Were you thinking about buying a home two years ago, but dang, those prices were just so hiiiigh? Ha ha ha ha. You thought prices were high then.
We work with clients who live in areas with crazy-high house price—Bay Area, Seattle, New York. Some of whom have been talking for several years about buying a home. And for all those years, prices have seemed Too High to be able to wrap their heads around. So, they didn’t buy.
Enter a year-long quarantine.
Predictably, the entire damn country has decided that now—during the tightest, most expensive, most difficult housing market in years—now is the time they cannot wait to buy.
How frustratingly opposite-of-helpful the human psyche is.
Worst. Timing. Ever. Or is it?
You could call it the worst timing ever. And by some very reasonable standards, it is. Have you seen these prices? Have you seen how little inventory there is? Have you seen the apple video?
On the flip side, however, I’ve noticed a hugely positive thing with many of our desperate-to-buy clients:
This quarantine has proven to these folks that they really truly want to stay where they are for years to come.
The last year-plus of remote work has given people in the tech industry the best opportunity ever to move. You could move and still keep your job. Companies were very permissive and many promise to continue to be permissive.
And yes, we’ve had some clients move. But we’ve also had many clients reaffirm their commitment to the Bay Area or New York or Seattle, despite those areas not being able to offer their usual awesomeness during the pandemic.
If you want to buy a home, you really need to stay put for a while.
One of the rules of buying a home is that you want to commit to staying in it at least 5, maybe 7, years purely to “earn back” the transaction costs that go into buying and selling: realtor commissions, inspection, legal and recording costs, mortgage closing costs, etc.
Commissions alone can cost 6% upon sale (3% to buying agent, 3% to selling agent). If you buy a $1M home (ha ha ha ha! You wish you could find a home for $1M), you’re going to spend $60k purely in commissions.
That’s why you want to be pretty sure you’re going to stay in the home for enough years to amortize/earn back/smear out those transaction costs.
A lot of clients, pre-quarantine, were iffy about buying a home because they really didn’t know if they wanted to stay where they were. And that’s one of the top two reasons to not buy (the other being you can’t afford the down payment or monthly costs).
And while quarantine has proven that they don’t want to stay inside their current four walls, it has also proven to them that they love the area where they live and want to stay for a long long time.
That realization alone is darn near enough to get a “go for it!” when they ask me if they can buy a home.
A story about the power of knowing you’re here to stay. Mine.
My husband and I met and lived together and got married and had our first child in San Francisco. I remember us looking, back in 2008, at 2-BR condos to buy in the Inner Sunset for around $400-500k. And it felt like so much, too much, money.
We didn’t buy.
We moved to Norfolk, VA, where we had child #2 and I started to establish myself in my new profession. (I had switched from tech to financial planning.) We were still renting. It was a fine rental but definitely had things we didn’t like (window AC units and original—read: shitty—single-pane windows).
I started to get antsy. I wanted to buy. I wanted to feel settled. My desire to buy was driven almost entirely by that desire to feel settled. After a cross-country move and two young kids and a career change, I was sick of the upheaval.
We looked around. At that point, the typical place available was a 3-BR brick townhome for $500-600k. It seemed like so much, too much money.
We didn’t buy.
After a few years in Virginia, I decided I didn’t want to live there any more or raise my kids there. (I’d grown up in Virginia and never felt like I fit in. I didn’t want to impose that on my kids either.)
So, long (so painfully long!) story short, we end up back on the west coast, in Bellingham, WA.
Thank goodness I hadn’t bought the financial planning practice in Virginia that I’d had an opportunity to. Thank goodness we hadn’t bought a home in Virginia. By avoiding those commitments, we still had flexibility to “up and move” when we wanted.
Now in Bellingham, in 2014, I remember explicitly thinking—and maybe even saying to my husband—”This is where we’re going to raise our kids. We’re going to stay here for the next 20 or so years.”
So we bought.
Granted, housing prices in Bellingham were and are lower than what our clients are contending with. That helped for sure. But most importantly, the knowledge that we were here to stay made the decision to buy almost like falling off a log.
(Not to say the whole process of buying and emptying out our taxable investment account for a downpayment and getting a mortgage wasn’t stressful as hell. I mean seriously. But I didn’t have profound doubts about the decision to buy.)
The financial question should be: Is it safe?
You can find a million resources online for figuring out if it’s a smart idea to buy instead of rent from a financial perspective.
One of my go-tos is the New York Times rent vs. buy calculator, because it incorporates variables that many calculations don’t:
- the cost of maintaining a home
- the return you can get on your money if you don’t use it on a downpayment and instead (rent and) invest it
(When you leave these variables out, you give owning a home an unrealistically rosy advantage.)
I almost never think about owning homes as a “financially good or bad/smart or dumb?” decision.
I draw the line at: Is buying a home financially safe or not?
Your home is not an investment. Don’t expect a “return” on it.
Your home isn’t an investment.
Philosophically, it represents so much more than an asset that has potential returns. Just as you wouldn’t expect to get a return on that new gas stove. The point of buying it is to improve your quality of life; you get joy and use out of your home every day.
Financially, it’s so utterly unknowable how this one home in this one neighborhood in this one city will perform over time. Yes, your home might end up gaining a lot in value. But that possibility is of limited usefulness for two reasons:
- You can’t know ahead of time what this one asset is going to do. (By contrast, in an investment portfolio, we recommend diversifying across thousands of stocks, so the fate of your money isn’t tied to a single asset.)
- You have to live somewhere. So unless you eventually leave a high cost of living area and move to a lower cost of living area, the value of your home is way less helpful than the value of your investment portfolio.
On average, across the country, residential real estate historically keeps up with inflation and little more. Contrast that to investing in the stock market, which historically returns 10%ish, compared to inflation of 2-3%.
So, you really should be buying a home because you want to own a home. Not because you think you’ll make money off of it.
Maybe you can buy that “stupidly expensive” home.
What does this mean in practice? One thing I’m observing is that this attitude frees you up to consider buying a home that feels Stupidly Expensive.
I’m telling you, none of our clients—regardless of their strong financial situation—who have bought a $700k or $1.2M or $1.8M or $2.5M home in the last year has thought that was a reasonable price. They all thought it was stupidly expensive. But it got them a quality of life that they really really wanted.
And it wasn’t financially dangerous.
When we looked at their income and compared it to the ongoing housing costs—mortgage + insurance + tax + HOA + maintenance—the ongoing costs were reasonable. By reasonable, I mean two things:
- The clients would still have enough money—either in savings or income—to do the other things that were really important to them, like changing careers or taking a sabbatical.
- The housing costs were 30%ish or less of their income. Sometimes they accomplished this 30% by putting down a gigantic down payment…that’s okay!
And maybe you can’t.
Even if you are sure you want to settle in a town, it’s still possible that financially it’s just not safe to buy a home there.
For example, we have one couple client—pregnant with their first child, both employed at tech companies—who are looking at homes in the $1.2M range.
Given their ability to put down a down payment, their monthly costs would be meaningfully above 30% of their gross income, and way above 30% of their take-home income. And this higher housing cost would start right at a time when their other monthly expenses are about to go up significantly (hello, childcare).
That’s not necessarily a deal breaker, but it means they’ve got some soul-searching to do. And perhaps simply some financially hard decisions to make.
- They have to question what really matters to them in their lifestyle. If they buy, they lose a lot of flexibility for the next several years. They’d both have to maintain their current incomes. That limits career choices. Taking time off is off the table. Changing careers to anything lower paying is off the table.
- They have to get a really strong, accurate handle on their non-housing expenses, so they can decide whether they have the ability to fit higher housing costs on top of it. If they buy, they have to pay much stricter attention to their other expenses for the next few years as they adjust to the newly higher housing costs.
- They have to look at how much (or rather, how little) cash they will have left over after they buy. Does this leave them dangerously exposed to emergencies? Because we’ve definitely had clients who bought a home, and within a month were laid off. Scary.
The harsh truth for these clients might be simply that They Can’t Buy right now. It feels so ridiculous that a couple making > $300k/year Can’t Buy, but it could be the truth.
Home prices are really high nowadays. Kind of everywhere. But if quarantine has helped you realized that you do, indeed, want to stay where you are for years to come, you might find those “stupidly expensive” homes are, in fact, just your flavor of stupid.
Are you desperate to buy a home…and also desperate to have someone you trust guide you through the process? Reach out to me at firstname.lastname@example.org. I am happy to put you on our waitlist or give you referrals to other, wonderful planners.
Sign up for Flow’s weekly-ish blog email to stay on top of my blog posts and videos.
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Meg Bartelt, and all rights are reserved. Read the full Disclaimer.