Downgrade home or not?

[supersaverman]

Hi All,

New member here and recent Mustachian convert. After turning Mustachian herself, my wife really wants to downgrade our home and quite drastically, wanting to cut 1000sf just like the Mr. himself. We currently live in 2130sf new construction purchased last year for 900k and thinking about going to 1100-1400sf in the low 600s. Problem is, in San Jose where we live, houses in that range are pretty much crap and the downgrade is quite considerable. Not just the house condition but neighborhood gets worse as you go down in price. Net savings will probably end up at 1000/mo. (could be less factoring higher utilities and maintenance for older place)

We have two kids and our current payments are not suffocating but saving more money is always a plus. Should we make the move to downgrade or just stay put and cut back on everything else?

[Jack]

Problem is, in San Jose where we live, houses in that range are pretty much crap and the downgrade is quite considerable. Not just the house condition but neighborhood gets worse as you go down in price.

I have a very hard time believing that any neighborhood where people can afford $600K houses could possibly be a bad neighborhood. I can see it being not quite as fancypants as the $900K house neighborhood, but compared to, say, anywhere else in the entire fucking country it's going to be pretty damned upscale. Based on that, you should move and deal with it.

However, there's also the issue that you've only lived in your current house for a year, so (chances are) transaction costs would kill you. Would your current house make a viable rental property? Could you afford the carrying costs of both places at the same time?

[Bearded Man]

I agree with the above poster. But I know what the OP means. It's a visibly noticeable difference in quality of people even in the 600K neighborhood compared to the 900K one.

That said, I still think it's a good idea, and am considering moving back into a rental that meets my  needs fine though the neighborhood is nothing to write home about. It's not gang land, just have a lot of low income folks who live a block or two away on each side and they have a tendency to walk through. We also have some ghetto neighbors there, both owners and renters.

But the cost savings makes me think I'd be willing to deal with it again. Plus, a couple of the bad neighbors have since moved. There is only one left. They've been there at least 4 years, how much longer could they possibly last?

[supersaverman]

Problem is, in San Jose where we live, houses in that range are pretty much crap and the downgrade is quite considerable. Not just the house condition but neighborhood gets worse as you go down in price.

I have a very hard time believing that any neighborhood where people can afford $600K houses could possibly be a bad neighborhood. I can see it being not quite as fancypants as the $900K house neighborhood, but compared to, say, anywhere else in the entire fucking country it's going to be pretty damned upscale. Based on that, you should move and deal with it.

However, there's also the issue that you've only lived in your current house for a year, so (chances are) transaction costs would kill you. Would your current house make a viable rental property? Could you afford the carrying costs of both places at the same time?

I see your point but the reality is that Bay Area housing is extremely overpriced and you can't really compare it to other parts of the country. Surprisingly we would break even after transactions costs even at a conservative sales price. We won't be able to afford both places so it's either one or the other. I'm leaning with the wife towards the downgrade but afraid of the "what have we gotten ourselves into" type scenario. Yeah I know, very non-Mustachian first world problem.

[Jack]

I'm leaning with the wife towards the downgrade but afraid of the "what have we gotten ourselves into" type scenario.

Let me put it this way: does the neighborhood you're thinking of moving to have people hanging out on the street corner waiting to sell drugs, that other people buy with their social security disability income? No? Then it's fine.

Hell, even if there are people doing that, it might still be fine! (There are some neighborhoods here in Atlanta like that: they're still a little rough, but they're rapidly gentrifying and I'd love to buy into them if I could.)

[undercover]

I have a very hard time believing that any neighborhood where people can afford $600K houses could possibly be a bad neighborhood.

I'm sure we all have different opinions of "bad" neighborhoods, but this is very much possible, especially in cases where the land is worth far more than the building itself.

I think the best "move" would be to wait until you're ready to quit and then downsize into a LCOL area. Why make sacrifices and unnecessary transaction costs when you're really not going to be making a move that you're truly comfortable with? You're looking at nearly $75k in transaction costs alone including your closing costs on your current home, selling agent fee, and closing costs on a new home.

As long as your housing expense is still around 1/3, ideally 1/4 of your net income, I wouldn't worry about it.

[supersaverman]

I have a very hard time believing that any neighborhood where people can afford $600K houses could possibly be a bad neighborhood.

I'm sure we all have different opinions of "bad" neighborhoods, but this is very much possible, especially in cases where the land is worth far more than the building itself.

I think the best "move" would be to wait until you're ready to quit and then downsize into a LCOL area. Why make sacrifices and unnecessary transaction costs when you're really not going to be making a move that you're truly comfortable with? You're looking at nearly $75k in transaction costs alone including your closing costs on your current home, selling agent fee, and closing costs on a new home.

As long as your housing expense is still around 1/3, ideally 1/4 of your net income, I wouldn't worry about it.

Our housing expenses are at 1/3 of take home so while not an emergency could be better. But you are absolutely right. We are probably over thinking this and the costs won't be worth it.

[2Cent]

Would it not be more convenient to rent a smaller place and rent out your larger house. It would save on the transaction fees and you can go back if you don't like it. And if you do like it you can always sell and buy with the added benefit that you don't have the pressure of either selling or buying.

[Another Reader]

A $900k newly constructed house in San Jose probably isn't much of a house - more likely a townhouse with no common walls.  Most of these are in adequate but not the very best school districts.  Looking at mlslistings.com, $600-$700k is going to be a huge downgrade.  Schools will be a big problem, as will the size of the house and probably the commute.  When the market turns, it's the marginal areas that suffer the most.  They get run up in price by folks in your position when the market is hot, but have little appeal when buyers can afford better neighborhoods.

Getting a traditional house in a good school district looks like around $750k to start.  That will get you a small house in Cambrian or Evergreen, the areas with the best schools for your housing dollar.   Renting a house in these same areas would be $3,500 to $4,000 a month, not much better and you lose the tax benefits and any appreciation.  If you are happy with the design, yard area, commute, and the schools where you are, I would not make a change.

[supersaverman]

A $900k newly constructed house in San Jose probably isn't much of a house - more likely a townhouse with no common walls.  Most of these are in adequate but not the very best school districts.  Looking at mlslistings.com, $600-$700k is going to be a huge downgrade.  Schools will be a big problem, as will the size of the house and probably the commute.  When the market turns, it's the marginal areas that suffer the most.  They get run up in price by folks in your position when the market is hot, but have little appeal when buyers can afford better neighborhoods.

Getting a traditional house in a good school district looks like around $750k to start.  That will get you a small house in Cambrian or Evergreen, the areas with the best schools for your housing dollar.   Renting a house in these same areas would be $3,500 to $4,000 a month, not much better and you lose the tax benefits and any appreciation.  If you are happy with the design, yard area, commute, and the schools where you are, I would not make a change.

LOL, you couldn't have painted a more accurate picture of our house and the San Jose housing market, down to our school district which is crappy. And yes, 600-700k really is a huge downgrade. We will stay put for now but maybe next summer might even think of selling the house to just rent for 2-3yrs hopefully to bypass the next downturn.

[Another Reader]

Lived in the San Jose area for 32 years and in the Bay Area for a lot longer.  It has certainly been an interesting period in real estate here....

Those "houses" scare me if you have toddlers.  The stairs in the ones I toured, with no landings halfway down, are dangerous.  Public parks are no substitute for back yards.  There's nowhere for the kids and the dog to play safely.  The project that is off Cottle Road and 85 is in a location that already has severe traffic problems.  Once the high density apartments are built out and Costco is finished, the area traffic will be a nightmare.  Same problems with similar projects in the Northeast section of San Jose.

In your shoes, I would look to sell when you can clear enough to pay selling costs and come out close to whole.  Depending on the employment situation and the age of the kids, I would consider renting in a good school district close to the job(s).  If you are committed to the Silicon Valley area, I would take some piled up cash savings and buy when the market turns.

[ShumateWB]

I agree with other Bay Area residents. Don't downgrade just for the prospect of saving some money. You have kids who will have to face public schools in the area you are going to live. Many people work a lot just so that they can live in an area where their kids will be safer. Downgrading your house will expose them to more problems. You will be "buying" more problems by downgrading and the cost of these problems may be more than your savings from the downgrade. If you must, rent out your house and rent for yourself a smaller house, but in a good neighborhood.

[grettman]

Don't downgrade just for the prospect of saving some money.

I agree with this.  Are you happy where you are and with the amount you are able to save now? Does the idea of saving $1K more per month with the trade-off that you will be in a less than ideal place make you more happy?  For me, I think these decisions come down to the happiness factor.  If you are on track to achieve your financial goals, why push the envelope and risk negative consequences with variables you can't control (e.g., bad neighbors). 

[supersaverman]

Don't downgrade just for the prospect of saving some money.

I agree with this.  Are you happy where you are and with the amount you are able to save now? Does the idea of saving $1K more per month with the trade-off that you will be in a less than ideal place make you more happy?  For me, I think these decisions come down to the happiness factor.  If you are on track to achieve your financial goals, why push the envelope and risk negative consequences with variables you can't control (e.g., bad neighbors).

This is exactly my argument to the wife. We are not in an emergency situation and we are still saving. She just wants that extra push to get us to FI sooner and also preaches Mustachism about how we don't need the space or the luxury etc and we can get by with less. I do agree but baby steps woman!  So the debate rages on..

[ShortInSeattle]

It might help you if you make the distinction more concrete.

Moving from House A to a house like House B will let us retire X years sooner.

Don't forget transaction costs from selling one home and buying another. And once you get specific you can figure out if the change is worth it.

I say this as someone who sold a fancy condo to buy a little one. But we got to stay in the building we love and the "FI Math" was exciting. We went from 5-7 years to FI down to one year.

SIS

[Bearded Man]

It might help you if you make the distinction more concrete.

Moving from House A to a house like House B will let us retire X years sooner.

Don't forget transaction costs from selling one home and buying another. And once you get specific you can figure out if the change is worth it.

I say this as someone who sold a fancy condo to buy a little one. But we got to stay in the building we love and the "FI Math" was exciting. We went from 5-7 years to FI down to one year.

SIS

That's a pretty big drop, congrats! I don wonder if people consider the sustainability of their lifestyles in the long run, in exchange for cheaper living. For example, moving into a box truck would allow many people here to be FI TODAY, and while many could pull it off for a little while, I doubt anyone wants to live like that for 40-50 years. I imagine living in the ghetto is not fun. I myself am considering moving back into an old rental that, while it isn't in the best of areas, though I think it's largely the people in the surrounding blocks who pass through that are unsavory. Not 100% sure, but no issues with my house or my neighbors in three years I've owned it. At a previous house in a known ghetto I had stolen cars in the alley, neighbor had home invasion, and a knife fight, in front of my house, in about the same time frame.

[ohana]

This makes me so, so happy I don't live in California. 

[zephyr911]

This makes me so, so happy I don't live in California.

No shit. Threads like this make me twitch! For $900K, I could buy a 5,000 square-foot lakefront mansion with marble floors, top-line appliances, and a detached 3-car garage with a guest suite on top....

[skeeder]

This makes me so, so happy I don't live in California.

No shit. Threads like this make me twitch! For $900K, I could buy a 5,000 square-foot lakefront mansion with marble floors, top-line appliances, and a detached 3-car garage with a guest suite on top....

Pretty sure I could toss in a lambo in for that price as well.

I see a house like this as an investment...sure, maybe not the best one, but maybe stay put until the kids are gone and neighborhoods/schools are no longer an issue.