1st time home buying in this crazy market

[jamtero]

Looking for some advice on 1st time home buying.  Some stats......I'm 42 with an 850k portfolio and no debt. I make about 130k after taxes.  I work part time 3 days a week and the wife is stay at home mom for now.   I'm currently renting a 2bdrm with my wife and 2 young kids for 2200. To say we have outgrown this living situation is an understatement. 

I live in a mid to high cost of living area and decent homes for us are in the 600-650k range.  With current rates/prices I'm considering a very non mustachian move by putting down 250k or so to bring the monthly overhead within a workable range.  Crazy right? This would be a large haircut and the move would drop my yearly investments quite a bit.  Plus the added costs of owning etc.   I understand this is not fiscally the best idea but in this current environment seems like the best option.  I'm tied to this location so moving to a lower cost area is not an option.

Running the scenario through the calculators seems to work out in the end when i include my pension although there are so many things to consider.  Im not including my wife working but she'll likely re-enter the workforce once the kids are a little older.  Buy vs rent calculators say I should rent a similar home but again we are fed up with renting. 

What do you guys think?

[Freedomin5]

Buying va renting is often not simply a financial decision.

People often consider other things like stability, fear of being priced out of the market in a location that you are tied to, etc.

If it helps, we are the same age as you, we make around the same as you, and we recently bought a 635k townhouse with a 220k downpayment, in a MCOL city that is touted as being one of the fastest growing cities in Canada. Housing prices have doubled in the last five years.

It’s perhaps not the fastest way to grow our money, but we feel it’s the right decision for us because we wanted some stability (got tired of having rental contracts terminated by landlords, and did not want to be priced out of the market). We were willing to pay for that stability and understood the costs associated with owning.

Besides, there are ways to househack such as renting out extra bedrooms, or buying in a good location where houses rent easily, so if we do move, the house can generate enough rental income to cover its own expenses, both of which we have done. It’s brought our housing costs down by about 50%. So we are paying less than what it would cost to rent, except we have our own larger house.

[SilentC]

I used to think like that, but most stocks and credit has run up enough/expected returns are low enough (especially on a risk-adjusted basis) that we are now looking to liquidate a good chunk of our portfolio to pay cash for a house with a little more space than our rental and fancier than what we can rent, or 50% down or whatever.  In other words, house is starting to look like a good relative value.  I say go for it and put down a fat downpayment as long as you can sell portfolio in a reasonably tax efficient way. 

[FINate]

What's the rent on a 3-bed in your area?

[AccidentialMustache]

I wouldn't call 600k+ "mid". I would call that "high, just not bay area high" if that's really the sort of 1500-2000 sq ft 3-4 bedroom 2 bath type place. Yes it is only slightly over the average home price (500k) but that's being heavily skewed by sf/seattle/nyc types.

[jamtero]

What's the rent on a 3-bed in your area?

Rent for a comparable home is around $3400 and up

[Villanelle]

I wouldn't call 600k+ "mid". I would call that "high, just not bay area high" if that's really the sort of 1500-2000 sq ft 3-4 bedroom 2 bath type place. Yes it is only slightly over the average home price (500k) but that's being heavily skewed by sf/seattle/nyc types.

I suppose it's all relative, because when i read that number, I thought, "that's mid, but certainly not high". 

[FINate]

What's the rent on a 3-bed in your area?

Rent for a comparable home is around $3400 and up

That's a rather large 55% jump over your current rental. Are you perhaps paying below market rate for your 2-bed?

There are really two different concerns here. One, do you spend more on larger housing? Two, is it better to rent or buy? I would really try to keep these separate. There are many good reasons to buy a house, outgrowing a rental isn't one.

Compared to the US median home price you're in a high cost market. Not VHCOL, merely HCOL. Still, the reality of this for most means either living in less than ideal housing (e.g. family of 4 in a 2-bed) or being house poor. That's the essential trade-off involved unless you suddenly come into more money.

If you're going to stay put for more than 5 years buying is probably a fine option. This will push back FI, just something you have to be okay with.

But I think it's best to have renting as a fallback option. It's far better to rent a 3-bed for a few years vs. buying something in a hurry that doesn't really work for your family.

[AccidentialMustache]

I wouldn't call 600k+ "mid". I would call that "high, just not bay area high" if that's really the sort of 1500-2000 sq ft 3-4 bedroom 2 bath type place. Yes it is only slightly over the average home price (500k) but that's being heavily skewed by sf/seattle/nyc types.

I suppose it's all relative, because when i read that number, I thought, "that's mid, but certainly not high".

It's high, it just isn't SF/LA/NYC high.

Chicago's median home price is under 400k. Houston same story. Phoenix under 500k, Philadelphia under 300k. That's #3 to #6 in largest US cities.

[jamtero]

What's the rent on a 3-bed in your area?

Rent for a comparable home is around $3400 and up

That's a rather large 55% jump over your current rental. Are you perhaps paying below market rate for your 2-bed?

There are really two different concerns here. One, do you spend more on larger housing? Two, is it better to rent or buy? I would really try to keep these separate. There are many good reasons to buy a house, outgrowing a rental isn't one.

Compared to the US median home price you're in a high cost market. Not VHCOL, merely HCOL. Still, the reality of this for most means either living in less than ideal housing (e.g. family of 4 in a 2-bed) or being house poor. That's the essential trade-off involved unless you suddenly come into more money.

If you're going to stay put for more than 5 years buying is probably a fine option. This will push back FI, just something you have to be okay with.

But I think it's best to have renting as a fallback option. It's far better to rent a 3-bed for a few years vs. buying something in a hurry that doesn't really work for your family.

Good points.  Indeed, we have been getting a great deal with rent.  It's a nice place in a rich neighborhood just too small.  It has allowed me to rationalize waiting on the home purchase and divert funds to our investments.  A rent increase would likely push me to make a decision.  We could stick it out another year or two to sail past that million milestone which would be nice.  However, from the sidelines it just seems like waiting will result in a similar blow to the finances except in the future everything (our net worth, the huge down payment, overblown house values) proportionally higher.  Pain now vs pain later.  My hope has been the portfolio would outpace the home growth in our area but unfortunately we are just treading water in terms of purchasing power. 

[Freedomin5]

Maybe get your financial ducks in a row, get a mortgage preapproval, and start looking. It might take you a year or two to find something you like.

[jamtero]

Maybe get your financial ducks in a row, get a mortgage preapproval, and start looking. It might take you a year or two to find something you like.

Good idea.   Been dragging my feet after rage quitting the house hunt in 2021/2022.  Viewing all the cheap flips getting 30+ offers, 100k over asking was brutal.  Should be better now. 

[Freedomin5]

2021/2022 was bad. We were watching houses sell in less than a week for $100k over asking. However, 2023 and early 2024 have been better. Houses have been sitting on the market for longer, and a good number of them are not selling for over asking anymore. At least that’s the case in my area.

[lhamo]

2021/2022 was bad. We were watching houses sell in less than a week for $100k over asking. However, 2023 and early 2024 have been better. Houses have been sitting on the market for longer, and a good number of them are not selling for over asking anymore. At least that’s the case in my area.

+1.  Here in crazy market Seattle (at least in my zip code) I am seeing lots of things sitting on the market, some even after significant price drops.  There are still a few bidding wars, but those are typically for houses that have been priced very reasonably and have certain things about them that make them attractive to a wide range of buyers.

I somehow managed to time the sale of my last house and purchase of my new house perfectly to get a high price on the former and a low price on the latter.  Sellers of my current house had priced it for the 2022 market, not the dropping 2023 one, and I eventually got it for 130k less than their original list price after they dropped the price twice and I swept in with cash.  It needs some work, but I can afford it because I didn't pay too much to begin with. 

[Wintergreen78]

I’ve got an accepted offer on my first (only?) house right now, so I’m in a similar spot. I use 7% average returns for planning purposes. My actual average returns over the last 17 years have been 9% per year, so 7% is conservative. Nevertheless, assuming 7% returns makes a 7% mortgage a wash, so I wouldn’t feel bad about making a larger down payment if that was necessary to feel comfortable about your monthly expenses. My numbers all worked out with a 20% down payment, so that’s what I’m doing.

Assuming you have a reasonable mix of investments, odds are you would probably come out ahead by minimizing your down payment and keeping money invested. Personally I think with mortgage rates where they are now, making a larger down payment is a reasonable decision for people who want to be conservative.

And the don’t pay off your mortgage debate begins in 3, 2, 1… :)