Housing costs ruining my RE plans?

[tmitchell]

I have been targeting RE for this fall, but the housing market is throwing me for a loop.

My number is 2.5M, out of which I planned to pay cash for a house worth approximately 500k. In the past year those same homes now cost 700k+, which is basically screwing my budget. Before covid my plan was on track.

I feel depressed that I’ve worked so hard to get to not a small amount of NW (way more than I ever thought I’d accrue) and yet now be faced with chasing “more”.

My savings rate is high, although my pay was cut by 25% this year due to covid. (Not sure if megacorp will use this as an excuse to become the new normal or what. Not exactly counting on their hearts to turn fuzzy.)

If I keep to my plan I’m basically looking at 2 more years’ work now, which I kind of dread. Worse if prices keep rising I guess I will have to totally reassess my dreams. Maybe this is called “staying flexible in retirement”??

What are your thoughts on this? Thanks.

 

[Ready]

What is happening to the rental market in your area? In Southern Cal home prices are at an all time high but rentals are dropping fast. So this is a good time to rent until the market turns. If you can just rent for a few years in your neighborhood eventually prices will have to drop. They can’t go up forever.

 

[OldShooter]

Well, I would view it as a risk question.
1) If I deplete my nest egg chasing high prices does that risk changing my retirement lifestyle?
2) If I buy a high priced home can I count on it holding and increasing in value or could my market be in a bubble that could cause my equity to go backwards? (Possibly California or other states with declining populations.)
3) Are there external risks in my market that could hurt me as a homeowner, like the impending Illinois pseudo-bankruptcy?
4) Is there a target market change that would mitigate risks 1-3 because of lower, less frothy, house prices? Would that kind of mitigation be acceptable from a lifestyle point of view?
5) (your question) Is another two years of work acceptable as a risk-reducer?

 

[jkern]

The way I see it you have a few choices.

1) Retire and absorb the extra $10K/yr in expenses (Mortgage the $200K)
2) Retire and buy a $500K house and not the $700K house (lower your expectations)
3) Retire and rent
4) Work until you feel you can afford what you want.

 

[tmitchell]

What is happening to the rental market in your area? In Southern Cal home prices are at an all time high but rentals are dropping fast. So this is a good time to rent until the market turns. If you can just rent for a few years in your neighborhood eventually prices will have to drop. They can’t go up forever.

Yes in fact I'm in Socal and sold my condo last year to generate the money I was hoping to use for a home, so I am renting. Was just hoping to RE and move to a little quieter area. But it seems all the work-from-home folks had the same idea!

 

[finnski1]

Let's say you used a 4% wr for your budget.
After you initially paid cash (500k) that would have left you 2m or 80k per year. Now if you have to pay 700k you are left with 1.8m or 72 k per year.
add property tax and insurance but then subtract the rent and renters insurance you are now paying. You may find that your net spending would be the same or even slightly better.
Have you done that math?

 

[Major Tom]

If you can just rent for a few years in your neighborhood eventually prices will have to drop. They can’t go up forever.

I'd amend that last sentence to, "They can't keep going up at the same rate as they have been, indefinitely."

House prices might plateau at some point, for an extended period, or they might come down. Hard to know when any of this will happen though.

 

[freedomatlast]

If $200,000 means the difference between retiring and not retiring, perhaps you're cutting it too close and you should keep working for a little while longer. What happens if you retire and we have a market correction that causes your portfolio to drop $200,000. Are you going to go look for a job?

 

[Major Tom]

If $200,000 means the difference between retiring and not retiring, perhaps you're cutting it too close and you should keep working for a little while longer. What happens if you retire and we have a market correction that causes your portfolio to drop $200,000? Are you going to go look for a job?

Well, it's not just the extra $200K. It's also the fact that property taxes will be significantly higher on a 700K house than a 500K house - and those are a recurring expense.

 

[Aerides]

If $200,000 means the difference between retiring and not retiring, perhaps you're cutting it too close and you should keep working for a little while longer. What happens if you retire and we have a market correction that causes your portfolio to drop $200,000. Are you going to go look for a job?

I mean yes and no. If the OP assumed to pay $500k for the house, and then had a solid plan that the balance of 2M was good, with, say, a 3% WD, now, dropping that to 1.8m after the house difference, the WD becomes 3.33%.

In reverse, if the OP had been planning a 4% SWR, $80 budget, that's now chopped to 72k. Plus increased taxes. I don't view that as cutting too close, that's goal posts moving.

Either way a 10% shift would probably have given most any of us pause when about to ER.

Still, OP, have your investments not seen some benefit in the past 12 months to close the gap? It shouldn't really be a deficit of $200k. Perhaps, if you go ahead and ER, use the time to move around some of those small towns - keep renting a bit longer? I don't think housing will come down in the short term, but neither should the market.

 

[tmitchell]

I mean yes and no. If the OP assumed to pay $500k for the house, and then had a solid plan that the balance of 2M was good, with, say, a 3% WD, now, dropping that to 1.8m after the house difference, the WD becomes 3.33%.

In reverse, if the OP had been planning a 4% SWR, $80 budget, that's now chopped to 72k. Plus increased taxes. I don't view that as cutting too close, that's goal posts moving.

Either way a 10% shift would probably have given most any of us pause when about to ER.

Still, OP, have your investments not seen some benefit in the past 12 months to close the gap? It shouldn't really be a deficit of $200k. Perhaps, if you go ahead and ER, use the time to move around some of those small towns - keep renting a bit longer? I don't think housing will come down in the short term, but neither should the market.

I have definitely seen benefit but am perhaps too conservative with a 60/40 portfolio. If it were today the deficit would be closer to $150k yes. I suppose if the markets trend as they are I could wiggle my way into a workable situation. But as some others noted now a 200k buffer is gone (or 150k).

I do think I’ll earn some money in RE at some point, but at least to begin it seemed like fun to just hang it up and see how I feel. Maybe I’m being premature but jeez. Never thought I’d be in a predicament with 2.5 mil.

 

[ut2sua]

What are your thoughts on this?

OP, I think you do have a number of options:
1- Buy a house now for $700K cash. This option hurts a bit, but probably the most beneficial to your good sleep. Nothing to worry regarding future housing market. You will not care if the housing market will go up or down in the next xx years.
2- Using 4->5% of the $500K (or $700K) as "free" rent money and rent in the next few years. Since you have not spent $700K to buy a house, you can put that $ in the market with your favorite AA. You should be able to get 4-5% on average per year. Do this if you feel strongly that the housing market will cool down. You can buy at a lower price point later if the housing market will actually cool down.
3- Buy a house now ,but get a mortgage at very low interest rate. Say put $140K down and get a mortgage of 560K. Put the 560K into the market. Do this if you have to have a house now (peace of mind + better living environment), and you feel strongly that the market will outperform the low mortgage interest rate. You can decide later when/if you want to pay off the mortgage.
#2 and #3 options could be a smart bets, but you will care how the housing market and/or the stock market will perform in the future.
There is no guarantee that any of the above options will be most beneficial. It will be up to what level of risk you want to take. Good luck

 

[troutnut1]

Well, it's not just the extra $200K. It's also the fact that property taxes will be significantly higher on a 700K house than a 500K house - and those are a recurring expense.

This is not normally true.While property taxes are an “ad valorem” (according to value) tax, the actual calculation is more like roommates splitting the bills of the community in which they live. If ALL houses double in value (or halve in value) and the county and state maintain the same level of spending, the mill levy raises (or lowers) and the county collects the same amount of money. This is the reason people did not see lower taxes when the values dropped in 2008-2009. Nobody fired any police, school teachers, or rolled up any roads, and taxes stayed the same in spite of value decreases. Spending money by counties and states raises taxes. Voting yes on everything raises taxes. Building room additions and doubling your square footage raises taxes (because your value goes up but your neighbors values didn’t). But us all going up together does not have that same effect. I suspect taxes will go up everywhere soon for the same reason we see when we go to the grocery store, buy fuel, or pickup lumber. But it will not be because our values all went up a certain %. It will because our dollars value is decreasing.

 

[Boose]

I'm following this thread with interest. We're listing our SoCal condo next month (dissatisfaction with neighborhood and rising HOA costs). While we expect to net a tidy sum from the sale that will ease our purchase of a subsequent home in another state, I've been astonished by the rate at which housing prices have risen in other parts of the country - parts that are not even close to traditionally steep markets like CA or NY. Prices are blowing past the estimates I plugged into our retirement budget, although healthcare estimates are coming in lower. We're renting for at least a year until we find the right area to re-settle. Hopefully the craziness like bidding wars and no-inspection clauses will subside by then.

 

[Ally]

Would you consider a move to another state? $500,000 would go much farther in Texas, for example.

 

[daylatedollarshort]

Would you consider a move to another state? $500,000 would go much farther in Texas, for example.

Or even within California there are less expensive areas, especially if you are retired and don't need to live within commute distance of a major job market. I just looked up Fairfield near the Bay Area and that had a median sales price of $585K.

 

[statsman]

Would you consider a move to another state? $500,000 would go much farther in Texas, for example.

Maybe, but if you are considering Central Texas, better hurry. We moved here 2.5 years ago, purchasing a house being built in one of the typical housing tracts. House was purchased for less than $500,000, and that included some upgrades to the kitchen cabinets, slide-out drawers for the lower kitchen cabinets, granite countertops throughout, 3rd car garage addition, etc.

We moved in two years ago. Comparable houses selling in the neighborhood the past 6-9 months now have our house valued at least $150,000 more than what it was purchased for. A lot of people are moving from the urban areas to the suburbs. Some driven by the COVID mandates. Some driven by the fact many can now work from home, so commuting has been reduced or eliminated.

The bad news is Texas property taxes are driven by the value of the house, and while there is a cap, they can rise up to 10% per year (somewhat less for 65+ as school taxes are locked at first property tax bill). This could get out of hand in a hurry. Long time Texans, especially those on fixed incomes, have been barking about this, and I don't blame them one bit.

 

[W2R]

The way I see it you have a few choices.

1) Retire and absorb the extra $10K/yr in expenses (Mortgage the $200K)
2) Retire and buy a $500K house and not the $700K house (lower your expectations)
3) Retire and rent
4) Work until you feel you can afford what you want.

I like this answer.

I think if it was me, I'd choose #2 and look for a $500K house in a cheaper location, if you can find one before prices go up any further.

If I didn't want to move to a new location, I'd choose #1 and cut back on my expenses.

I wouldn't choose #3 because rents might be headed upwards too.

I'd prefer not to choose #4, but sometimes we gotta do what we gotta do. It would be a crummy 2 years, but two years from now it won't matter.

 

[2HOTinPHX]

This is not normally true.While property taxes are an “ad valorem” (according to value) tax, the actual calculation is more like roommates splitting the bills of the community in which they live. If ALL houses double in value (or halve in value) and the county and state maintain the same level of spending, the mill levy raises (or lowers) and the county collects the same amount of money. This is the reason people did not see lower taxes when the values dropped in 2008-2009. Nobody fired any police, school teachers, or rolled up any roads, and taxes stayed the same in spite of value decreases. Spending money by counties and states raises taxes. Voting yes on everything raises taxes. Building room additions and doubling your square footage raises taxes (because your value goes up but your neighbors values didn’t). But us all going up together does not have that same effect. I suspect taxes will go up everywhere soon for the same reason we see when we go to the grocery store, buy fuel, or pickup lumber. But it will not be because our values all went up a certain %. It will because our dollars value is decreasing.

If you buy a house in California, the assessed value is equal to the purchase price. Its like 1.25% or so.
So yes buy a 700000 house and your property taxes start significantly higher than a 500000 house.

 

[teejayevans]

The way I see it you have a few choices.

1) Retire and absorb the extra $10K/yr in expenses (Mortgage the $200K)
2) Retire and buy a $500K house and not the $700K house (lower your expectations)
3) Retire and rent
4) Work until you feel you can afford what you want.

5) Retire to a different area with lower housing prices.

 

[Bamaman]

This is just an example where life is just one big crap shoot.

Unfortunately, we can all be victims of a balance between the costs of housing (including property taxes) and an equities market we don't have any control of.

The worst thing is that in SoCal you can spend $500K on a home, and it may not even be a very nice place in a decent neighborhood. Many of us just have higher standards of living than a $500K home in much of your state. And the only thing you can count on in SoCal is that you cannot count on your state and local governments for stability in anything. State and local taxes simply eat your retirement nest egg alive--on top of high r/e prices.

But home is home, despite the negative side of life.

We've chosen to live in ultra LCOL places our entire lives. And our comparable homes in the 3 states we've lived would be more like $2 million homes in SoCal. Until RMD's, we virtually have no state income taxes, and property taxes on a fine home might be $1,200 a year.

There are just so many places in this country where you could afford to live comfortably and where your hard earned money would afford a much higher standard of living.

 

[Retireby45ish]

I’ll be following this closely as we are in a similar boat.

We took advantage of the market in our area (which was usually quite illiquid and homes often took 1-2 years to sell) and just sold our home and are looking to buy in another state. But the price acceleration in that area has really ramped up over the last few months. So we are also afraid of being priced out.

The idea to use the lower mortgage rates now and invest in the market is good since over the long term I think returns will exceed the 3% mortgage rate. however we were trying to keep AGI low (including div and stock sales which you need to pay the mortgage) to qualify for ACA when we stop working so it’s tough to do that.

Hopefully this madness stops soon.

 

[Aerides]

A lot of those "just buy a $500k house they are cheaper in these other 17 states" is less and less true every day. Even houses listed at $500k (which were $300k 2 years ago...) are selling for cash for $550k and up with multiple offers.

In my neighborhood Zillow still has me at $450k, which was $400 last March. Nice right? No, it just hasn't caught up because the last 10 sales in my neighborhood, which are barely on the books, are all over $600k. An interior lot house 3 doors down sold for $650 despite being sorely outdated, no work done in 20+ years, and needs a new roof.

So you might look at my area and think "oh sure I can live there for $500k" but in reality nope, not anymore, not now.

 

[MRG]

A lot of those "just buy a $500k house they are cheaper in these other 17 states" is less and less true every day. Even houses listed at $500k (which were $300k 2 years ago...) are selling for cash for $550k and up with multiple offers.

In my neighborhood Zillow still has me at $450k, which was $400 last March. Nice right? No, it just hasn't caught up because the last 10 sales in my neighborhood, which are barely on the books, are all over $600k. An interior lot house 3 doors down sold for $650 despite being sorely outdated, no work done in 20+ years, and needs a new roof.

So you might look at my area and think "oh sure I can live there for $500k" but in reality nope, not anymore, not now.

+1

We moved to this spot 5 years ago. We paid $155 a square foot for our then 6 year old home. The few remaining listings are now going for $300 a foot.

I saw one place, FSBO, absolutely fantastic views; the house was a tear down for only $880,000.

 

[daylatedollarshort]

This is just an example where life is just one big crap shoot.

Unfortunately, we can all be victims of a balance between the costs of housing (including property taxes) and an equities market we don't have any control of.

The worst thing is that in SoCal you can spend $500K on a home, and it may not even be a very nice place in a decent neighborhood. Many of us just have higher standards of living than a $500K home in much of your state. And the only thing you can count on in SoCal is that you cannot count on your state and local governments for stability in anything. State and local taxes simply eat your retirement nest egg alive--on top of high r/e prices.

But home is home, despite the negative side of life.

We've chosen to live in ultra LCOL places our entire lives. And our comparable homes in the 3 states we've lived would be more like $2 million homes in SoCal. Until RMD's, we virtually have no state income taxes, and property taxes on a fine home might be $1,200 a year.

There are just so many places in this country where you could afford to live comfortably and where your hard earned money would afford a much higher standard of living.

Interesting perspective. Have you ever lived in California or is what you are posting what you have read in certain media outlets? On the flip side of your post, we live in a Mediterranean climate, our house has been an appreciating asset that appreciated 7 figures since we bought it, and we can go to Redwood forests, wineries in Napa, an ocean beach or a play in the city for the afternoon. We don't spend a lot on travel as we can take long day trips or overnights to places like Carmel, Mendocino, and Lake Tahoe.

Our property taxes are around .33% of our home value, our kids went to college tuition free thanks to the state grant program, and our state income taxes are pretty low. California has high tax rates on the very wealthy, but Social Security isn't taxed and for middle class families the rates aren't bad.

From Kiplinger's The 10 Most Tax-Friendly States: "Wait, what? California is a tax-friendly state? Yes…for middle-class families. If you're a rich person, California taxes will cut deep into your earnings. But for other people, the Golden State's tax hit isn't really all that bad.Our hypothetical middle-class family's income tax bill was the third-lowest among states that impose an income tax......Although property taxes are sky high in Silicon Valley and certain other parts of the states, property taxes are below average for the state overall. For a $300,000 home in California, the statewide estimated property tax is only $2,187, which is the 16th-lowest amount in the country." https://www.kiplinger.com/taxes/state-tax/601612/most-tax-friendly-states-for-middle-class-families

So there's that.