Real Estate in 2024?

[MBAVisionary]

I searched for similar threads with this topic but came up short. I also know I'm a little crazy with overthinking situations and long-winded... hopefully this isn't hard to follow.

Background: I know people say you should invest in Real Estate when you're financially able to... but this feels like the worst possible time to buy. Take one of the more affordable homes (not a condo) in my area. It's $325k, 4bedrooms, 2 bathrooms, slightly over 1700 sq. ft. Realistically I could save around $16k toward a down payment by the time my lease is up. It's very similar to a house I once co-owned 2013-2014. The big difference is then the house was ~$142k and our combined income was $170k not $325k value and $145k income. Same builder / same layout and sq footage. I see affordable places in the sticks but no one I knew lives out there.

Legally speaking I'm single and wouldn't be renting rooms out to anyone so all the burden would fall entirely on me. I also think I earn too much for downpayment assistance in my state, but nowhere near enough saved to avoid PMI. That would be $65k with today's prices and easily a 2+ year target given my current expenses. This is also on the lower end of the spectrum in terms of homes.

Current lifestyle: Rent a 1br low frills apartment ~$1240/mo, same place since December 2014. It's mostly quiet, clean, somewhat safe though a woman was fatally shot recently in a fluke road rage incident. Location isn't horrible but also not ideal. No kids, no pets. I don't own a ton of items. The largest expense I have is my vehicle, I like parking close to my front door without taking elevators or walking to a garage so some of these super large apartment communities are a big turnoff.

Napkin Math: Recurring monthly costs add up to $1019/mo or $12k/yr between HOA, mortgage insurance, property taxes, homeowners insurance. Then separately buyer's agent fee is ~$10k. The $16k down payment drops the amount financed to $307,800. On a 30 year fixed 7.2% interest on that is $22,162 per year to start with or $1,847/mo. $1019+$1847=$2,866/mo not including utilities, maintenance, or anything going to principal. I'm estimating all that other stuff to be $1000-1300/mo.

Questions / Thoughts:
1. Is there something I'm missing in this equation I should be thinking about?
2. Should I be concerned the tax assessment 2 years ago was over $100k less than the asking price which suggests to me that the home is overpriced? Even the 2023 assessment is $60k under the asking.
3. Do condos really suck as much as people say they do? Association fees, overly strict rules, drama, one-time assessments to cover major maintenance, lower appreciation rates vs stand-alone or townhomes come to mind.
4. Anyone 40+ who is still renting because it doesn't make sense for their lifestyle? Ask because in 10 years I could be a millionaire and still rent my home. That sounds weird but lots of people on here don't follow traditional rules of what is considered normal.
5. I looked at some homes for rent as opposed to buying. $2400/mo starting for anything decent. Still double what I pay now or more.
6. Several people I know are in the real estate industry. They seem biased and overly pushy on why I should buy now and not wait. Locking myself into a 7.2% interest rate at near all-time home values seems like a bad idea.
7. Saving is an option. I haven't really planned to buy a home and having 50% down or some other super high % would be a way to eliminate PMI, default risk, and being in a potentially high interest rate environment. That could mean staying in this apartment another 3 years or doing something else similar.
8. Buying a foreclosure or short-sale home is also a potential option down the line depending on how the economy or housing market goes. Closing is usually longer on those and sometimes the previous tenants destroy the property before leaning.
9. I hate owing money to banks, my car loan is a small % of my income but that is temporary. A 30 year loan seems like a huge commitment. I'll be 70 if I didn't pay it off early, that's too old in my opinion. Taxes would still be recurring every year even after it's paid off. More overhead..
10. If I lose my job for whatever reason there is a possibility I'd have to relocate. I mention this because there have been multiple rounds of layoffs the last 4 years. Statistically speaking I think my shelf life at my current company is probably 4 years or less. Some people stay much longer but it's rare.
11. If homes were around $220-$240k the math would be more palatable but we aren't there now, maybe not ever.

 

[pjigar]

Disclaimer: I haven't read all your questions carefully but I just wanted to share a few things:
If you have a stable job (i.e. don't sell in less than 5 years) and 20 percent down payment then any time is the right time to buy a primary home. Simply because the rent and/or house prices will normalize in a few years making the renting a more expensive option after 5 years. This is a general rule of thumb.

And never look at past prices, you may never be able to pull the trigger in that case. If price is higher than the past then you are scared that it may drop. If price is lower than the past then you may think it will drop further. It is a futile waiting game.

Here is our home ownership history:
* House 1: Buy: $103K, Sell: $134K, Owned: 1.5 years (Climbing up side of the housing bubble)
* House 2: Buy: $222K, Sell: $290K, Owned: 7 years (The lost decade)
* House 3: Buy: $385K, Sell: $730K, Owned: 8 years

PS: The house prices generally always go up simply due to inflation. But there are couple of magical things working FOR you:
1. Your interest expense is fixed (which can be brought down with a refinance) but you are paying it with a devalued dollar every year goes by.
2. Your income will keep pace with the inflation but your mortgage will stay fairly constant (i.e. going down in a real dollar terms) baring local tax changes.

FWIW we were scared to death when we bought every single house looking at the mortgage payment compared to our income and prevailing rent prices. But fast forward a few years and the mortgage payment looked like a deal compared to our income. Every time.

 

[tryan]

Sounds like analisis paralisis ....The only real question to ask is whether you can commit to staying long term. Time is your friend in a real estate investment.

If not keep renting and saving so you can put down 20% WHEN your ready to settle long term.

 

[tmitchell]

It's impossible to say what will happen in the future, but I'm on the side of renting, especially if it's between a house and condo.

I owned a condo for 4 years and it was a major headache. Half the residents were elderly/poor compared to the new buyers and refused to raise the HOA fees to pay for very badly needed repairs, like a roof. At one point I had water falling into my place from heavy rains. Special assessments came twice for $5k each time for things like fixing an old elevator and plumbing issues. So re: condo living I'd due as much diligence as you can, but even that might not get you to the full truth. Make sure there's plenty of reserve money in the HOA at the very least.

Financially, the place looked great on paper since the neighborhood had a ton of money pouring in from businesses--office buildings, expensive gyms, etc. Then our friend Covid came along and that all died along with it. I sold in 2020 and basically broke even, but timed that incorrectly because the place actually went UP about $100k in value despite a persistent homeless situation in the area.

Now I live in a rent controlled apartment that costs less and I don't have to worry about repairs. Granted, the place isn't perfect, buy my condo wasn't either. We've made some cosmetic improvements that help. I admit I did enjoy the "feeling" of being a homeowner, but the headache wasn't worth it and I don't regret selling, other than wishing I'd come out $100k ahead.

Some day I'd like to own a house, but that's not financially possible where I live unless I want to be house poor. I prefer my freedom. Some friends got into a great house in MT during the pandemic and will probably make out very well if they ever sell. However they've been in a small war with their neighbor the whole time because of an illegal wall he built, and also being a slob and creating eye sores in his yard--which is supposed to be their beautiful view of MT nature.

Maybe this is all just bad luck. Hope yours is better if you decide to jump in. The feeling was great at first, and I know a lot of people who've loved their homes. In the end I'd just caution you to do a lot of research before making the commitment.

 

[pb4uski]

You may want to check out the New York Times rent vs buy calculator.
https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

In addition to the identifiable costs that you have covered off you need to consider the opportunity cost of money on your equity (down payment) and appreciation on the property. The opportunity cost money on the $16k downpayment is only $800/year at 5%. But if the property appreciates 3% annually then that is a $9.720 benefit in the first year.

We have a condo and I like it. It is like having an apartment except I have more freedom to do what I want inside my unit.

You might look at ARMs vs fixed rate mortgages given that interest rates are expected to decline from here.

However if you think it is likely that you will need to move in 4 years you may be better off to just keep renting.

 

[LateToFIRE]

TLDR, will circle back to read it when I have more time. Just wanted to address this statement: "... this feels like the worst possible time to buy."

I am a serial r.e. buyer, investor. Gains from real estate ownership have added $3M-$4M to my current NW. You could argue that had I invested the dollars I put into r.e. in the SP500 I would have done as well, but that ignores the use of debt leverage in r.e. Also, I have been a prodigious saver and securities investor, and built an equally significant portfolio, so my approach has been one of balance and I have in general pursued a "don't put all your eggs in one basket philosophy.

Anyhow, where I was going is this: With each r.e. acquisition, whether it was a primary home, a multi-family, or commercial, the media and onlookers would tell me I was buying at peak of the market. My first home, neighbors would exclaim "oh you set a record price" and yet a few years later sold that for over 2x what I paid. My next buy, purchased after a crazy bidding war, set a record on the block, but now more than 3x what I paid. Commercial r.e. bought at the height of the 2006 frenzy, dipped during the great recession, roared back 2x in the recovery.

My point is this: Real estate is a long-term purchase. If you want to be a flipster, well then market timing is key, good luck with that. If you want to become wealthy as an owner, you need to think in 5-10 year increments, even longer, think in terms of your kids (if you have kids) inheriting that property (w/stepped up tax basis) and what that could look like for them in 50 years. Think of the rental income prospects and how that could double, triple, etc. over time, basically inflation-indexed income. Think of the tax breaks on that income, which can be substantial.

Ok, stepping off soap box now!

[P.S. I'm not saying blindly buy any old real estate. There are a huge number of considerations and criteria if you want to hit home runs. You are right to be detail-oriented. That's how I am. I have researched the heck out of all my purchases, analyzed every angle to death, run excel models backwards and forwards, reduced the risk of the unknown as much as humanly possible. The challenge is to be able to take action after all that analysis - because the answers will never be 100% clear.]

 

[MBAVisionary]

Disclaimer: I haven't read all your questions carefully but I just wanted to share a few things:
If you have a stable job (i.e. don't sell in less than 5 years) and 20 percent down payment then any time is the right time to buy a primary home. Simply because the rent and/or house prices will normalize in a few years making the renting a more expensive option after 5 years. This is a general rule of thumb.

And never look at past prices, you may never be able to pull the trigger in that case. If price is higher than the past then you are scared that it may drop. If price is lower than the past then you may think it will drop further. It is a futile waiting game.

Here our home ownership history:
* House 1: Buy: $103K, Sell: $134K, Owned: 1.5 years (Climbing up side of the housing bubble)
* House 2: Buy: $222K, Sell: $290K, Owned: 7 years (The lost decade)
* House 3: Buy: $385K, Sell: $730K, Owned: 8 years

PS: The house prices generally always goes up simply due to inflation. But there are couple of magical things working FOR you:
1. Your interest expense is fixed (which can be brought down with a refinance) but you are paying it with a devalued dollar every year goes by.
2. Your income will keep pace with the inflation but your mortgage will stay fairly constant (i.e. going down in a real dollar terms) baring local tax changes.

FWIW we were scared to death when we bought every single house looking at the mortgage payment compared to our income and prevailing rent prices. But fast forward a few years and the mortgage payment looked like a deal compared to our income. Every time.

Thanks for your reply. All great points. I'm starting to see price cuts here and there, expect that to continue into the next year. 20% down is ideal but 2 years also seems so far away. I'd have to save $65k and then upward of $16k for closing costs to do it the right way or $81k. One of the perks I left out with the first home purchase in 2013 is our employer paid for closing costs as part of the relocation package.

So $81,000 in...
4 years is $1,687 / month or $844 biweekly
3 years is $2,250 / month or $1,125 biweekly
2 years is $3,375 / month or $1688 biweekly
1 year is $6,750 / month or $3,375 biweekly

If I drop my 401k contribution down to the match my take-home before Roth IRA, rent, car payment, brokerage contribution, etc. is ~$7400/mo or ~6300/mo currently. Maybe a little higher if I cut back HSA contributions. Realistically short of getting a bonus, raise, parental assistance or other windfall the 3 to 4 year option seems most tenable. My initial assessment of 2 years is too much of a stretch.

 

[MBAVisionary]

It's impossible to say what will happen in the future, but I'm on the side of renting, especially if it's between a house and condo.

I owned a condo for 4 years and it was a major headache. Half the residents were elderly/poor compared to the new buyers and refused to raise the HOA fees to pay for very badly needed repairs, like a roof. At one point I had water falling into my place from heavy rains. Special assessments came twice for $5k each time for things like fixing an old elevator and plumbing issues. So re: condo living I'd due as much diligence as you can, but even that might not get you to the full truth. Make sure there's plenty of reserve money in the HOA at the very least.

Financially, the place looked great on paper since the neighborhood had a ton of money pouring in from businesses--office buildings, expensive gyms, etc. Then our friend Covid came along and that all died along with it. I sold in 2020 and basically broke even, but timed that incorrectly because the place actually went UP about $100k in value despite a persistent homeless situation in the area.

Now I live in a rent controlled apartment that costs less and I don't have to worry about repairs. Granted, the place isn't perfect, buy my condo wasn't either. We've made some cosmetic improvements that help. I admit I did enjoy the "feeling" of being a homeowner, but the headache wasn't worth it and I don't regret selling, other than wishing I'd come out $100k ahead.

Some day I'd like to own a house, but that's not financially possible where I live unless I want to be house poor. I prefer my freedom. Some friends got into a great house in MT during the pandemic and will probably make out very well if they ever sell. However they've been in a small war with their neighbor the whole time because of an illegal wall he built, and also being a slob and creating eye sores in his yard--which is supposed to be their beautiful view of MT nature.

Maybe this is all just bad luck. Hope yours is better if you decide to jump in. The feeling was great at first, and I know a lot of people who've loved their homes. In the end I'd just caution you to do a lot of research before making the commitment.

Very eye-opening story. There is a condo near me but it looked kind of rundown and only a step above the apartments that surround it. Like sure you have 1k square feet but the steps outside look like they haven't been updated in 40 years. Interior is plain jane and the exterior doesn't have much to look at. No businesses within reasonable walking distance. Save maybe $100k over a starter home and HOA is nearly $400/mo.

I feel you on the affordability piece, just made a $2k credit card payment to get back to $0, $350 principal car payment, $369 Roth IRA payment. My rent is paid until February but trying to do all of this and save for a home seems a bit daunting. Dec 2020 30yr interest rates were 2.66%, now closer to 6.84%. On $300k financed that's $7,980 to start off with the first year in interest vs $20,520.

A friend of mine in this 30s recently bought a sorta rundown 1br condo in a nice area but the unit itself needed a lot of work. The A/C wasn't working properly, I think the association was trying to fix it but didn't really have the money needed to do it properly. He sounded remorseful a few months after moving in.

Another friend has been living in a 2br/2ba condo for many years. First renting it, then buying it from the previous owners. He got a good deal for the area and before interest rates spiked up. He doesn't have a car but the parking situation isn't too bad and the location is considered desirable since it's walkable for a lot of things. He likes it. Some parts of the neighborhood get sketchy at night and it's near multiple bars. See a bit of recreation drug use, loud people out into the late hours of the night, and homeless people wandering about. The bars were more of a draw in my 20s/early 30s. Now I just like the peace and quiet.

 

[MBAVisionary]

You may want to check out the New York Times rent vs buy calculator.
https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

In addition to the identifiable costs that you have covered off you need to consider the opportunity cost of money on your equity (down payment) and appreciation on the property. The opportunity cost money on the $16k downpayment is only $800/year at 5%. But if the property appreciates 3% annually then that is a $9.720 benefit in the first year.

We have a condo and I like it. It is like having an apartment except I have more freedom to do what I want inside my unit.

You might look at ARMs vs fixed rate mortgages given that interest rates are expected to decline from here.

However if you think it is likely that you will need to move in 4 years you may be better off to just keep renting.

Cool link, I was playing around with the numbers. I could mentally justify moving from a 700 sq ft 1br apartment to a 2 or 3br home. If it's something close to the same size I question the value. Working remotely right now and my home office is 2 ft away from my bed. Sounds cool in theory but in practice that cabin fever feeling sets in really quickly. I can drive to some office space if I choose to but it adds about a minimum of an hr commute time.

The future is really unknown right now. I want to be optimistic but if all of a sudden there are layoffs.... I'll get severance pay but still finding something that pays comparably could present a challenge.

ARMs scare me due the volatile nature of the payment amounts. Strong chance of rates going down, but what if they go up even higher than they are now at some point. It's a big life commitment. I know people who have moved 3 times in the past decade, granted they earn more than I do and got company assistance to send them off to a different state.

 

[DrRoy]

We have lived in 5 different houses since 1983. Two of them lost value in the 3-5 years we had them. The others rose, not always by a lot. Look at a house as where you live, and less as an investment.