RE market throwing a wrench in my FIRE plans--advice??

[4tify]

I need some input here. I've been targeting October 1st as my quitting day at work, though it's possible I'll morph that into a contract situation. Either way I'd be ending my W-2 situation.

I currently rent in HCOL and had been planning to buy a home in another area in the West (WA, OR, MT, CO) in the area of 500k, which was in line with my 3.5% SWR plan. The one I've been working towards for over a decade!

But now that covid has lit a match under the RE market in all my target cities all those 500ks are 700-800ks. If I retire as planned I can afford a 400k mortgage plus 220k set aside for down payment. But this gets me a not ideal situation.

As I see it here are my options:

1. Get over the idea of owning a home and just keep renting
2. OMY and save more for down payment (probably about 100k more) and see if the market cools down a bit as more inventory comes on line
3. Buy a place I don't really love and suck it up OR rent it out for a couple years in hopes there's some appreciation and then move that equity into a better house (although there could be some issue qualifying for a loan at that point)
4. Get over the idea of quitting now and slog it out for 2-5 (?) more years until my SWR aligns with the new reality (assuming RE levels off a bit)

I'm at a bit of a loss as none of the options I'm seeing are amazing. I do not HATE my job, which gives me some flexibility, but I'm a little annoyed the market threw such a big wrench in my plan. I know "that's life" but...damn it!

[maizefolk]

I currently rent in HCOL and had been planning to buy a home in another area in the West (WA, OR, MT, CO) in the area of 500k, which was in line with my 3.5% SWR plan. The one I've been working towards for over a decade!

But now that covid has lit a match under the RE market in all my target cities all those 500ks are 700-800ks. If I retire as planned I can afford a 400k mortgage plus 220k set aside for down payment. But this gets me a not ideal situation.

If you are using a 3.5% withdrawal rate and current 30 year mortgage interest rates, you have approx. $575k set aside to cover the principal and interest on your mortgage, correct?

While I'd argue against counting principal repayment as part of your total spending for calculating ones safe withdrawal rate (obviously opinions can and do differ on this). But if you do want to approach the mental accounting that way, if you combine the money you'd use to pay your mortgage with the $220k you have set aside for your downpayment, it would seem you could afford to make an all cash offer up to $795k, couldn't you?

[Dicey]

Never buy  a place you don't really love unless what you don't love about it is cosmetic and within your skill set to fix.

[moneytaichi]

There are many mid-size cities in Western US where you can still buy houses under $400K. If you are FIREed, a mid-size city may be better due to slower pace, friendlier neighborhood, and cheaper. The internet, e-commerce and big stores can make them less remote too. They can be around 1-2 hours drive to the big cities. If I were in your shoes, I'd cast the net wider and check out other places.

If it makes you feel better, keep working 1-2 years, especially if you can negotiate a remote working :-)

Good luck!

P.s. Apply mortgages while you have a job. Otherwise it's so much harder and more expensive without the job. The bankers still don't get FIRE people is much safer than people with jobs, which can go away anytime.

[Morning Glory]

Just keep renting for a year or two until this real estate frenzy passes. Check out some lower col cities that you might like. No need to panic. There's plenty of nice places where those 500ks are 200k.

I don't know your situation with kids etc but check out the air bnb thread. I would totally do that if I didn't have to worry about kids school. (One thing I learned from 2020 is that homeschooling would not work for my family).

[Dicey]

Working until you figure this out will let you get a mortgage more easily. If I was moving to a new place, the last thing I'd want is to dump a load of cash in a place I didn't end up liking, then being trapped if/when the market cools.

[Morning Glory]

I usually agree with Dicey but my plan is to move to a new place and rent while I see if I like it. By that time the market will hopefully have cooled off a bit. It's a big leap for me because I've been a homeowner my whole adult life. I have felt some pressure to decide a place now while I have a job because I'll have an easier time with mortgages, but I don't know where I want to go and my kids have special needs so I really want to try before I buy to see if I like the school system.

3.5% wr is very conservative. Can you post your fire budget and total assets?

[4tify]

I currently rent in HCOL and had been planning to buy a home in another area in the West (WA, OR, MT, CO) in the area of 500k, which was in line with my 3.5% SWR plan. The one I've been working towards for over a decade!

But now that covid has lit a match under the RE market in all my target cities all those 500ks are 700-800ks. If I retire as planned I can afford a 400k mortgage plus 220k set aside for down payment. But this gets me a not ideal situation.

If you are using a 3.5% withdrawal rate and current 30 year mortgage interest rates, you have approx. $575k set aside to cover the principal and interest on your mortgage, correct?

While I'd argue against counting principal repayment as part of your total spending for calculating ones safe withdrawal rate (obviously opinions can and do differ on this). But if you do want to approach the mental accounting that way, if you combine the money you'd use to pay your mortgage with the $220k you have set aside for your downpayment, it would seem you could afford to make an all cash offer up to $795k, couldn't you?

Yes I could afford that, but it would eat up a great deal of the money I had earmarked for travel and hobbies.

[4tify]

I usually agree with Dicey but my plan is to move to a new place and rent while I see if I like it. By that time the market will hopefully have cooled off a bit. It's a big leap for me because I've been a homeowner my whole adult life. I have felt some pressure to decide a place now while I have a job because I'll have an easier time with mortgages, but I don't know where I want to go and my kids have special needs so I really want to try before I buy to see if I like the school system.

3.5% wr is very conservative. Can you post your fire budget and total assets?

2.5M Total assets
$87,500/yr spending

[maizefolk]

Yes I could afford that, but it would eat up a great deal of the money I had earmarked for travel and hobbies.

Could you expand a bit on this? Obviously this means I am misunderstanding your math a bit, as from what you'd posted it sounds you should be able to pay that much while only reducing your annual spending by the amount you had earmarked for paying your mortgage.

[Simpleton]

I need some input here. I've been targeting October 1st as my quitting day at work, though it's possible I'll morph that into a contract situation. Either way I'd be ending my W-2 situation.

I currently rent in HCOL and had been planning to buy a home in another area in the West (WA, OR, MT, CO) in the area of 500k, which was in line with my 3.5% SWR plan. The one I've been working towards for over a decade!

But now that covid has lit a match under the RE market in all my target cities all those 500ks are 700-800ks. If I retire as planned I can afford a 400k mortgage plus 220k set aside for down payment. But this gets me a not ideal situation.

As I see it here are my options:

1. Get over the idea of owning a home and just keep renting
2. OMY and save more for down payment (probably about 100k more) and see if the market cools down a bit as more inventory comes on line
3. Buy a place I don't really love and suck it up OR rent it out for a couple years in hopes there's some appreciation and then move that equity into a better house (although there could be some issue qualifying for a loan at that point)
4. Get over the idea of quitting now and slog it out for 2-5 (?) more years until my SWR aligns with the new reality (assuming RE levels off a bit)

I'm at a bit of a loss as none of the options I'm seeing are amazing. I do not HATE my job, which gives me some flexibility, but I'm a little annoyed the market threw such a big wrench in my plan. I know "that's life" but...damn it!

I think the threat is that rents may equally rise with real estate if the market doesn't essentially crash from here. This would put you in the same boat regardless of renting or buying.

My vote would be OMY - but I think I am very conservative and like a huge margin of safety in my calculations compared to many here.

[Morning Glory]

Option 5. Rent in a few places until you find one you really like. Do the air bnb thing if you don't have to worry about kids school. Buy a house after the RE market cools down, which it always does.

This is just like last year when people wanted to sell their stocks before they dropped more. Now it's dollars that they're worried about, not stocks. Take a deep breath. Go for a walk or something.

[4tify]

Yes I could afford that, but it would eat up a great deal of the money I had earmarked for travel and hobbies.

Could you expand a bit on this? Obviously this means I am misunderstanding your math a bit, as from what you'd posted it sounds you should be able to pay that much while only reducing your annual spending by the amount you had earmarked for paying your mortgage.

Sure. I don't keep a super detailed budget anymore because I know basically what I spend in aggregate each year, but here's the plan. If some lines are over/under I can move money around.

Housing (mortgage, taxes, insurance--assume 350k loan)   $2,000
Groceries/Dining   $800
Transportation   $150
Utilities   $100
Hobbies/travel/entertainment    $2,000
Insurance    $250
Telephone/Internet   $150
Merchandise   $250
Health care   $500
Personal Care   $400
Major Expense Fund   $500
Misc   $250
Taxes   $500
Total.   $7850/mo

If I assume an 800k purchase that brings the mortgage up by about $1000/mo, which would have to come out of my travel (which I know is high but in the early years I do expect to spend this much), or by leaning out extras like personal care & dining. Taxes and healthcare are a little fuzzy so there might be some savings there, but I've got them at 1k just in case. Major expense fund is to plan for new furnaces, cars, etc.

BTW this is a cool map of housing prices I just found https://www.newyorkfed.org/research/home-price-index

[PMJL34]

Personally, I wouldn't feel comfortable retiring as a renter in a city you can't afford with the set intention of buying. It's one thing to rent an airbnb for a month or two to get a feel for the city before purchasing, but OP can't comfortably buy so this doesn't work.

For everyone who is saying just go rent and wait for market to cool off. Please show me proof that this method will work out with certainty.

Unfortunately, my vote is OMY or pick a cheaper city.

Best of luck!

[jeromedawg]

For everyone who is saying just go rent and wait for market to cool off. Please show me proof that this method will work out with certainty.

I mean, isn't this kind of like asking for a working crystal ball? ;)

[Morning Glory]

For everyone who is saying just go rent and wait for market to cool off. Please show me proof that this method will work out with certainty.

I mean, isn't this kind of like asking for a working crystal ball? ;)

Not a crystal ball, just some historical data that might be reassuring.  The market always slows down when school starts because fewer people want to buy houses and move during the school year. Nobody likes to move in the winter either, so there will be less competition for houses at that time if you have a cold climate. These variations are so predictable that they are adjusted for when housing market statistics are reported. These are not all high quality articles but they do indicate a pattern here. Hell, the value of my house on Zillow swings by about 100k depending on time of year.

Article from 2020:
https://www.nerdwallet.com/blog/best-month-buy-home/

Article from 2013:
https://www.jstor.org/stable/24862535?seq=1

Article from 2011:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2785400

Article from 2008:
https://slate.com/culture/2008/09/an-economics-mystery-why-houses-cost-more-in-summer-has-finally-been-solved.html

Even he who must not be named says that houses are cheaper in the winter:
https://www.financialsamurai.com/winter-best-time-to-buy-a-house/

[jeromedawg]

For everyone who is saying just go rent and wait for market to cool off. Please show me proof that this method will work out with certainty.

I mean, isn't this kind of like asking for a working crystal ball? ;)

Not a crystal ball, just some historical data that might be reassuring.  The market always slows down when school starts because fewer people want to buy houses and move during the school year. Nobody likes to move in the winter either, so there will be less competition for houses at that time if you have a cold climate. These variations are so predictable that they are adjusted for when housing market statistics are reported. These are not all high quality articles but they do indicate a pattern here. Hell, the value of my house on Zillow swings by about 100k depending on time of year.

Article from 2020:
https://www.nerdwallet.com/blog/best-month-buy-home/

Article from 2013:
https://www.jstor.org/stable/24862535?seq=1

Article from 2011:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2785400

Article from 2008:
https://slate.com/culture/2008/09/an-economics-mystery-why-houses-cost-more-in-summer-has-finally-been-solved.html

Even he who must not be named says that houses are cheaper in the winter:
https://www.financialsamurai.com/winter-best-time-to-buy-a-house/

It will definitely be interesting come September. My realtor pointed out that on top of the moratoriums ending (presumably) end of June, COVID-related unemployment benefits (at least in CA) are slated to end in September which coincides with after school starting.

I'm very curious to see how things will look from Sept 2021 through end of year around here, and this factor makes me want to stay in our current tiny apartment rental and keep braving through it just for the opportunity to land something then... but I feel like it will be quite stressful doing that - I have a feeling there will still be higher than normal amounts of activity even then (I would expect things to be relatively proportional in terms of buyer pools for any given home). Right now, we have the option to move into a bigger 4/3 home and though it's $1k more than we're currently paying, I think it will just be relieving after being 'trapped' in an upstairs 2/1 apartment for nearly a year with 2 small kids who have tons of pent-up energy :P

But, I have a feeling the "desperation" and "FOMO" with "needing" to buy a home is just going to spillover - we seem to have an excess of buyers in this mode (battered, bruised and frustrated) who just want to get something and are probably all thinking the same thing: "let's just wait until the end of the year when things slow down"
While the relative numbers of buyers may not be as high in Q3 and Q4 I think the buyer pools are still going to be big... e.g. *just* an example here but instead of pools of say 12-15 buyers on average that you might see now, maybe that means pools of 8-12 buyers in Q3/Q4. Regardless, compared to prior years the pools of buyers were maybe 4-8 buyers at most. These figures probably hugely vary depending on market and location of course.

[SunnyDays]

I vote for #2. Covid is close to being over and in a year the situation could look a whole lot different.  There will be nothing to drive up demand any more than normal and the people that bought in frenzied bidding wars may find themselves over their heads, especially if interest rates edge up. 

There is some signs of things going flat in Toronto; one agent was expecting multiple bids on a particular condo as is the norm, and instead received not even one.  He was very surprised.

[Abe]

I don’t think prices are going to come back down to the level you are wanting. I’d be surprised if houses lose 30% of their value in the foreseeable future, barring some major economic collapse again that will also reduce your investment. Options are to look at cheaper areas, or work longer to earn enough to pay for the more expensive house. Other option is to buy a fixer-upper and do it yourself with all your free time post-retirement. Also you may want to trim your food and personal care budget if possible.