House price vs Net Worth

[Retireby45ish]

Looking for some insight here as we look at housing costs.

We moved to a location where housing costs are much higher than our last home(600k). We have been looking for a year(!) but bid 1.1 Million for a home and finally won. I feel conflicted on this.

The higher price, coupled with the recent market downturn, seems to have me putting too much equity into a home…and setting back my RE plans.

Wife and I are both early 40s.
House: 1.1M…I’ll put 600k in (previous home) and mort the other 500k

Other assets: 2.5M (70/30). Down 500k from Jan
Earnings per year around $400k (remote workers)
So we were saving about 200k per year.

Current expenses: 75k yearly. Not counting new mortgage.
Target spending in retirement (with healthcare); 120k

I wanted to FIRE with 4M of investments, which at 3% WR, set us up to FIRE. So seems like I was on my way at ~3.2M to retire in 3-4 years before market selloff and now having to take on the mortgage debt and added expenses of bigger home. I’ll also be tying up almost 30% of my money in home as I pay off mortgage early (if that makes sense vs bond yields).

I also worry the housing market will soften and this illiquid market might make it tough to exit in 7-10 years if we are ready for a new chapter.

Any thoughts are appreciated. We need a home. And we like it here. But I hate the idea of stepping backwards in my FIRE journey. But honestly getting anything decent here for under 1M is impossible.

 

[Magus]

Doesn't seem like a crazy thing given your income and assets. Curious - since you are able to work remote, why are you moving to a much higher COL area? Most folks are doing the opposite!

 

[Aerides]

IIRC you sold a while back, so you probably weren't planning on a 1M+ home in your new location, more like thinking $200k more than the old one?

Either way, sounds like you have landed, and it's where you want to be. Your alternative is to roll the dice and rent and live with uncertainty for a few years (I would not want to do that).

You're still young, working, and saving. 3-4 years it could still all work out in your favor. Or maybe 4-5, so I'd probably go for it and enjoy your home.

 

[daylatedollarshort]

Not sure where you are buying, but in the Bay Area, the home prices have always been pretty boom and bust and it looks like we are headed for a bust.

 

[W2R]

The higher price, coupled with the recent market downturn, seems to have me putting too much equity into a home…and setting back my RE plans.
[...]
We need a home. And we like it here. But I hate the idea of stepping backwards in my FIRE journey. But honestly getting anything decent here for under 1M is impossible.

Sounds like buyer's remorse to me. I don't want to seem mean, but as you know, the time to make these decisions is before you move, not after. Hopefully the new job brings with it new opportunities for career advancement and higher paychecks on down the road.

 

[Retireby45ish]

Doesn't seem like a crazy thing given your income and assets. Curious - since you are able to work remote, why are you moving to a much higher COL area? Most folks are doing the opposite!

When we initially looked here it was a lower COL area. But it’s a nice vacation destination so prices have skyrocketed because there is low inventory and a lot of demand since everyone can work remotely.

 

[Koolau]

I don't think your move puts you in any serious financial jeopardy. I would look at it this way:

You have a plan that looks like it will work to let you retire when you want to. Buying in a HCOL area when the markets are dropping may change some of the figures in your plan. BUT you have two back-ups that should be golden (though admittedly not ideal):

1) Retire a bit later if you must

2) If you can move to a HCOL area, you can move away from a HCOL area. 5 years, 10 years down the road if your FIRE plans are in jeopardy, such a move would likely solve everything - not that it's ideal.

My gut says you'll not need either of these back-ups, but either should be very effective (all else being normal) at preventing any financial catastrophe. But, as always, YMMV.

 

[OldShooter]

... bid 1.1 Million for a home and finally won. ... I hate the idea of stepping backwards in my FIRE journey. ...

Seems like the train has already left that station. Are you looking for people to tell you that stepping backwards is OK? Life is more than just finances, but your decision is not one that I would have made.

 

[aaronc879]

Seems like an odd time to be asking. You already have an accepted offer so too late to reasonably back out now. That said, with your income I see no reason to hold back if you like the new house a lot better than the old one. Housing in HCOL areas will continue going up long term so not a bad investment. Good luck

 

[Running_Man]

You are trading 3 years of working for a nice home while in your 40's and still able to retire by the time your are 50. Congratulations, you must have made some wonderful decisions along the way. Homes can be lived in for another 30 years seems like a sound decision to me.

 

[NW-Bound]

I just happened to check mortgage rates.

Average 30-year rate is 7.1%.

Average 15-year rate is 5.5%.

 

[Retireby45ish]

I just happened to check mortgage rates.

Average 30-year rate is 7.1%.

Average 15-year rate is 5.5%.

Yikes!

First, thanks for all the responses.
This has been a tough decision, but we are moving ahead. And one that overshadows years of frugal (miserly?) small ones. But as someone said, “not all decisions are financial” which is my life-lesson to learn (according to DW).

For those that said “this is coming too late…we were within the inspection period and could have backed out with no major penalty”. Until the ink is dry it’s never too late to assess all options (I have 2 more weeks).

I got a 7/1 ARM 4 weeks ago at 4.125. I will pay it off or refinance then because I need lower cash flow for ACA reasons.

So I guess the good thing in all this is I’ve locked in my rate in this rapidly raising rate environment. I wish it was 3% or so, as it was 3 months earlier, but I guess I’ll take that small win.

 

[NW-Bound]

Well, 7% is only 1/2 of what I paid for the mortgage of my 1st home back in 1980. And I padded myself on the back when the rate climbed from 14% up to 17% or so.

My son bought his home in 2017 or so, and paid a bit less than 4%. We kept telling him to refinance, and he finally did 6 months ago, getting 2.75%. I think he now realizes how lucky he was.

 

[rodi]

Congrats on your new home.

As to the question posed in the title... I live in Southern CA. Home prices are wacked!!! My home value is about 45% of my net worth. Fortunately, we didn't pay that much. All that matters to me is that our non-house investments cover our spending.

I keep waiting for a housing correction, but keep reading it's not going to happen.

 

[RetiredHappy]

BOA is only at 5.5% for 30-year.

 

[Alex The Great]

My home value is about 45% of my net worth.

This is still reasonable. I have it about 60% (Bay Area) and it really gives me a headache what's to do with this situation.

 

[NW-Bound]

The values of my 2 paid-for homes are roughly 20% of my net worth. With the market beaten up, the ratio is now 22%.

I have no doubt the home values will drop along with the stock market, and the ratio may go back to 20%.

 

[DrRoy]

Our house is 8% of our NW.

 

[street]

My home is ~5% of NW as of today with my portfolio down ~20%. I also remember the high interest rate in 1984 when I built my home. It was ~14% and I doubled my principal payments every month to avoid/void the interest on that second payment. After about a year and a half of that I paid the house off so no more high interest rate for me.

 

[The Cosmic Avenger]

Yikes!

First, thanks for all the responses.
This has been a tough decision, but we are moving ahead. And one that overshadows years of frugal (miserly?) small ones. But as someone said, “not all decisions are financial” which is my life-lesson to learn (according to DW).

For those that said “this is coming too late…we were within the inspection period and could have backed out with no major penalty”. Until the ink is dry it’s never too late to assess all options (I have 2 more weeks).

I got a 7/1 ARM 4 weeks ago at 4.125. I will pay it off or refinance then because I need lower cash flow for ACA reasons.

So I guess the good thing in all this is I’ve locked in my rate in this rapidly raising rate environment. I wish it was 3% or so, as it was 3 months earlier, but I guess I’ll take that small win.

That's still lower than long-term market performance. We also paid off our mortgage early, but in hindsight I'd probably rather invest the excess, or at least part of it. At your rate, have you considered investing the extra money instead, at least until the market fully recovers, then switching? I am also debt-averse, and while that helped get me where I am today, I wish I had tempered it a bit sometimes and played the odds more.

 

[jkern]

This is still reasonable. I have it about 60% (Bay Area) and it really gives me a headache what's to do with this situation.

Growing up in the Bay Area (60+years) I don't give it a second thought. You buy a house, live in it, and all other financial planning comes after. I saved and invested to meet my financial goals independent of the value of my home.

 

[jkern]

Not sure where you are buying, but in the Bay Area, the home prices have always been pretty boom and bust and it looks like we are headed for a bust.

What I've noticed in the Bay Area are that the downturns mostly align with recessions. The ones I remember most are 1980, 1992, 2002 and 2008. RE mostly dropped about 10% to 15% with the exception of 2008 where is some cases dropped nearly 50%.I think RE has already started to drop around here.

 

[Aerides]

I don't expect anything like a bust here. Homes are still listing and selling at almost double their prices from 3 years ago. Most of them aren't mortgage-dependent buyers, but investors and flippers.

Still, with the equity markets in a down turn & rates increasing, I see the demand drying up. Supply will similarly stay near-nil, as new builds will slow/stop as well. So I anticipate a flattening, and a mild taper, a shaving off the tops, but nothing like a bust or a burst or a 2008.

 

[aja8888]

I don't expect anything like a bust here. Homes are still listing and selling at almost double their prices from 3 years ago. Most of them aren't mortgage-dependent buyers, but investors and flippers.

Still, with the equity markets in a down turn & rates increasing, I see the demand drying up. Supply will similarly stay near-nil, as new builds will slow/stop as well. So I anticipate a flattening, and a mild taper, a shaving off the tops, but nothing like a bust or a burst or a 2008.

Yes, this time it is different as there are not as many sub-prime mortgages to fail. This time, people were using stock gains, PPP Gov. loans (mostly all forgiven, I'll bet), cash out refi's from the main house, etc to fund the second (or third) house purchases. When inflation and property tax increases become a burden to people with multiple homes, they will sell them.

Falling house prices are "sticky" because people try to stay in them as long as possible during a recession. In the 2008 - 09 Great Financial Crisis, I bought a 2,000 sq. ft., 3 year old brick and Hardiplank ranch in Spring, Texas for $62 per square foot in mid-2010. That house sold new for $250 K in 2007 and is now shown as worth just over $300,000 on Zillow. Daughter and her husband are living in it now.

There were so many foreclosures, HUD listings, bank workout, people just trying to get out, etc, it was like taking candy from a baby 3 years after the crash. My real estate agent, son's wife, bought three and they have been rentals ever since.

 

[pacergal]

OP--
You are both young, earn and save a ton of money, well above average.
If this move and house are a positive dream for you, then you have done well.
You have the means to afford it.
Take life one day/year at a time. You may or may not need to work beyond your planned retirement.
Enjoy your new house, try to maintain a solid budget and keep plugging away at your savings.