and less than a year's salary, or $70,000. In the east valley of Phoenix, this doesn't seem feasible. The median price is over $200,000.

I seem to be in an amazing position to save a huge amount of money. I have no debt, my car is paid off, my insurance is paid for by work, I have very few bills, my rent is ridiculously cheap, and I make a comfortable wage. Even with all of that, I still don't see how it's feasible to comfortably save 50% of my take-home pay if I were to buy a house. The mortgage alone would be about half of my expenses, not including the need to pay for utilities, property taxes, etc.

Any clarification on my assumptions would be much appreciated.

turketron

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Re: Trouble understanding how housing is possible
« Reply #1 on: May 14, 2018, 12:56:00 PM »
Owning a house does't make sense in every market. In many markets, renting is much cheaper.

In the east valley of Phoenix, this doesn't seem feasible. The median price is over $200,000.


Sounds like Phoenix may be one of them. 

Slee_stack

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Re: Trouble understanding how housing is possible
« Reply #2 on: May 14, 2018, 12:57:43 PM »
25X of EXPECTED expenses at RE.

That may include Rent/Mortgage...or if a house is paid for...than just non P-I expenses (taxes, etc.)

Paying down a mortgage is SAVINGS.  If you were to retire in the same house, you would no longer have a Principal or Interest payment to make each month and you would need less of a stash at that point to reach 25X (all else equal).
« Last Edit: May 14, 2018, 01:02:28 PM by Slee_stack »

onlypretending

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Re: Trouble understanding how housing is possible
« Reply #3 on: May 14, 2018, 01:02:22 PM »
Owning a house does't make sense in every market. In many markets, renting is much cheaper.

In the east valley of Phoenix, this doesn't seem feasible. The median price is over $200,000.


Sounds like Phoenix may be one of them.

I might have to do more research on the rent vs buy, then. Just looking at the average rent for a 2 bedroom house is $1,015. I can't easily comprehend why I wouldn't pay the extra few hundred dollars to build equity if I were to finance a comparable house.

25X of EXPECTED expenses at RE.

That may include Rent/Mortgage...or if a house is paid for...than just non P-I expenses (taxes, etc.)

Is there a reliable way to calculate the expected home values and interest rates in 10 or more years? The HPI in my area is reaching pre-crash levels. Who knows if they'll flatten or keep climbing?
« Last Edit: May 14, 2018, 01:03:55 PM by onlypretending »

diapasoun

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Re: Trouble understanding how housing is possible
« Reply #4 on: May 14, 2018, 01:16:49 PM »
I might have to do more research on the rent vs buy, then. Just looking at the average rent for a 2 bedroom house is $1,015. I can't easily comprehend why I wouldn't pay the extra few hundred dollars to build equity if I were to finance a comparable house.

The thing to remember it's not just a few hundred dollars to build equity.

It's also repairs, and property taxes, and homeowners insurance, and closing costs, and being tied to an area for a long period of time, and last but not least, the opportunity cost of putting that extra money into investments instead of into a house.

I share a house with five roommates and pay significantly below market rate for rent; I will likely never buy a house in my current area, because the median home price in my city is almost $1mil. If we move to an area with much lower COL, I would consider buying a house. However, that would not be to build equity, or because a house is a great investment (they can be terrible investments) -- it would be because I want to have significant control over the property and things like shelving and major appliances and garden space.

I'm currently far enough from FI that I'm not trying to really get numbers like housing fully figured out. I'm just plonking as much as I can into savings and investments, because no matter what that's not gonna hurt me. :)

AZDude

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Re: Trouble understanding how housing is possible
« Reply #5 on: May 14, 2018, 01:18:54 PM »
Hmm...

Theoretical budget for 50% take home while owning a house in Phoenix.

Yearly salary - $70, 000

401(k) - $2,692 (50% of gross)
Remaining paycheck - $2,178

Mortgage, taxes, and ins - $1489 ($250K home @4.4% interest, 20% down)
Food/household goods - $200
Electric - $180
Water - $50
Gas, license, insurance for car - $200
Misc and entertainment - $50
Extra - $9

It would be exceptionally tough, but you could do it. This also shows why those big purchases can make or break your ER dreams. A house that is only $180K has a mortgage of $1,100 a month. If nothing else, save first, then buy. Once you have a large chunk in your 'stache, that monster will compound and do most of the work for you.


jlcnuke

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Re: Trouble understanding how housing is possible
« Reply #6 on: May 14, 2018, 01:21:24 PM »
The advice for how much home to purchase is highly variable and not much use if you look at it all.  Lending criteria is the #1 thing you have to ensure is met, but everything else is based on someone else's opinion.

If you're spending $1,700/month currently, above and beyond housing/utility costs, and take on a mortgage then you're savings rate will decrease given the same income and other spending. If all you can manage now is 50%, then you won't be able to manage 50% with increased housing/utility costs.

When evaluating rent vs buy, taking into consideration your long-term plans (are you buying the house you'll live in for the next 60 years until you pass it on to your heirs, or do you plan on moving out of the area in 3 years for instance?), as well as total costs (including maintenance etc that you likely don't pay when renting).

Hirondelle

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Re: Trouble understanding how housing is possible
« Reply #7 on: May 14, 2018, 01:34:17 PM »
I've been living in my parents' rental house (the house I grew up in) for over 20 years. I share the three bedroom house with two roommates: a high school friend and my cousin. I pay $300 in rent--utilities included. It's an amazing deal. I make $70,000/year. Currently, I'm able to invest $2,000 a month--half of my take-home pay. I'm looking to move, though. I want my own space. I want to start a family.


You find yourself in an excellent situation. Dirt cheap rent for the house you grew up in! First thing I noticed, you pay only $300 rent but only save $2000 which you consider half of your take home pay. Where does the other $1700 go?! That sounds like you've got some big other expenses that you could use to cut to make more expensive housing feasible.

Second you mention you want your own space and start a family. I get that you can get tired of roommates. That's a hard one. How much is the rent on a 1 bed condo in your area? Like a place where you'd have everything for just you?

You also mention starting a family. Is there an SO already to start this family with? If yes, that's great, because that means sharing housing expenses! If not, this argument doesn't make sense until there's a chance you'll be starting a family on the short turn. What if you meet an SO who already has a house and you guys have to sell one and move into the other? Keep your life simple as long as it makes sense.


From the other threads I've read, a lot of users are renting with roommates to become financially independent. I'm confused about what the plan is once financially independent. Are you saving 25x your current expenses (including the cheap rent because of multiple tenants) or are you saving 25x your expected expenses with your own home/mortgage?


You should always use your expected expenses. Regardless of whether you intend to spend your FIREd life renting or having your own house.


I seem to be in an amazing position to save a huge amount of money. I have no debt, my car is paid off, my insurance is paid for by work, I have very few bills, my rent is ridiculously cheap, and I make a comfortable wage. Even with all of that, I still don't see how it's feasible to comfortably save 50% of my take-home pay if I were to buy a house. The mortgage alone would be about half of my expenses, not including the need to pay for utilities, property taxes, etc.


Again I wonder, if your bills are low and you have no debt, where is the other half of your take-home pay going? Then it sounds like buying a house at this stage of your life doesn't make sense. Maybe if you'd buy a 2-3 bedroom and take roommates again? Iin this case you can pick them yourselves + build equity in the house. Then if there's an SO with whom you want to start a family you can end the lease of your roommates.

onlypretending

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Re: Trouble understanding how housing is possible
« Reply #8 on: May 14, 2018, 02:47:46 PM »
I might have to do more research on the rent vs buy, then. Just looking at the average rent for a 2 bedroom house is $1,015. I can't easily comprehend why I wouldn't pay the extra few hundred dollars to build equity if I were to finance a comparable house.

The thing to remember it's not just a few hundred dollars to build equity.

It's also repairs, and property taxes, and homeowners insurance, and closing costs, and being tied to an area for a long period of time, and last but not least, the opportunity cost of putting that extra money into investments instead of into a house.

I share a house with five roommates and pay significantly below market rate for rent; I will likely never buy a house in my current area, because the median home price in my city is almost $1mil. If we move to an area with much lower COL, I would consider buying a house. However, that would not be to build equity, or because a house is a great investment (they can be terrible investments) -- it would be because I want to have significant control over the property and things like shelving and major appliances and garden space.

I'm currently far enough from FI that I'm not trying to really get numbers like housing fully figured out. I'm just plonking as much as I can into savings and investments, because no matter what that's not gonna hurt me. :)

Very true. I will do the work of calculating exactly how much my housing costs would be if I were to finance.

Hmm...

Theoretical budget for 50% take home while owning a house in Phoenix.

Yearly salary - $70, 000

401(k) - $2,692 (50% of gross)
Remaining paycheck - $2,178

Mortgage, taxes, and ins - $1489 ($250K home @4.4% interest, 20% down)
Food/household goods - $200
Electric - $180
Water - $50
Gas, license, insurance for car - $200
Misc and entertainment - $50
Extra - $9

It would be exceptionally tough, but you could do it. This also shows why those big purchases can make or break your ER dreams. A house that is only $180K has a mortgage of $1,100 a month. If nothing else, save first, then buy. Once you have a large chunk in your 'stache, that monster will compound and do most of the work for you.

It's definitely cutting it close. I'd probably want to find a cheaper house in this case.

The advice for how much home to purchase is highly variable and not much use if you look at it all.  Lending criteria is the #1 thing you have to ensure is met, but everything else is based on someone else's opinion.

If you're spending $1,700/month currently, above and beyond housing/utility costs, and take on a mortgage then you're savings rate will decrease given the same income and other spending. If all you can manage now is 50%, then you won't be able to manage 50% with increased housing/utility costs.

When evaluating rent vs buy, taking into consideration your long-term plans (are you buying the house you'll live in for the next 60 years until you pass it on to your heirs, or do you plan on moving out of the area in 3 years for instance?), as well as total costs (including maintenance etc that you likely don't pay when renting).

I'd definitely consider the home purchase to be a long-term living situation. I don't mind being in one place for a long time and the job opportunities in the valley are plentiful.

I've been living in my parents' rental house (the house I grew up in) for over 20 years. I share the three bedroom house with two roommates: a high school friend and my cousin. I pay $300 in rent--utilities included. It's an amazing deal. I make $70,000/year. Currently, I'm able to invest $2,000 a month--half of my take-home pay. I'm looking to move, though. I want my own space. I want to start a family.


You find yourself in an excellent situation. Dirt cheap rent for the house you grew up in! First thing I noticed, you pay only $300 rent but only save $2000 which you consider half of your take home pay. Where does the other $1700 go?! That sounds like you've got some big other expenses that you could use to cut to make more expensive housing feasible.

Second you mention you want your own space and start a family. I get that you can get tired of roommates. That's a hard one. How much is the rent on a 1 bed condo in your area? Like a place where you'd have everything for just you?

You also mention starting a family. Is there an SO already to start this family with? If yes, that's great, because that means sharing housing expenses! If not, this argument doesn't make sense until there's a chance you'll be starting a family on the short turn. What if you meet an SO who already has a house and you guys have to sell one and move into the other? Keep your life simple as long as it makes sense.


From the other threads I've read, a lot of users are renting with roommates to become financially independent. I'm confused about what the plan is once financially independent. Are you saving 25x your current expenses (including the cheap rent because of multiple tenants) or are you saving 25x your expected expenses with your own home/mortgage?


You should always use your expected expenses. Regardless of whether you intend to spend your FIREd life renting or having your own house.


I seem to be in an amazing position to save a huge amount of money. I have no debt, my car is paid off, my insurance is paid for by work, I have very few bills, my rent is ridiculously cheap, and I make a comfortable wage. Even with all of that, I still don't see how it's feasible to comfortably save 50% of my take-home pay if I were to buy a house. The mortgage alone would be about half of my expenses, not including the need to pay for utilities, property taxes, etc.


Again I wonder, if your bills are low and you have no debt, where is the other half of your take-home pay going? Then it sounds like buying a house at this stage of your life doesn't make sense. Maybe if you'd buy a 2-3 bedroom and take roommates again? Iin this case you can pick them yourselves + build equity in the house. Then if there's an SO with whom you want to start a family you can end the lease of your roommates.

I've admittedly been living a pretty frivolous lifestyle the last 6 months. This is when the $70,000 job came in. Now that I'm settling into a routine, I'll be spending about $1,000 a month:

Take home: ~4375 (I just got a raise from $65,000)

Food (working on getting this down to $300): $400
Rent: $300
Recreation: $200
Car insurance: $110
Phone: $30
Misc: $75
Fuel: $50

Investments: $2,000

By my estimates, I'll be able to afford $1,510 for housing leaving me no wiggle room. Are there any red flags in my budget that I could make some big slashes to? Or, should I bite the bullet and spend a few years putting the extra $1,200 I'll be saving to invest.

bacchi

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Re: Trouble understanding how housing is possible
« Reply #9 on: May 14, 2018, 03:10:48 PM »
By my estimates, I'll be able to afford $1,510 for housing leaving me no wiggle room. Are there any red flags in my budget that I could make some big slashes to? Or, should I bite the bullet and spend a few years putting the extra $1,200 I'll be saving to invest.

The extra costs when buying a house are pretty shocking. New curtains, a new appliance or 2 (maybe the fridge left with the house is about to die), paint, etc. -- it adds up quickly. I'd save the extra $1200 in a money market account for a while. Living as is for 6 more months gives you an extra $7200.

I know you don't want to but you can get a roomie when you buy a house, too. Even a year would help a lot with PITI and maintenance and utilities.

onlypretending

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Re: Trouble understanding how housing is possible
« Reply #10 on: May 14, 2018, 03:15:01 PM »
By my estimates, I'll be able to afford $1,510 for housing leaving me no wiggle room. Are there any red flags in my budget that I could make some big slashes to? Or, should I bite the bullet and spend a few years putting the extra $1,200 I'll be saving to invest.

The extra costs when buying a house are pretty shocking. New curtains, a new appliance or 2 (maybe the fridge left with the house is about to die), paint, etc. -- it adds up quickly. I'd save the extra $1200 in a money market account for a while. Living as is for 6 more months gives you an extra $7200.

I know you don't want to but you can get a roomie when you buy a house, too. Even a year would help a lot with PITI and maintenance and utilities.

Too true... I guess I'm antsy because I started this journey a little too late in my life and I want to get the rest of my life rolling as well. I'll take it 6 months ($7200) at a time.

Kind of unrelated, but should I keep any money in a bank savings account? Or, should I keep my emergency fund in a money market account?

patchyfacialhair

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Re: Trouble understanding how housing is possible
« Reply #11 on: May 14, 2018, 04:06:01 PM »
How is your take-home so high? Ballparking 70K before tax, minus 18.5k for 401k (max), minus $3450 HSA (max), minus $1500 other payroll deductions, I get about $1365 per paycheck paid every 2 weeks.

So here's my budget for you:

 $1,100.00    house payment (160k loan @ 4.5%, $3k/year taxes and insurance)
 $150.00    utilities
 $166.67    house maintenance (1% per year on a 200k house)
 $30.00    cell phone
 $50.00    internet (guessed at this number)
 $100.00    car repair/replacement (guessed at this number)
 $110.00    car insurance
 $50.00    gas
 $400.00    food
 $200.00    recreation
 $75.00    misc
   
 $2,431.67    total expenses
   
 $2,730.00    take home pay (using 2 paychecks per month to budget)
   
 $298.33    leftover for extra investing each month

This assumes you put down $40k on a $200k house, not in an HOA neighborhood (those cost more), and that my assumptions are all on point. I'd recommend only buying once you have down payment, an appropriate-for-you emergency fund, plus an extra $10k or so in initial home expenses (painting, maintenance, furniture, etc).

Saving $18.5k in a 401k plus $3.45k in an HSA plus $300 per month in extra investing is pretty solid. Only you can determine whether you think that's cutting it too close or whether it makes sense for your life's goals

Keep in mind, you can get a couple roommates as well. Charge them $500/room plus their share of utilities and you're back to saving a ton each month, but now you're the beneficiary, rather than your parents.

onlypretending

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Re: Trouble understanding how housing is possible
« Reply #12 on: May 14, 2018, 05:27:39 PM »
How is your take-home so high? Ballparking 70K before tax, minus 18.5k for 401k (max), minus $3450 HSA (max), minus $1500 other payroll deductions, I get about $1365 per paycheck paid every 2 weeks.

So here's my budget for you:

 $1,100.00    house payment (160k loan @ 4.5%, $3k/year taxes and insurance)
 $150.00    utilities
 $166.67    house maintenance (1% per year on a 200k house)
 $30.00    cell phone
 $50.00    internet (guessed at this number)
 $100.00    car repair/replacement (guessed at this number)
 $110.00    car insurance
 $50.00    gas
 $400.00    food
 $200.00    recreation
 $75.00    misc
   
 $2,431.67    total expenses
   
 $2,730.00    take home pay (using 2 paychecks per month to budget)
   
 $298.33    leftover for extra investing each month

This assumes you put down $40k on a $200k house, not in an HOA neighborhood (those cost more), and that my assumptions are all on point. I'd recommend only buying once you have down payment, an appropriate-for-you emergency fund, plus an extra $10k or so in initial home expenses (painting, maintenance, furniture, etc).

Saving $18.5k in a 401k plus $3.45k in an HSA plus $300 per month in extra investing is pretty solid. Only you can determine whether you think that's cutting it too close or whether it makes sense for your life's goals

Keep in mind, you can get a couple roommates as well. Charge them $500/room plus their share of utilities and you're back to saving a ton each month, but now you're the beneficiary, rather than your parents.

My company doesn't have a 401k. The only things taken out of my paycheck are taxes. I get paid bi-monthly. This example is at $65,000 since I just got a raise to $70,000:

    ass:cash:checking                       2,073.33 USD
    exp:taxes:2018:federal:income           354.69 USD
    exp:taxes:2018:federal:ss               167.92 USD
    exp:taxes:2018:federal:medicare         39.27 USD
    exp:taxes:2018:state:income             73.12 USD
    inc:salary                             -2,708.33 USD

I currently don't have an HSA because I wasn't entirely sure how it works. I'm simply maxing my Roth (which apparently should be a traditional IRA and transferred to Roth when my salary stops) and putting the rest in a regular brokerage account.

Should I save for the down payment and initial home expenses in a bank account or keep it in stocks until I can use them?
« Last Edit: May 14, 2018, 05:29:33 PM by onlypretending »

bacchi

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Re: Trouble understanding how housing is possible
« Reply #13 on: May 15, 2018, 07:27:23 AM »
Should I save for the down payment and initial home expenses in a bank account or keep it in stocks until I can use them?

Bank account. If stocks lose 20%, you'd be bummed when your house down payment drops too.

Or, you could put it in a Vanguard brokerage account and, if/when stocks lose 20%, just roll with it and delay a house purchase.

patchyfacialhair

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Re: Trouble understanding how housing is possible
« Reply #14 on: May 15, 2018, 08:10:02 AM »
How is your take-home so high? Ballparking 70K before tax, minus 18.5k for 401k (max), minus $3450 HSA (max), minus $1500 other payroll deductions, I get about $1365 per paycheck paid every 2 weeks.

So here's my budget for you:

 $1,100.00    house payment (160k loan @ 4.5%, $3k/year taxes and insurance)
 $150.00    utilities
 $166.67    house maintenance (1% per year on a 200k house)
 $30.00    cell phone
 $50.00    internet (guessed at this number)
 $100.00    car repair/replacement (guessed at this number)
 $110.00    car insurance
 $50.00    gas
 $400.00    food
 $200.00    recreation
 $75.00    misc
   
 $2,431.67    total expenses
   
 $2,730.00    take home pay (using 2 paychecks per month to budget)
   
 $298.33    leftover for extra investing each month

This assumes you put down $40k on a $200k house, not in an HOA neighborhood (those cost more), and that my assumptions are all on point. I'd recommend only buying once you have down payment, an appropriate-for-you emergency fund, plus an extra $10k or so in initial home expenses (painting, maintenance, furniture, etc).

Saving $18.5k in a 401k plus $3.45k in an HSA plus $300 per month in extra investing is pretty solid. Only you can determine whether you think that's cutting it too close or whether it makes sense for your life's goals

Keep in mind, you can get a couple roommates as well. Charge them $500/room plus their share of utilities and you're back to saving a ton each month, but now you're the beneficiary, rather than your parents.

My company doesn't have a 401k. The only things taken out of my paycheck are taxes. I get paid bi-monthly. This example is at $65,000 since I just got a raise to $70,000:

    ass:cash:checking                       2,073.33 USD
    exp:taxes:2018:federal:income           354.69 USD
    exp:taxes:2018:federal:ss               167.92 USD
    exp:taxes:2018:federal:medicare         39.27 USD
    exp:taxes:2018:state:income             73.12 USD
    inc:salary                             -2,708.33 USD

I currently don't have an HSA because I wasn't entirely sure how it works. I'm simply maxing my Roth (which apparently should be a traditional IRA and transferred to Roth when my salary stops) and putting the rest in a regular brokerage account.

Should I save for the down payment and initial home expenses in a bank account or keep it in stocks until I can use them?

Too bad you don't have a 401k. It would save you a ton in taxes.

An HSA is a Health Savings Account. You save money in it, usually for medical expenses, and it has many awesome benefits. It eventually turns into another tax-advantaged retirement account if you don't use it though. Do some google-research to determine if your company offers a health insurance option where you are eligible to use an HSA.

Regarding the down payment, I'd say it depends on your time horizon. Are you going to be saving for a down payment for 10 years? Then yeah, find an index fund and invest the money. Less than 2 or 3 years...I'd lean toward a high-yield savings account. At least you'll make about 1%.

formerlydivorcedmom

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Re: Trouble understanding how housing is possible
« Reply #15 on: May 15, 2018, 08:51:49 AM »
Assuming I'm not talked out of moving, I've seen advice that I should purchase a house where the expense is 25% or less of my take-home pay, or $1,000, and less than a year's salary, or $70,000. In the east valley of Phoenix, this doesn't seem feasible. The median price is over $200,000.

That's the median price.  How much are the houses that you would realistically be looking to purchase?  The median price in my hometown is $253k.  Here, that buys a five-year-old, 2600 sq ft 4-bedroom home with nice floors and granite countertops.  What does 200k buy you, and what can you get for $150k?

I was convinced that my first home (purchased with my husband before we had kids) would be our forever home.  We bought a 3000 sq ft house for 2 people...and paid taxes and utility costs and maintenance for years on a home that we used approximately 1/3 of.   We moved before baby 1 arrived.  It doesn't always make financial sense to buy a home for the life you plan to have in 10 years, especially if you are currently single (I wish I'd rented instead of purchasing a house after my divorce; when I remarried I ended up selling that house and moving anyway).

Make a plan.  How much house do you need?  How much will it cost?  How long will it take you to save up the appropriate downpayment (minimum of 20%; more if you want the monthly cost to go down)?  How much do appraisal values go up every year (this impacts property taxes - we pays hundreds of dollars more a month now in property taxes than we did when we bought the home)?    How much would utilities be, on average? 

Once you have those numbers, you'll be in better shape to make a decision.

JLee

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Re: Trouble understanding how housing is possible
« Reply #16 on: May 15, 2018, 08:55:57 AM »
Regarding that "couple hundred of dollars extra to build equity" part....I bought a house in Phoenix in 2013. At the time, was cheaper than renting by a few hundred $ per month.

I'm also putting a $10,000 roof on it today, so there's that to consider too.