Author Topic: Market timing home purchase (primary residence)  (Read 9959 times)

dragoncar

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Market timing home purchase (primary residence)
« on: April 21, 2014, 04:54:56 PM »
I did a search of this forum, which seems mostly about investment properties.  Sorry if it's been discussed.

What's your philosophy about trying to time this?  My gut tells me to just buy when ready, and shop around as much as we need to.  However, prices around here are back to their former peaks.  My crystal ball shows a recession coming in the next few years.

It would suck to buy a place and then lose 20% over the next year.  On the other hand, we wouldn't buy anything that we wouldn't want to stay in for decades, or that we couldn't afford on one salary.

Any thoughts? 


Edit:  A related question - I know we advocate living near work around here.  But for me, living near work carries immense housing costs.  If I'm already planning to ER in a few years, can't it make sense to buy something farther from work, and much cheaper, that we will want to stay in forever?
« Last Edit: April 21, 2014, 05:01:05 PM by dragoncar »

DoubleDown

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Re: Market timing home purchase (primary residence)
« Reply #1 on: April 21, 2014, 08:37:03 PM »
Great question.

My gut tells me to just buy when ready, and shop around as much as we need to.

I think that's a solid plan right there, and you'll already meet the 80/20 rule with that approach alone. Meaning, if you are patient and wait for the right house to come along that's a good deal, you will have already taken care of the majority of the situation. By being prepared to strike right away when the right house comes along, you can likely score a great deal. For example, have all your financing and preapproval letter lined up if you're taking out a loan; a healthy earnest deposit ready to put down; be the first person to see the house when it becomes available (or even before it's listed ideally); be prepared to make an immediate offer with an expiration of 24 hours; and don't put on a bunch of contingencies -- then you have a good chance of getting the house with little or no competition from other buyers. If you've done your homework in advance and know a good property when you see it, you can make an offer immediately upon seeing it (assuming it is what you want) before anyone else even views it. Have the written contract to them within a couple of hours along with your earnest deposit, and only inspection contingencies.


What's your philosophy about trying to time this?  ... My crystal ball shows a recession coming in the next few years.
Mine is completely hazy. I would not attempt to do any long term timing for your purchase, i.e. trying to forecast where your housing market will be in 1-2+ years in order to strike at just the right moment. But you could definitely take advantage of cyclical, seasonal trends. For example, you will likely find better deals in the off season (late fall, winter), but you'll also have less inventory to choose from. That's not a problem for you though since you're patient!


It would suck to buy a place and then lose 20% over the next year.  On the other hand, we wouldn't buy anything that we wouldn't want to stay in for decades, or that we couldn't afford on one salary.

No, that would not suck since you're in it for the long haul. It sucks no more than when the stock market goes down for a short time, only to go up again. Now, this is all predicated on you not buying into an area that ends up in permanent decline, like Detroit or the Rust Belt or something. Then it would suck.

Edit:  A related question - I know we advocate living near work around here.  But for me, living near work carries immense housing costs.  If I'm already planning to ER in a few years, can't it make sense to buy something farther from work, and much cheaper, that we will want to stay in forever?

I'd be inclined to just rent close to work until you're ready to make the move, but if you've done the math and figured out that you're somehow better off buying now and doing the commute for a while, it's not necessarily a horrible proposition. But man, I'd say you need to be really sure about your plans, because it would in fact suck to lock yourself into a place far from work, then have something come along and change your ER or life plans.

FIreDrill

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Re: Market timing home purchase (primary residence)
« Reply #2 on: April 21, 2014, 09:02:03 PM »
My crystal ball shows a recession coming in the next few years.

Funny, I have the opposite prediction for my local market.  We saw a nice increase in home prices from 2001-2006 and then fairly flat or slightly negative from 2007-2013.  Inventory has been running really low and I've read several reports showing that there is no way builders can keep up with new housing demand.  We are also running out of land to build on in certain areas so that will play a factor for those areas.  Unemployment here is just below 7% I believe and depending on the outcome of several different things there is a great chance that additional jobs will be added contributing to population increase and an even tighter housing market.  Who knows what the market will actually do but I could see house prices increase in the coming years pretty easily for my area.  We just bought a place and actually close on it May 1st but there was no market timing involved.  It was just good timing for us and I wanted to know what kind of market I was getting into so I did some research.  After figuring out what was going on in my market, I felt a lot better about what I was getting myself into.

All that being said is there any reasoning behind your crystal ball feeling or is it simply a gut feeling?

dragoncar

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Re: Market timing home purchase (primary residence)
« Reply #3 on: April 21, 2014, 09:53:08 PM »
Great question.

My gut tells me to just buy when ready, and shop around as much as we need to.

I think that's a solid plan right there, and you'll already meet the 80/20 rule with that approach alone. Meaning, if you are patient and wait for the right house to come along that's a good deal, you will have already taken care of the majority of the situation. By being prepared to strike right away when the right house comes along, you can likely score a great deal. For example, have all your financing and preapproval letter lined up if you're taking out a loan; a healthy earnest deposit ready to put down;

Thanks for the detailed response, it really helped.  Just one question (that I've asked in a couple places including this and other forums).  If I'm willing to take the long view and wait for the right place, it could take months.  Does this mean I should get "pre qualified" but not "pre approved"?  I'm worried that I'll have to keep hitting my credit every few months to keep a true "pre approval" active, hurting my score (I know they will consolidate a bunch of hits in the same time frame, but I also assume the pre-approval only lasts a few months).  Or is it not a big credit hit and I should just keep re-upping my pre-approval?  Or when you say "wait for the right property" do you foresee it happening within a few months?  I realize I started rambling there.

My crystal ball shows a recession coming in the next few years.

Funny, I have the opposite prediction for my local market.  We saw a nice increase in home prices from 2001-2006 and then fairly flat or slightly negative from 2007-2013.  Inventory has been running really low and I've read several reports showing that there is no way builders can keep up with new housing demand.  We are also running out of land to build on in certain areas so that will play a factor for those areas.  Unemployment here is just below 7% I believe and depending on the outcome of several different things there is a great chance that additional jobs will be added contributing to population increase and an even tighter housing market.  Who knows what the market will actually do but I could see house prices increase in the coming years pretty easily for my area.  We just bought a place and actually close on it May 1st but there was no market timing involved.  It was just good timing for us and I wanted to know what kind of market I was getting into so I did some research.  After figuring out what was going on in my market, I felt a lot better about what I was getting myself into.

All that being said is there any reasoning behind your crystal ball feeling or is it simply a gut feeling?

I guess all markets are local.  I'm in the SF Bay Area.  In SF proper, where I work, the average rental is over $3k now (obviously it gets cheaper the further out you go, unless you are heading towards San Jose where the average rent is $2k).  Unemployment is 4.8%  Home prices are back to, and starting to surpass, their previous highs.  In short, the local economy is booming.  I'm hearing worrying macroeconomic whispers -- for example, leverage in the US and China is now surpassing our previous highs.  This all makes me very cautious, although I fully realize the market can continue to defy gravity for years.  I purposely used the phrase "crystal ball" to emphasize the point that my guess is pure speculation.

Edit:  On the other hand, SF has a huge supply problem.  Rent control keeps units off the market.  NIMBYs put city-council-approved high-rises to a voter referendum and vote to kill the project, leaving a ground-level parking lot and tennis courts one block from the bay.  We are in a great building boom (countless cranes), but at the same time it's not enough -- the approved project pipeline will soon run out.  Protesters in Oakland climb a Google bus and literally vomit on the windshield to protest rising housing prices and gentrification.  It's getting a bit scary out there.
« Last Edit: April 21, 2014, 09:56:28 PM by dragoncar »

FIreDrill

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Re: Market timing home purchase (primary residence)
« Reply #4 on: April 21, 2014, 10:16:01 PM »
My gut tells me to just buy when ready, and shop around as much as we need to.

Idk how I missed that part.... Too much multi-tasking :P.  I think this is the best way to go though.  We ended up getting something that we were comfortable with and that wouldn't have a large effect on our savings rate.  I actually considered spending more to get additional leverage but the increase in taxes/insurance made the payments balloon up to where it would hurt our extra cash for tax deferred investments.  We ended up purchasing a place in the 230k price range which is still plenty of leverage for me at least and is below the median house price in my area.
« Last Edit: April 22, 2014, 01:19:10 PM by StudentStacher »

mpbaker22

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Re: Market timing home purchase (primary residence)
« Reply #5 on: April 22, 2014, 08:15:42 AM »
I think just posting my experience will be easier to understand.
I live in St. Louis and have been looking for houses since late 2012.  I started off looking casually not even sure I wanted a house.  I do like old architecture, so I enjoyed looking as a hobby in itself.  I had an offer in on a house roughly 6-8 months ago, but the inspection caused it to fall through.  Basically it was a 2 family building, and I was only able to view one unit before putting an offer in.  The second unit was an absolute disaster.

I went back to casually looking and knowing I wanted to buy, BUT ONLY IF THE RIGHT DEAL CAME ALONG.  I think that's the key.  There isn't really an opportunity for market timing; But there is an opportunity to get something priced below market.   Finally, about a month ago, I put an offer in on a beautiful house ... old woodwork, fireplace, cool attic, etc.  I ended up buying it for $37,200, and it needs about $20K in work.  That would be a total cost of ~$57,200, at which point it will be worth at least $70,000.

Oh, it's also a foreclosure.  Don't be afraid to check out homepath.com for severely undervalued properties.  If you're going to owner occupy, you have a huge advantage, but only for the first 20 days.

Edit - it would be worth at least in the 100s if I did all the work to truly restore it, but I used the work needed to move in with comfort items as a starting point.

Poorman

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Re: Market timing home purchase (primary residence)
« Reply #6 on: April 22, 2014, 12:47:44 PM »
dragoncar-
The pre-approvals won't hurt you.  Lenders understand the buying process and they will require a letter of explanation when you are ready to move forward with the loan.  It simply says, "I was getting my credit pulled repeatedly as part of the home buying process..signed Dragoncar".  They just want to make sure you weren't applying for any car loans or credit cards over that time.

Your question about market timing is very important and I disagree with anyone that says just buy for the long haul and don't worry about it.  That implies that overpaying for real estate is ok.  Many people got severely burned from this type of thinking just a few years ago.  San Francisco has had 3 major declines over the past 25 years and there will be others.  If the historical pattern holds, there might be another 1-2 years to this recovery before the bubble bursts again.  Even San Franciscans have limits to their affordability and when that limit is reached, it only takes a minor economic event to send prices crashing.  A tech downturn, a Chinese recession, or a US recession could all be catalysts.

This site has some good information on San Francisco real estate cycles:  http://www.paragon-re.com/3_Recessions_2_Bubbles_and_a_Baby

If I were you, I would make the comparison between monthly rents and what your PITI payment will be to make sure you are not overpaying.  Try to quantify what your interest deductions and property tax deductions would be and subtract these from the PITI payment for a truer picture.  If the rent amount and the PITI payment (minus tax deductions) are pretty close then it's not a bad deal, otherwise you might want to keep renting and wait for a downturn before you buy. 

In California, another benefit to buying near the bottom is locking in a lower Prop 13 property tax base.  Your property tax can only go up 2% per year from this level, which is an outstanding benefit if you do indeed plan on holding for the long haul.

dragoncar

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Re: Market timing home purchase (primary residence)
« Reply #7 on: April 22, 2014, 02:18:13 PM »
dragoncar-
The pre-approvals won't hurt you.  Lenders understand the buying process and they will require a letter of explanation when you are ready to move forward with the loan.  It simply says, "I was getting my credit pulled repeatedly as part of the home buying process..signed Dragoncar".  They just want to make sure you weren't applying for any car loans or credit cards over that time.

Your question about market timing is very important and I disagree with anyone that says just buy for the long haul and don't worry about it.  That implies that overpaying for real estate is ok.  Many people got severely burned from this type of thinking just a few years ago.  San Francisco has had 3 major declines over the past 25 years and there will be others.  If the historical pattern holds, there might be another 1-2 years to this recovery before the bubble bursts again.  Even San Franciscans have limits to their affordability and when that limit is reached, it only takes a minor economic event to send prices crashing.  A tech downturn, a Chinese recession, or a US recession could all be catalysts.

This site has some good information on San Francisco real estate cycles:  http://www.paragon-re.com/3_Recessions_2_Bubbles_and_a_Baby

If I were you, I would make the comparison between monthly rents and what your PITI payment will be to make sure you are not overpaying.  Try to quantify what your interest deductions and property tax deductions would be and subtract these from the PITI payment for a truer picture.  If the rent amount and the PITI payment (minus tax deductions) are pretty close then it's not a bad deal, otherwise you might want to keep renting and wait for a downturn before you buy. 

In California, another benefit to buying near the bottom is locking in a lower Prop 13 property tax base.  Your property tax can only go up 2% per year from this level, which is an outstanding benefit if you do indeed plan on holding for the long haul.

Right now the rent vs. buy equation isn't so hot because I expect AMT to start killing my interest deduction.  I would also prefer to lock in low interest rates, just like everyone else.  On the other hand, it's always possible that interest rate spikes will drive down prices.  But there are a LOT of cash buyers right now -- a couple properties I toured for fun ended up closing within a week (assuming all cash) for hundreds over asking.  I don't want to buy in a market where I have to participate in a bidding war.

So the above being said, my soon-to-be wife has more emotional reasons for ownership.  And although I agree that the bubble could pop, there's no guarantee the price will ever return to the current level during the next recession.  The complainypants downside to having large income is that these crazy prices are still nominally "affordable" to us.

Poorman

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Re: Market timing home purchase (primary residence)
« Reply #8 on: April 22, 2014, 03:02:33 PM »
I'm not a tax expert but I believe mortgage interest is still deductible under AMT, however the property tax is no longer deductible.  You'll have to do what seems best and most people buy homes for emotional reasons, but you should realize that this might delay your FI plan by years.

If you are a high income earner and you are afraid that interest rates will make owning unaffordable, that means it will be unaffordable for everybody else that earns what you do.  Where will the additional demand come from?  This cycle repeats over and over again in California.  Everybody runs out to buy property at any price because they are afraid of being priced out, then eventually most people are priced out for a short time before prices fall again.  When prices are falling nobody wants to buy, but eventually investors put a floor in the market when prices are in line with rents.  Study history and read real estate headlines from the late 80's and you'll see your situation is nothing new.  People thought they would be priced out in 1989 also, but now homes are worth 5x as much.  The people that bought in 1989 had to wait 10 years to break even though.

waltworks

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Re: Market timing home purchase (primary residence)
« Reply #9 on: April 22, 2014, 03:14:23 PM »
Market timing isn't very doable in most markets (for anything), and real estate is no exception. I mean, if you truly have some secret insight that the economy is going to crash - there are ways to make money on that, which you should be doing if you have any actual confidence in your prediction. If you're not confident enough to bet on it by shorting stuff or whatever, then you also aren't confident enough to let that prediction drive your choice of rent vs. buy, right?

If renting makes more sense right now, rent. If buying makes more sense, buy. Don't spend too much time worrying about future house values unless you're buying real estate as an INVESTOR. Your home (especially if it's where you want to spend decades) is not an investment in the same sense that stocks or bonds or something are.  Don't think about it that way.

-W

dragoncar

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Re: Market timing home purchase (primary residence)
« Reply #10 on: April 22, 2014, 03:19:11 PM »
I'm not a tax expert but I believe mortgage interest is still deductible under AMT, however the property tax is no longer deductible.  You'll have to do what seems best and most people buy homes for emotional reasons, but you should realize that this might delay your FI plan by years.

If you are a high income earner and you are afraid that interest rates will make owning unaffordable, that means it will be unaffordable for everybody else that earns what you do.  Where will the additional demand come from?  This cycle repeats over and over again in California.  Everybody runs out to buy property at any price because they are afraid of being priced out, then eventually most people are priced out for a short time before prices fall again.  When prices are falling nobody wants to buy, but eventually investors put a floor in the market when prices are in line with rents.  Study history and read real estate headlines from the late 80's and you'll see your situation is nothing new.  People thought they would be priced out in 1989 also, but now homes are worth 5x as much.  The people that bought in 1989 had to wait 10 years to break even though.

Wow, OK you may have changed my entire world if home mortgage interest is deductible.  In the current rental market, at our 45%-ish marginal tax bracket, buying becomes a slam dunk.  I originally thought it would be, then realized we'd be hit by AMT, and now it's swinging back around.  The question still remains whether it makes sense to buy, say, a condo now and wait for SFHs to come down in price.  1-2 br condo rent vs. buy is definitely in favor of buy with tax deductions.

Edit:

You're right.  Praise jeebus.  I think I saw a line about some home mortgage interest being disallowed under AMT and freaked out without doing my full due diligence.  Apologies if I gave any misinformation in any other thread...

Quote
Mortgage interest: The rules for deducting mortgage interest are more
restrictive for AMT than for regular tax. If a taxpayer can deduct more
mortgage interest for regular tax than for AMT, the difference is an adjustment
that the taxpayer adds back in calculating AMTI.

For the regular tax, individual taxpayers can deduct interest on a mortgage
loan that the taxpayer used to purchase a qualified residence (i.e., the
taxpayer’s principal residence and one other residence selected by the
taxpayer that the taxpayer uses as a personal residence) or refinance an
existing loan that was used to purchase a qualified residence, to the extent
the refinancing loan does not exceed the original mortgage loan. The
taxpayer may also deduct interest on a home equity loan or line of credit.  For
the AMT, an individual may only deduct interest on a mortgage loan used in
acquiring, constructing, or substantially improving a principal residence or
qualified dwelling.

http://www.amtadvisor.com/AMT_adjustments.html
« Last Edit: April 22, 2014, 03:48:29 PM by dragoncar »

dragoncar

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Re: Market timing home purchase (primary residence)
« Reply #11 on: April 22, 2014, 07:59:41 PM »
Here's a thought experiment in the vein of ARebelSpy (http://forum.mrmoneymustache.com/welcome-to-the-forum/almost-logical-to-gamble-$50-000-on-red/):

I have $1 million and save $100k/year.  I am looking at a $600k house, with monthly expenses of $1.3k.  I can buy the house now, or wait a couple years.

If I wait a couple years, the housing market could go up or down.

If the house goes up to $800k in two years, I will have the original $1 million, plus the $200k I saved, so I can buy the $800k house with $400k left over.  That covers my monthly expenses of $1.3k at 4% SWR, but I worked two more years for nothing.

If it goes down to $400k in two years, I will have the original $1 million, plus the $200k I saved, so I can buy the $400k house with $800k left over.  That covers my monthly expenses of $1.3k, and I worked two more years in order to lower my WR to 2%.

If I had just bought the $600k house to begin with, I could have retired with $400k to cover my $1.3k monthly expenses at 4% SWR.

Of course, I'm not at $1 million, but I think the experiment still applies.  The point being that I fear being priced out of the market (or treading water with the market) more than I value lowering my SWR. 

There is no scenario in which a falling market reduces my time to ER because I have to work while I wait in case the market rises rather than falls.  The falling market only increases my wealth, it doesn't buy me more time.

[Mod Edit: Link fixed.]
« Last Edit: April 22, 2014, 10:21:05 PM by arebelspy »

brooklynguy

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Re: Market timing home purchase (primary residence)
« Reply #12 on: April 23, 2014, 07:57:45 AM »
In your thought experiment, you are FIRE today (even after giving effect to the house purchase today), so of course waiting for a falling market does not reduce the time to FIRE.  If, instead, you are a few $100k away from FIRE, waiting for a falling market can reduce your time to FIRE (if the price of the house drops by those few $100k faster than you can save it up).

dragoncar

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Re: Market timing home purchase (primary residence)
« Reply #13 on: April 23, 2014, 10:02:25 AM »
In your thought experiment, you are FIRE today (even after giving effect to the house purchase today), so of course waiting for a falling market does not reduce the time to FIRE.  If, instead, you are a few $100k away from FIRE, waiting for a falling market can reduce your time to FIRE (if the price of the house drops by those few $100k faster than you can save it up).

Yes, there is some potential for faster FIRE.  With my real numbers it could save me maybe a year if the market falls 10% per year.  On the other hand, if the market rises 10% per year I will literally be priced out of the market forever. 

So there's definitely a risk-aversion thing going on, making me willing to pay a slightly higher price now. 

totoro

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Re: Market timing home purchase (primary residence)
« Reply #14 on: April 23, 2014, 10:19:09 AM »
We faced a similar dilemma. 

In the end, we focussed on finding the right house and bought anyway.  There are a lot of variables at play in trying to time the market and, as it turns out, we have not experienced the predicted bursting of the bubble where we live. 

What we did consider was:

1. Historic appreciation rates - buying at a low will be a huge boost up, but buying at a high still ends up working well over the long term.

2.  Timeframe - how long do we expect to hold.  Greater than ten years is enough time to even out dips if the past is a good predictor of the future, which I believe to be true.

3. Interest rates - historic low interest rates mean that house prices can stay high for a while imo.  If rates rise and prices drop the real beneficiaries are the all cash purchasers. We are not in that group.  It was better for us to get a 10 year very low rate mortgage than buy in at a lower price with an unknown interest rate.  What mattered was monthly cost.

4. Current needs - we wanted to fit everyone in comfortably and be able walk everywhere.  Our prior home was driving distance only to some amenities.  Walking has saved us money and increased fitness.

5.  Ability to increase value - we wanted a project house we could invest time and energy in with a resulting increase in value. 

And the last factor for us was locating a multi-family property that subsidized our cost of living and created a buffer for future interest rate hikes.  Not everyone wants that, but it allows us to retire earlier which is nice and will create an income stream in retirement.

My view is similar to DoubleDown's in that the right place is more important than timing the market.  Not having pressure to buy gives you time to find the right place. 

Poorman

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Re: Market timing home purchase (primary residence)
« Reply #15 on: April 23, 2014, 04:03:40 PM »
The fear of being priced out is irrational.  If interest rates rise and you get priced out as a high-income earner, it means everybody else is priced out as well, so prices won't be able to increase any further.  Where will the demand come from if nobody can afford to buy anything?  Eventually, some of those people that overpaid for houses will want to sell (death, divorce, unemployment, etc.) and it will push prices down to a level where enough people can afford to buy again.  A lot of people thought the way you do back in 2005 and they got burned badly.

Whatever you do, just make a sound decision based on rational thinking.  Don't let fear push you into buying an overpriced house that becomes a weight around your neck.
« Last Edit: April 23, 2014, 04:08:37 PM by Poorman »

totoro

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Re: Market timing home purchase (primary residence)
« Reply #16 on: April 23, 2014, 05:07:26 PM »
The fear of being priced out is irrational.  If interest rates rise and you get priced out as a high-income earner, it means everybody else is priced out as well, so prices won't be able to increase any further.  Where will the demand come from if nobody can afford to buy anything?  Eventually, some of those people that overpaid for houses will want to sell (death, divorce, unemployment, etc.) and it will push prices down to a level where enough people can afford to buy again.  A lot of people thought the way you do back in 2005 and they got burned badly.

Whatever you do, just make a sound decision based on rational thinking.  Don't let fear push you into buying an overpriced house that becomes a weight around your neck.

The fear of being priced out of a nice SFH is not irrational.  Housing is changing in Canada, I don't know about the US. 

People in high demand areas here are buying less and spending more to do it and that has been a trend for about forty years now if you look at the price/income ratios.  That is why we have more families in condos, more multi-generational living, and many more homes with suites - look at Vancouver or Toronto.  Where I live suites are more common than not due to the high prices.

Buying a house you can't afford is irrational, but there is no guarantee prices will deflate - or increase. If you need financing interest rates and term need to be weighed against the possibility of a decrease in price.

dragoncar

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Re: Market timing home purchase (primary residence)
« Reply #17 on: April 23, 2014, 05:13:05 PM »
The fear of being priced out is irrational.  If interest rates rise and you get priced out as a high-income earner, it means everybody else is priced out as well, so prices won't be able to increase any further.  Where will the demand come from if nobody can afford to buy anything?  Eventually, some of those people that overpaid for houses will want to sell (death, divorce, unemployment, etc.) and it will push prices down to a level where enough people can afford to buy again.  A lot of people thought the way you do back in 2005 and they got burned badly.

Whatever you do, just make a sound decision based on rational thinking.  Don't let fear push you into buying an overpriced house that becomes a weight around your neck.

The fear of being priced out of a nice SFH is not irrational.  Housing is changing in Canada, I don't know about the US. 

People in high demand areas here are buying less and spending more to do it and that has been a trend for about forty years now if you look at the price/income ratios.  That is why we have more families in condos, more multi-generational living, and many more homes with suites - look at Vancouver or Toronto.  Where I live suites are more common than not due to the high prices.

Buying a house you can't afford is irrational, but there is no guarantee prices will deflate - or increase. If you need financing interest rates and term need to be weighed against the possibility of a decrease in price.

This area has a crazy amount of cash buyers right now, so while I'm a high earner, I don't have enough cash on hand and I don't have nearly as much headroom as my competitors.  I may need to rethink my target demographic again (earlier I was looking in a certain area, and then when I saw four listings sell hundreds over asking in a matter of days, I realized I cannot afford that area despite the teaser listings).

brooklynguy

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Re: Market timing home purchase (primary residence)
« Reply #18 on: April 24, 2014, 07:54:14 AM »
I faced a similar dilemma in my neck of the woods (Brooklyn, NY).  I pulled the trigger and purchased in early 2012, worried that I was buying at the top of the market (prices never really dropped following the financial crisis).  Since Brooklyn has now become one of the hottest real estate markets on the planet, prices have subsequently climbed to staggering new heights.  I continue to question whether this is sustainable, but if I would have held off purchasing trying to time the market I would still be waiting and sitting on the sidelines in a market in which I can no longer afford to buy.  I agree with the sentiment that it makes more sense to run the numbers and buy if it makes sense to do so without being overly concerned about market timing.  If the numbers work for you, the worst that can happen is you end up with less wealth than you could have had.  But you won't end up "badly burned" if the numbers make sense for your situation and you're not stretching yourself on the assumption that prices will definitely continue to climb.

dragoncar

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Re: Market timing home purchase (primary residence)
« Reply #19 on: April 24, 2014, 11:45:20 AM »
I faced a similar dilemma in my neck of the woods (Brooklyn, NY).  I pulled the trigger and purchased in early 2012, worried that I was buying at the top of the market (prices never really dropped following the financial crisis).  Since Brooklyn has now become one of the hottest real estate markets on the planet, prices have subsequently climbed to staggering new heights.  I continue to question whether this is sustainable, but if I would have held off purchasing trying to time the market I would still be waiting and sitting on the sidelines in a market in which I can no longer afford to buy.  I agree with the sentiment that it makes more sense to run the numbers and buy if it makes sense to do so without being overly concerned about market timing.  If the numbers work for you, the worst that can happen is you end up with less wealth than you could have had.  But you won't end up "badly burned" if the numbers make sense for your situation and you're not stretching yourself on the assumption that prices will definitely continue to climb.

Thanks, I'm still leaning towards the approach you mention -- I won't factor any real (after inflation) gain into my rent v. buy calculation.  If it still makes sense to buy, I probably will.

I'm sure the chances of the market going up/down are not 50/50, but I feel like I should treat it as 50/50 since I truly don't have a crystal ball and I don't have a good market-timing track record in the stock market (early years of investing)

KS

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Re: Market timing home purchase (primary residence)
« Reply #20 on: April 24, 2014, 02:17:58 PM »
This area has a crazy amount of cash buyers right now, so while I'm a high earner, I don't have enough cash on hand and I don't have nearly as much headroom as my competitors.  I may need to rethink my target demographic again (earlier I was looking in a certain area, and then when I saw four listings sell hundreds over asking in a matter of days, I realized I cannot afford that area despite the teaser listings).

Thanks for starting this thread! We're in almost the exact same boat, although may or may not be looking in exactly the same areas and price range as you since we work further South, and I think you also likely have higher income. The advice so far is still really helpful though.

Started seriously looking around March of last year, which is when things really started to get extra ridiculous, and we keep hoping they will calm down, but still waiting for that to happen... :)  Definitely take the listing prices with a huge grain of salt! Like you say they are usually "teaser" prices to get more people to come and see it. We still go look at any promising ones that list in our comfort zone, but actual sale price thus far has always been much, much higher than list. I totally get the fear of being permanently priced out of the market, although (luckily? or not) we have not yet seen any homes that we would act on in our price range in nearly a year anyway so we haven't had to question our motives for offering. Patience is very important, and very hard. Good luck to you guys! Even if it means more competition for us, I'm still rooting for anyone who isn't some mystery cash buyer snapping up all the "affordable" homes in the area within days of the listing going up.

dragoncar

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Re: Market timing home purchase (primary residence)
« Reply #21 on: April 24, 2014, 03:22:14 PM »
This area has a crazy amount of cash buyers right now, so while I'm a high earner, I don't have enough cash on hand and I don't have nearly as much headroom as my competitors.  I may need to rethink my target demographic again (earlier I was looking in a certain area, and then when I saw four listings sell hundreds over asking in a matter of days, I realized I cannot afford that area despite the teaser listings).

Thanks for starting this thread! We're in almost the exact same boat, although may or may not be looking in exactly the same areas and price range as you since we work further South, and I think you also likely have higher income. The advice so far is still really helpful though.

Started seriously looking around March of last year, which is when things really started to get extra ridiculous, and we keep hoping they will calm down, but still waiting for that to happen... :)  Definitely take the listing prices with a huge grain of salt! Like you say they are usually "teaser" prices to get more people to come and see it. We still go look at any promising ones that list in our comfort zone, but actual sale price thus far has always been much, much higher than list. I totally get the fear of being permanently priced out of the market, although (luckily? or not) we have not yet seen any homes that we would act on in our price range in nearly a year anyway so we haven't had to question our motives for offering. Patience is very important, and very hard. Good luck to you guys! Even if it means more competition for us, I'm still rooting for anyone who isn't some mystery cash buyer snapping up all the "affordable" homes in the area within days of the listing going up.

Yeah, I'm lucky in that I'm not looking in the hottest markets (don't need to commute to the south bay... yet?**).  Also, I really should start looking at sold prices instead of the teasers -- but if it's been on the market for a couple weeks then it's probably not a teaser any more.  I can probably get a loan for 1-2 million and buy a great place, but I don't consider that affordable given my desire to retire early.

Which leads into the next segment in my ongoing housing search -- do I deserve a facepunch for looking at expensive houses?  Right now, I'm seeing some nice 3-br places sold for around $800k (2-br availability is few to none).  Our carrying cost on $800k would be around $2500/mo, which looks pretty nice compared to, say, $1800 for a 1-br rental in the East Bay.  My "half" of $800k would only set back my retirement a couple years.

On the other hand, there are $400k places available in less-ideal areas (more crime, longer commute, etc.)  My "half" of that would let me retire now, although I'll probably keep working a few years anyways to help my SO along her path to FI (she's basically asset-less but has good earning potential and has a semi-mustachian outlook with a desire to FIRE).

** of course the vast majority of high-paying jobs for me are indeed in the south bay -- so if I ever decide I want to work another 5-25 years, I may end up working down there anyways, which would make an east bay purchase pretty antimustachian.
« Last Edit: April 24, 2014, 03:25:15 PM by dragoncar »

Poorman

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Re: Market timing home purchase (primary residence)
« Reply #22 on: April 24, 2014, 04:41:43 PM »
Just curious how you figure carrying costs at $2,500?  If you put 20% down that would be a $640k mortgage.  Assuming a 4.5% rate and adding property tax & insurance, I'm getting $4,000 per month.  I think you might be overestimating the tax advantages.  Remember the standard deduction negates the first $12,400 of interest deductions, unless you have other sources of deductions.

dragoncar

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Re: Market timing home purchase (primary residence)
« Reply #23 on: April 24, 2014, 04:46:58 PM »
Just curious how you figure carrying costs at $2,500?  If you put 20% down that would be a $640k mortgage.  Assuming a 4.5% rate and adding property tax & insurance, I'm getting $4,000 per month.  I think you might be overestimating the tax advantages.  Remember the standard deduction negates the first $12,400 of interest deductions, unless you have other sources of deductions.

My state income taxes are more than the standard deduction (you are in CA, so you should understand this).  I will probably be under AMT (damn, I keep forgetting I'm NOT), but here's how it would normally look:

$800k house
4.3% jumbo mortgage
1.2% property tax
40% tax bracket

$800000*(4.3%+1.2%)*(1-40%)=$2200/mo

AMT, insurance (I have no idea - $100/mo?) and maintenance (I have no idea - 1% is typically quoted, but I think for DIY mustachians with expensive land it should be much less) complicates things, but the above is valid for right now.  I may go in an out of AMT over the next decade -- really depends on other factors.

edit: obviously the down payment can be broken out, but I like assuming 100% financing in my rent v. buy calculations because any choice to pay down the mortgage (e.g. a 20% down payment) earns me a return at the risk-free rate.  Some people may assume higher returns, but I don't consider say 8% returns in the stock market to carry the same risk as paying down my mortgage.  30-year treasuries would be more comparable, but in that case, it's close to the tax-adjusted mortgage rate anyways.

edit again:  I also mention the $400k places above.  Obviously those shouldn't be compared to rent of $1800/mo -- they are in cities with lower rent so it's a whole different rent vs. buy calculation).
« Last Edit: April 24, 2014, 05:46:07 PM by dragoncar »

Poorman

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Re: Market timing home purchase (primary residence)
« Reply #24 on: April 24, 2014, 05:04:54 PM »
Ok, you're not including principal repayment as part of the monthly cost so that's the difference.  That makes more sense, although I think you should include it when comparing to rental cost.  There's still an opportunity cost to the principal amount because you could be investing that money instead, and you don't have the option of not paying it.

dragoncar

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Re: Market timing home purchase (primary residence)
« Reply #25 on: April 24, 2014, 05:27:04 PM »
Ok, you're not including principal repayment as part of the monthly cost so that's the difference.  That makes more sense, although I think you should include it when comparing to rental cost.  There's still an opportunity cost to the principal amount because you could be investing that money instead, and you don't have the option of not paying it.

Yes, I am talking about the carrying cost** -- the principle I get back if I sell.  I don't personally agree with including principle repayment when comparing rents, but in this case principle repayment would be about $1k/mo.  Principle opportunity cost is set equal to the tax-adjusted mortgage rate, as mentioned above.  Thus, it should be compared to perhaps a $3500/mo rental.

Of course the above is back-of-the-envelope in order to get a rough sense.  I would do a full NYT analysis before an actual purchase, but I still would NOT assume a full 8% return on investment.

I did look, and can rent a similar house for around $4-$6k/mo.  Thus, I'd say it's still definitely a buy on the buy v. rent front.  The real face-punch question isn't buy vs. rent, it's buy this vs. buy or rent something cheaper.


** apparently I'm using this phrase incorrectly?  I view principle repayment as essentially purchasing a 30-year bond at the mortgage rate, because it reduces my interest payments over time.  In other words, not including the principle repayment in my "monthly costs" is a way of accounting for the fact that my mortgage will be gone in 30 years (whereas when renting I would still be paying rents in 30 years).  Of course, bond interest is also taxed at my marginal tax rate.
« Last Edit: April 24, 2014, 05:57:19 PM by dragoncar »

brooklynguy

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Re: Market timing home purchase (primary residence)
« Reply #26 on: April 24, 2014, 07:40:50 PM »

Yeah, I'm lucky in that I'm not looking in the hottest markets (don't need to commute to the south bay... yet?**).  Also, I really should start looking at sold prices instead of the teasers -- but if it's been on the market for a couple weeks then it's probably not a teaser any more.  I can probably get a loan for 1-2 million and buy a great place, but I don't consider that affordable given my desire to retire early.

Which leads into the next segment in my ongoing housing search -- do I deserve a facepunch for looking at expensive houses?  Right now, I'm seeing some nice 3-br places sold for around $800k (2-br availability is few to none).  Our carrying cost on $800k would be around $2500/mo, which looks pretty nice compared to, say, $1800 for a 1-br rental in the East Bay.  My "half" of $800k would only set back my retirement a couple years.

On the other hand, there are $400k places available in less-ideal areas (more crime, longer commute, etc.)  My "half" of that would let me retire now, although I'll probably keep working a few years anyways to help my SO along her path to FI (she's basically asset-less but has good earning potential and has a semi-mustachian outlook with a desire to FIRE).

** of course the vast majority of high-paying jobs for me are indeed in the south bay -- so if I ever decide I want to work another 5-25 years, I may end up working down there anyways, which would make an east bay purchase pretty antimustachian.

My Brooklyn row house is absurdly expensive by national standards, but I still think it is consistent with a mustachian lifestyle.  Living in a global city offers lifestyle arbitrage opportunities that aren't available elsewhere.  I take full advantage of the benefits NYC has to offer but my family's spending level (other than housing expense) is on par with MMM (in absolute terms, without any cost of living adjustments).  The benefit of high local incomes doesn't end once you attain FIRE and quit your job -- there are more high income side hustles and other "work while you're retired" opportunities available than in your average city.  I feel less compelled to spend money on travel because of the abundance of culture and diversity in my own back yard -- for example, world class cuisine of any ethnicity imaginable is available within easy walking, biking or subway-riding distance (and, since the best ethnic food is usually found in the immigrant enclaves, there tends to be an inverse relationship between quality and cost).  My absurdly expensive house is also exceedingly small and energy efficient by national standards, and is a multi-family with a high income rental apartment that offsets part of my mortgage expense and will provide a significant share of my early retirement income.  So, I think it is possible to live (and purchase expensive real estate) in NY, or SF, or the expensive city of your choice, without giving up your mustachian bona fides (or earning a face punch).  Or maybe all of this is simply rationalizing what is really just my desire to remain in the city I was born in and am deeply in love with.

totoro

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Re: Market timing home purchase (primary residence)
« Reply #27 on: April 24, 2014, 09:50:39 PM »
My absurdly expensive house is also exceedingly small and energy efficient by national standards, and is a multi-family with a high income rental apartment that offsets part of my mortgage expense and will provide a significant share of my early retirement income.  So, I think it is possible to live (and purchase expensive real estate) in NY, or SF, or the expensive city of your choice, without giving up your mustachian bona fides (or earning a face punch). 

Have you gone through the numbers?

brooklynguy

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Re: Market timing home purchase (primary residence)
« Reply #28 on: April 25, 2014, 08:12:04 AM »
My absurdly expensive house is also exceedingly small and energy efficient by national standards, and is a multi-family with a high income rental apartment that offsets part of my mortgage expense and will provide a significant share of my early retirement income.  So, I think it is possible to live (and purchase expensive real estate) in NY, or SF, or the expensive city of your choice, without giving up your mustachian bona fides (or earning a face punch). 

Have you gone through the numbers?

Yes, I ran the numbers on my house as far as rent vs. buy and it was a no-brainer due to a rare combination of circumstances in my area:  low property taxes, a relatively low purchase price (for this particular neighborhood) due to the house's poor condition when I bought it, and the ability to rent out a unit.  I think in most cases in NYC the numbers will favor renting, especially because co-operative apartments (the most prevalent form of owned housing here) get shafted when it comes to taxes.

totoro

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Re: Market timing home purchase (primary residence)
« Reply #29 on: April 25, 2014, 08:49:06 AM »
My absurdly expensive house is also exceedingly small and energy efficient by national standards, and is a multi-family with a high income rental apartment that offsets part of my mortgage expense and will provide a significant share of my early retirement income.  So, I think it is possible to live (and purchase expensive real estate) in NY, or SF, or the expensive city of your choice, without giving up your mustachian bona fides (or earning a face punch). 

Have you gone through the numbers?

Yes, I ran the numbers on my house as far as rent vs. buy and it was a no-brainer due to a rare combination of circumstances in my area:  low property taxes, a relatively low purchase price (for this particular neighborhood) due to the house's poor condition when I bought it, and the ability to rent out a unit.  I think in most cases in NYC the numbers will favor renting, especially because co-operative apartments (the most prevalent form of owned housing here) get shafted when it comes to taxes.

Sorry - not meaning to pry.  The reason I asked is because our factors were similar and buying was much more favourable as well despite the fact that homes, on average here, are 6.5x income. 

When you add in historic appreciation rates on a high value property over the longer term, rental income off-setting mortgage payments, tax deductions from the rental suite and sweat equity the ROI becomes very attractive. 

As I've posted elsewhere, I think it is interesting how much better off financially you can end up by buying bigger, more expensive multi-family property in an expensive area rather than the smallest house for the least amount in a low cost area.   Property taxes are a big factor in the US it seems - our rates are generally much lower than yours (ie..5% of assessed).

Given the transaction costs of buying and selling, this may also favour buying one higher value multi unit if you are interested in holding real estate.

This particularly applies to the accumulation phase I suppose - but once it is paid off you have an income stream into retirement. 

jba302

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Re: Market timing home purchase (primary residence)
« Reply #30 on: April 25, 2014, 09:07:22 AM »
The only thing that I can share is that my ex bought her house at the absolute top of the market because "prices are only going up and you have to get in now". Then they crashed. So based on that, look for the most animated real estate agent you can find and do the opposite of what he/she is suggesting.

dragoncar

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Re: Market timing home purchase (primary residence)
« Reply #31 on: April 25, 2014, 10:10:11 AM »
The only thing that I can share is that my ex bought her house at the absolute top of the market because "prices are only going up and you have to get in now". Then they crashed. So based on that, look for the most animated real estate agent you can find and do the opposite of what he/she is suggesting.

How did it turn out?

jba302

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Re: Market timing home purchase (primary residence)
« Reply #32 on: April 25, 2014, 10:48:17 AM »

How did it turn out?

The house or the ex?

The house is still underwater by about 15% based on LKQ sales in the area. After almost 7 years. And has been for sale for a little over 3 months right now. I know this because I just bought a house with my wife and we had to look up my old addresses, amazingly zillow was easier than anything else in that regard.

I assume the ex is fine, but given how the house sale is going i imagine stressed :).

dragoncar

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Re: Market timing home purchase (primary residence)
« Reply #33 on: April 25, 2014, 10:55:46 AM »

How did it turn out?

The house or the ex?

The house is still underwater by about 15% based on LKQ sales in the area. After almost 7 years. And has been for sale for a little over 3 months right now. I know this because I just bought a house with my wife and we had to look up my old addresses, amazingly zillow was easier than anything else in that regard.

I assume the ex is fine, but given how the house sale is going i imagine stressed :).

Damn, down 15% or underwater 15%?  No did mean the house situation but I guess I should have realized you don't keep in touch.

jba302

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Re: Market timing home purchase (primary residence)
« Reply #34 on: April 25, 2014, 11:40:04 AM »
(estimated sale price based on lkq)/(purchase price) = right around 85%. I think (net sale price)/(current mortgage) will be 90%, maybe even 95% if I want to be optimistic about it. Pretty big loss overall, significantly worse than renting would have been.

Amusingly that was one of our first fights (she bought it about a month after we started dating). I'll take a 7 year told you so haha.

dragoncar

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Re: Market timing home purchase (primary residence)
« Reply #35 on: April 25, 2014, 12:00:01 PM »
(estimated sale price based on lkq)/(purchase price) = right around 85%. I think (net sale price)/(current mortgage) will be 90%, maybe even 95% if I want to be optimistic about it. Pretty big loss overall, significantly worse than renting would have been.

Amusingly that was one of our first fights (she bought it about a month after we started dating). I'll take a 7 year told you so haha.

Good cautionary tale for geographical areas in decline.  Just reinforces my plan to get something with payments that fit my ER plan, and that I wouldn't want to sell (although appreciation is nice, it wouldn't directly affect me to be underwater -- might actually lower my property taxes).

KS

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Re: Market timing home purchase (primary residence)
« Reply #36 on: April 26, 2014, 04:11:24 PM »
I can probably get a loan for 1-2 million and buy a great place, but I don't consider that affordable given my desire to retire early.

Quote
Just reinforces my plan to get something with payments that fit my ER plan, and that I wouldn't want to sell (although appreciation is nice, it wouldn't directly affect me to be underwater -- might actually lower my property taxes).

Both good ways to look at the situation, in my opinion! This is kind of our plan too. Just because the loan guy took a look at our credit scores and stash and offered us a rather obscene pre-approval amount, doesn't mean we haven't run our own numbers to find a price we're more comfortable with the monthly payments on. And we're trying to only look at places we could stay in long term, ideally forever. As to looking at cheaper but less desirable areas, maybe if the math really checks out... But personally for me with how high the prices still are in even those areas I'd rather not commit to being stuck there long term. Don't mind as much living somewhere that isn't ideal if I'm renting and can move if it gets worse, but would hate to be locked in to a place I don't love. (Especially since those are the areas where home values tend to get hit harder when there's a downturn.)

East Bay to South Bay commute is definitely not fun I think, so I hope you never have to do it! I'm currently doing sort of the opposite, south peninsula to lower east and the traffic going the other way always looks really miserable.

Also, if any construction-handy, loaded mustachian folks are following this thread and want a South Bay home in a great neighborhood for "cheap" this place just showed up on the market but is WAY out of my limited fixer-upper skill set: http://www.redfin.com/CA/Sunnyvale/764-Kilkenny-Ct-94087/home/759333

yeesh... makes me wish I knew more about whether it's as bad as it looks or not! If all the black on the walls is mold and not just grubbiness it's probably pretty bad though. Will be curious to see what it goes for and if it pops back up in a few months for $1million+ after being fixed up!

AccidentalMiser

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Re: Market timing home purchase (primary residence)
« Reply #37 on: April 26, 2014, 04:26:33 PM »
On the other hand, we wouldn't buy anything that we wouldn't want to stay in for decades, or that we couldn't afford on one salary.

Given this sentence, it doesn't matter what happens to a market you are not participating in (i.e. after you have bought a house to live in and you're not buying another.)

I also live 22 miles from work because RE prices in the city are double what they are here.  I compensate by driving a cheap car.


dragoncar

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Re: Market timing home purchase (primary residence)
« Reply #38 on: April 26, 2014, 08:09:58 PM »
On the other hand, we wouldn't buy anything that we wouldn't want to stay in for decades, or that we couldn't afford on one salary.

Given this sentence, it doesn't matter what happens to a market you are not participating in (i.e. after you have bought a house to live in and you're not buying another.)

I also live 22 miles from work because RE prices in the city are double what they are here.  I compensate by driving a cheap car.

In the outlying towns, I can still take a commuter train to work with my transit benefit checks (they won't cover 100%, but most of the cost).  Ideally, I'd like to be in biking distance to the station.

clarkfan1979

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Re: Market timing home purchase (primary residence)
« Reply #39 on: April 27, 2014, 12:21:49 PM »
If you are buying the house as an investment, I would say marketing timing is important. If you are buying a house because you want to have a specific type of home to live, timing is not important. I buying houses based on investment so timing matters to me. I am a slow flipper. I like to buy houses that need work, live in them for 5 years and then move onto the next project. I bought house #2 a couple years ago and I'm trying to plan out house #3. Good luck.

dragoncar

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Re: Market timing home purchase (primary residence)
« Reply #40 on: April 27, 2014, 10:37:05 PM »
If you are buying the house as an investment, I would say marketing timing is important. If you are buying a house because you want to have a specific type of home to live, timing is not important. I buying houses based on investment so timing matters to me. I am a slow flipper. I like to buy houses that need work, live in them for 5 years and then move onto the next project. I bought house #2 a couple years ago and I'm trying to plan out house #3. Good luck.

Good stuff - I'm hoping to stay forever, but would like to optimize my "investment" in the case where unexpected circumstances lead to a move (recognizing that life happens and things sometimes change)