Author Topic: Buying a house as a worse case scenario  (Read 3511 times)

capoevename

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Buying a house as a worse case scenario
« on: June 21, 2017, 08:11:53 PM »
Is there some weight behind owning a home as a worse case scenario for a bad market downturn?

Our NW is ~480K and we are thinking of using 100K as a downpayment in a ~280K house in the area we currently rent. We like the area and most tech jobs in our county are around here (we work in tech). We see ourselves here for the foreseeable future.

Even though we have enjoyed renting, we think there's some value in owning a property as a worse case scenario. Say the market crashes worse than before (past performance is no guarantee of future results, this is planning for worse case scenarios). It would be a lot easier for us to keep living in this area if we owned a property here. The "rent" payments (taxes, HOA, mortgage, insurance, etc) would be lower than renting as we are now. It's more likely we would have the income to make these lower payments.

Of course this is not optimum; I'm trying to go for redundancy here. When you make a backup engine it's definitely more costly and you hope not to use it. But the intention is to be less fragile.

What do you guys think?

ixtap

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Re: Buying a house as a worse case scenario
« Reply #1 on: June 21, 2017, 08:16:36 PM »
If the market crashes worse than 2008, you could end up owning more on the house than it is worth and out of a job. How is that a hedge?

Houses are investments for growing markets, not tanking markets. Conversely, houses are good to buy during a downturn, not if you think you are at the top.

But if you don't believe in timing the market, and you are ready to own, just go for it. Don't try to justify it with fantasy logic.

capoevename

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Re: Buying a house as a worse case scenario
« Reply #2 on: June 21, 2017, 08:25:44 PM »
If the market crashes worse than 2008, you could end up owning more on the house than it is worth and out of a job. How is that a hedge?

Houses are investments for growing markets, not tanking markets. Conversely, houses are good to buy during a downturn, not if you think you are at the top.

But if you don't believe in timing the market, and you are ready to own, just go for it. Don't try to justify it with fantasy logic.
The bet is that we are both not going to be out of jobs, and that we would be able to make payments. It's not a hedge NW wise, but I see it as worse case scenario, we most probably still have a place to live. I doubt we will have such a market down turn AND lose both jobs for more time than we can sustain our expense without working.

But if you don't believe in timing the market, and you are ready to own, just go for it. Don't try to justify it with fantasy logic.
Ha! Love it. I do get what you're saying that it's easy to rationalize when one wants to do something. It's true we are ready to own a place and wanna feel like we have a "home base".

But isn't there some logic in the above?

ixtap

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Re: Buying a house as a worse case scenario
« Reply #3 on: June 21, 2017, 08:30:43 PM »
If you are going to posit a worse down turn than the recent one, you have to realize how many people lost their homes and how many people were out of work long term.

You can't assume that the market goes bad in ways that hurt everyone else but you. Your plan only works if you own the property outright and can afford taxes for a few years on top of your minimal life expenses.

capoevename

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Re: Buying a house as a worse case scenario
« Reply #4 on: June 25, 2017, 06:10:40 PM »
Thank you for your words guys. You made me reconsider more objectively. I reallocated my investments to be a bit more conservative and I'm abandoning the plans of buying a house.

Scortius

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Re: Buying a house as a worse case scenario
« Reply #5 on: June 26, 2017, 11:39:03 AM »
Thank you for your words guys. You made me reconsider more objectively. I reallocated my investments to be a bit more conservative and I'm abandoning the plans of buying a house.

There are a number of reasons to buy a house beyond using it as a safety net.  If you're planning on living in the area for the foreseeable future, I would still certainly consider buying depending on the rent/buy trade-offs.

capoevename

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Re: Buying a house as a worse case scenario
« Reply #6 on: June 26, 2017, 12:36:57 PM »
Thank you for your words guys. You made me reconsider more objectively. I reallocated my investments to be a bit more conservative and I'm abandoning the plans of buying a house.

There are a number of reasons to buy a house beyond using it as a safety net.  If you're planning on living in the area for the foreseeable future, I would still certainly consider buying depending on the rent/buy trade-offs.
That's what I mean by reconsidering objectively. Renting is cheaper for my current situation financially. I live in a 1/1 and I have been able to save tons thanks to that.

ChpBstrd

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Re: Buying a house as a worse case scenario
« Reply #7 on: July 03, 2017, 02:06:13 PM »
A truly worst-case scenario would involve losing your job when unemployment is 10-15% and major employers have closed in your area and you'd be just fine if you could move... but... you're underwater on the house, so you commute 100 miles/day. And mortgage rates in this future scenario are twice what they are today (i.e. historically normal) so no one can afford the payments on that home anyway unless you're willing to take half price...

Compared to using a house as a hedge, what if you used options instead? If your portfolio was all SPY, for example, you could buy a put and sell a call (known as a collar) to limit both your upside and downside to a reasonable ROI for a minimal cost, or even a small credit. E.g. you could sell your upside above, say, 7%/y and use the proceeds to buy protection that kicks in if losses exceed 7%/y. You can't do that with physical property.

For housing, I'd pick the cheaper path in terms of today's cash flow. If you buy, just try not to fall into the trap of going from 1BR to 3BR just because that's what the market has most of. Also resist the urge to remod, redecorate, customize, etc. because it's "yours".

chasesfish

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Re: Buying a house as a worse case scenario
« Reply #8 on: July 04, 2017, 12:35:27 PM »
Your title caught my attention, then I have to disagree with the idea.

One of the most basic FIRE plans is to accumulate four free and clear rental houses - That way you're always guaranteed to generate four times the going rental rate in income, then less 30% for taxes/maintenance/vacancy and you still have just under 3x the cost of rent to live on.

In your situation, I don't think taking on leverage as a "safety net" is a good idea at all.  Renting gives you the freedom to move.  I was personally underwater by $25,000+ to my loan in 2009-2010 and it kept me from jumping on some great real estate opportunities.  I loved the house, but we ended up loosing almost $50,000 plus interest for the privilege of living there for 7 years.  Its up there in my top 3 financial mistakes ever.

capoevename

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Re: Buying a house as a worse case scenario
« Reply #9 on: July 09, 2017, 08:20:41 PM »
Thanks for the comments guy. And yep, not a reasonable choice. Not going for it.