Path to FIRE, only one problem

[couchpotato]

Background: Married couple 33 & 34 with one young kid
Currently renting a 2 bedroom condo but may need to purchase a bigger living space.

Problem: Unsure if buying a home is the sensible decision given the high costs of home maintenance and ownership. Real estate has been going up 10-20% yearly but we are afraid of buying during a housing bubble.

Average detached houses in the area are $1.4 million but based on our salaries we would only afford or want to spend up to $800k (about the cost of a town house)!

Savings/Investments total ~$820k.

Additionally, our investments have been performing well in a diversified portfolio (60/40 equity/bond) with returns ~7%.

Looking for advice..
Is it smart to buy now or wait? If we were to buy, how much of a down payment should I withdraw from our investment portfolio?

 

[exnavynuke]

If it were me, I'd see if there were decent paying careers in reasonable cost of living locations you could relocate to.

If that isn't an option, or an options you're willing to consider, then my answer to your first question is "no one can tell you if it's smart to buy now or wait". If you believe the current rampant housing inflation in your area will continue for years to come, then it would be a good idea to buy sooner rather than later if you want to own (assuming your belief turns out to be true). If you don't think it will continue, then waiting could be the smarter choice. How much you're paying in rent vs the cost of the mortgage you would get would also be a factor in whether it's a good idea to rent vs buy now.

For your second question, assuming you qualify for today's low mortgage rates, I wouldn't withdraw more than was needed to avoid PMI and get you into the home of your choice.

I'd also say that your portfolio is exceptionally conservative for your age. If that's what is needed to make you comfortable, that's fine. Just realize you'll need a higher savings rate to make up for expected lower returns over years to reach the same financial goals.

 

[LivePassionately]

Background: Married couple 33 & 34 with one young kid
Currently renting a 2 bedroom condo but may need to purchase a bigger living space.

Problem: Unsure if buying a home is the sensible decision given the high costs of home maintenance and ownership. Real estate has been going up 10-20% yearly but we are afraid of buying during a housing bubble.

Average detached houses in the area are $1.4 million but based on our salaries we would only afford or want to spend up to $800k (about the cost of a town house)!

Savings/Investments total ~$820k.

Additionally, our investments have been performing well in a diversified portfolio (60/40 equity/bond) with returns ~7%.

Looking for advice..
Is it smart to buy now or wait? If we were to buy, how much of a down payment should I withdraw from our investment portfolio?

This is my take only but the suggestion is that you should rent unless a bigger home really appeals to you. When I was young, I thought the same thing - buy a house because why pay down someone else's mortgage. However most studies (and my own anecdotal evidence) show that you will be better off renting. Again, life is also short so it does go back to a life style issue.

Condo means very little worry aside from paying rent while a house entails a lot of fixes, worries about taxes, insurance, etc. and a whole lot of maintenance. You also have a lot of flexibility when you move. Most people move , on average, every 7 years. I didn't think I'd move but ended up moving 10 years after purchasing , moved to the town next to us simply for the schools. The move and realtor fees ended up costing 40K alone on top of NJ realty transfer taxes . Then I had to pay closing costs, etc. on the new house and title insurance ,etc. Of course, you will want different furniture when you move and then upgrade the new house, etc. so house can end up being a money pit.

 

[couchpotato]

I am leaning towards buying because I am concerned about the massive price increases in the housing market and there is very limited supply in this area. Moving to another city is an option but we prefer to stay because we have family and friends nearby.

A house is truly a money pit, I see many of my friends slaves to their mortgages and not able to save much $$ after housing related expenses..

I guess I am looking to hear from someone who has had experience buying/renting during a hot real estate market. If they had any regrets/advice and the impact it had on their path to FIRE.

 

[W2R]

If it were me, I'd see if there were decent paying careers in reasonable cost of living locations you could relocate to.

If that isn't an option, or an options you're willing to consider, then my answer to your first question is "no one can tell you if it's smart to buy now or wait". If you believe the current rampant housing inflation in your area will continue for years to come, then it would be a good idea to buy sooner rather than later if you want to own (assuming your belief turns out to be true). If you don't think it will continue, then waiting could be the smarter choice. How much you're paying in rent vs the cost of the mortgage you would get would also be a factor in whether it's a good idea to rent vs buy now.

For your second question, assuming you qualify for today's low mortgage rates, I wouldn't withdraw more than was needed to avoid PMI and get you into the home of your choice.

I'd also say that your portfolio is exceptionally conservative for your age. If that's what is needed to make you comfortable, that's fine. Just realize you'll need a higher savings rate to make up for expected lower returns over years to reach the same financial goals.

+1
I think this is terrific advice.

I guess I am looking to hear from someone who has had experience buying/renting during a hot real estate market. If they had any regrets/advice and the impact it had on their path to FIRE.

Oh I have that experience! I bought a home in 2015 in a very hot seller's market (especially in this particular neighborhood). I paid the full asking price in cash, and even then wasn't sure I'd get the house. I had missed a previous house on this block eight months earlier, because of a bidding war.

This is in a lower COL area, so right now the prices are about 1/4 to 1/3 of what you are seeing but the market is hot right now.

Anyway, I'm glad I bought it because housing prices went up 11% last year for my whole suburb, and my best guess is that they went up at least 50% in my particular neighborhood because it is extra hot for local reasons I can't go into. Anyway, in 2017 you can't buy anything in my neighborhood that is suitable to live in, for what I paid in June of 2015.

So, I have no regrets and I am beginning to think I must have a guardian angel. This despite the fact that back in 2015, I was frankly embarrassed to have paid as much as I did. Now I'm not at all embarrassed because by today's standards, it was a steal.

I am retired so I can't really speak to the impact on my path to FIRE. I really like having no house payment in retirement, though. YMMV

 

[kgtest]

Do you enjoy doing maintenance?

Homes can return 6% easily with little to no maintenance.

Buy low, sell high like any other asset.

BTW I am 100% stocks, but I didnt start saving until 2007 and you have us beat by about 600+ so you will be fine either way rent or buy.

 

[couchpotato]

+1
I think this is terrific advice.

Oh I have that experience! I bought a home in 2015 in a very hot seller's market (especially in this particular neighborhood). I paid the full asking price in cash, and even then wasn't sure I'd get the house. I had missed a previous house on this block eight months earlier, because of a bidding war.

This is in a lower COL area, so right now the prices are about 1/4 to 1/3 of what you are seeing but the market is hot right now.

Anyway, I'm glad I bought it because housing prices went up 11% last year for my whole suburb, and my best guess is that they went up at least 50% in my particular neighborhood because it is extra hot for local reasons I can't go into. Anyway, in 2017 you can't buy anything in my neighborhood that is suitable to live in, for what I paid in June of 2015.

So, I have no regrets and I am beginning to think I must have a guardian angel. This despite the fact that back in 2015, I was frankly embarrassed to have paid as much as I did. Now I'm not at all embarrassed because by today's standards, it was a steal.

I am retired so I can't really speak to the impact on my path to FIRE. I really like having no house payment in retirement, though. YMMV

Congrats on the retirement. I appreciate your comment and it is great to hear that it has worked out well for you.

If you don't mind I have a few questions:
How did you decide to make the jump and purchase? What were some of the factors you were considering/thinking about (both financial and non-financial factors)? Were you a first time home buyer?

As a first time home buyer, I feel jumping in during a hot housing market puts me at a real disadvantage. In our area as well, there are many bidding wars and it is normal for buyers to waive all conditions in order to "win". It seems pretty crazy but this is the current market dynamics.

 

[couchpotato]

Do you enjoy doing maintenance?

Homes can return 6% easily with little to no maintenance.

Buy low, sell high like any other asset.

BTW I am 100% stocks, but I didnt start saving until 2007 and you have us beat by about 600+ so you will be fine either way rent or buy.

No I do not enjoy doing maintenance and that is one thing that concerns me about real estate when compared to equities.. I pay about 0.18% to maintain my portfolio but to maintain a house its probably many times that amount!!

But I guess it cannot be compared as I intend to live in the house.

 

[Spudd]

Do you live in Toronto? If so, I would emphatically NOT buy right now.

 

[euro]

I don;t think you can go very wrong with waiting a few years to see where your housing market is headed - yes, you could miss a potential "run up" in prices, but if that happens you still haven't actually lost much. On the other hand, if you jump in now and the market craters, it may take you a decade just to recover.

In your situation, I'd wait.

 

[W2R]

How did you decide to make the jump and purchase? What were some of the factors you were considering/thinking about (both financial and non-financial factors)? Were you a first time home buyer?

I bought my first home (well, the first one after my 1998 divorce) in 2002. I bought it because I was planning to retire in 2009, and my rents kept spiraling upwards so I wanted to buy a house and stabilize my housing expense. I paid it off in 2006, and then retired in 2009. After about five years of retirement I noticed that I wasn't spending all that I could, and decided that more than anything, I wanted to move to a better house in a better part of town. So I did.

As a first time home buyer, I feel jumping in during a hot housing market puts me at a real disadvantage. In our area as well, there are many bidding wars and it is normal for buyers to waive all conditions in order to "win". It seems pretty crazy but this is the current market dynamics.

I haven't ever bought a house in a higher COL area during a hot housing market. So, the idea of waiving the inspection just freaks me out. Don't know if I could do that. Sometimes houses have serious issues that don't show up until the inspection is done. For example, my present house needed all of the under-slab plumbing replaced. I had NO idea until my inspector found it when taking video of the insides of all the plumbing. The sellers had to pay $25K to have it fixed. Otherwise, the local government would not let them sell to anyone. So essentially the inspection gave me a $25K discount on the house.

 

[JohnnyBGoode]

That is correct - you have to live somewhere. It also can come down to the tradeoff between rent and mortgage. I know around here (Bay Area - super-duper hot real estate) the rents have definitely caught up to mortgage payments. So it isn't actually obvious that renting is "cheaper" than buying if you can afford the down payment (with no PMI!) and have a career that is reasonably stable.

We have several friends in the same position as OP - not the retirement part, but weighing whether to jump in to a hot housing market. My guidance, FWIW, has been that if you like the house/condo on its merits and don't mind staying there 5-7 years, then go for it if the price is fair given the current conditions. However, don't get desperate and don't get caught up in a bidding war.

Real Estate will correct itself sooner or later, but so will equities. Playing the long game does work.

 

[Walt34]

On the other hand, if you jump in now and the market craters, it may take you a decade just to recover.

This is what is happening with DW's nephew and his wife. They bought a townhouse almost at the housing peak and have been underwater on it since, but they kept paying the mortgage. Now because of the terrible schools for middle schoolers they must either move or home school, which isn't really an option for them. Their oldest daughter will be in middle school next year.

They don't want to be landlords but that is what it is looking to be their best option, the other being to bring ~$15k to the settlement table. They are planning to rent at the next place.

So much depends on the local conditions. I bought a house by myself in 1988 for $94k and that was a real stretch, and I was definitely "house poor" for several years. But five years later the rent on a one bedroom apartment was almost half again what my house payment was so at that time in that location buying was a good decision. I was there for 16 years (DW for 14) and during that time the value rose a little over 9% per year. Good, but not stellar.

But I also knew that was likely because of the local conditions - expanding population and that most of the buildable land had already been built on. What was left was going to be very expensive to develop so I was willing to take the gamble. And at the time I had never, ever, seen house prices go down.

Clearly, YMMV.

 

[socca]

Put together a 2018 budget with yourself as a homeowner, ditto with yourself as a renter, and compare the two. Of course, there are significant non-financial aspects that will impact your eventual decision.

 

[pjigar]

I am a landlord and I tell you that it is much cheaper to rent right now than buy in Dallas, Texas. Which means your situation is going to be very personal and local. There are lots of intangibles (and lot of tangible work and expenses) involved with homeownership. You can best answer your question. If you don't spend money saved from *not* buying the house then you can FIRE a lot quicker than otherwise. I wish I didn't buy my current house and kept my expenses low.