Quote:
Originally Posted by scfr
Thank you for stating my fuzzy thoughts so clearly!
And thanks to all of you for the thoughtful replies.
Some additional thoughts:
- I understand that we cannot dictate the appreciation or depreciation of our home's value, but that does not mean we can't make intelligent assumptions. We do it all the time when we do retirement calculators: Investment return, rate of inflation, life expectancy. None of us know can possibly know any of those figures for certain, but we assign numbers based on reason anyway. Historically, home values have kept pace with inflation. Assuming you are buying at a price that reflects the historical trend (and not at the top of a bubble), the figure you use for expected inflation and the figure you use for the expected appreciation of your home could be the same (for example 3%), couldn't it?
- Monkey Mama is correct that I am thinking a lot about this right now because I am trying to decide how much to spend on a house. I think this is a good time to think about it. But I also think it is something people might want to monitor, especially as they approach middle age ... (see next thought)
- Regarding downsizing: I think if more people monitored their home equity as a percentage of their net worth, especially as they start to get "older" (and I'm in my mid-40's and include myself in that category so I hope no one takes offense at the use of that word), it might prompt more people to downsize earlier on. For example, if someone is 55 and realizes their home equity is too large a fraction of their net worth, and they go ahead and put their home up for sale, they are in an infinitely better position than someone who comes to the same realization at 65 and who is forced to have a "fire sale" on their home.
Well ... I've heard percentages of 10-20% and they sound reasonable to me. If anyone else thinks this calculation is (or even possibly could be) important and cares to throw out a number, that would be great!
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I appreciate the research you are doing. I think you are doing a "top down" approach when a bottom up approach makes more sense.
top down- using some high level guideline such as income, debt, and net worth ratios.
bottom up- how much house do you NEED. Not a cost based analysis when you start. Define your requirements based on functional need, then figure out how to pay for it later.
bottom up example:
1) are you married?
2) do you have kids?
2a) are any of them moving out anytime soon?
2b) are any kids entering the picture anytime soon?
3) are the kids the same gender?
4) are the kids similar ages?
5) does your family live far away?
6) do you have visitors/entertain?
7) do you work from home?
8) does the holiday season affect your lifestyle?
9) do you host business functions at home?
10) do you have a hobby which affects the house you get?
and ask similar questions like these. There is no mention of cost anywhere in those questions- define the functional requirements first. (I am an engineer, bear with me).
Once you define your requirements, you can then attach a price to them. For example, if you work from home, you need a home office. Plenty of houses can be purchased without a home office (and cheaper than with a home office), but the requirement dictates that you need to pay extra for the functional requirement.
In my case, my wife loves the holidays. She also loves entertaining. She lives in many ways for having company. therefore we "need" a formal living room and some space so when 30-50 people are in our house, we have enough room.
If you have two kids of same gender and within a year in age, they could share a room, yet if there was a 3 year age difference, or a boy and girl, sharing a room is out. This would define the requirement for how many bedrooms. Again it's possible you need 4 and can find cheaper houses with 2 or 3, but your requirement is 4 and you will need to attach a price to that requirement. For example, the house we built comes with 2 upstairs floor plans- 4 and 5 BR. We have the 4, the 5 BR costs more. We can find the price on that additional BR if needed.
You could ask questions about the kitchen (maybe wife likes to cook and needs a given amount of counter space, even if normal house comes with less counter space). There will be a cost to this requirement.
Define the requirements, then do the following:
1) go to at least 3 different competing builders and price out a new home which meets the minimum requirements (even if you do not plan on building, I think this is a good step with little pressure from a realtor).
2) go look at 3 different houses (which are for sale) which come close to meeting the requirements as well. Look at overall prices.
3) go back to budget and look at what it will take savings wise to get the house which meets the minimum requirements. You have 6 data points (3 new construction and 3 for sale) to be able to average a price and make a good guess what things cost.
I should not my wife and I shared a condo for 4-5 years before building our current house. We went to homerama (expensive houses) each year and also would walk through builder market homes 2-5X per year even when we weren't looking to buy. When we walked into the model we eventually built, we knew immediately it met our requirements (hers and mine). Had an office for me and a loft for her (and kids), plus a good open great room. Window shopping for houses is a great way to spend cheap time with a spouse.
There might be houses in your area which sell for 150k, but they may not meet your requirements (two car garage, 3 BR, 2.5 BA, kitchen with formal dining room, family room and home office maybe), so you are then stuck with "higher priced" houses because of your requirements.
If that higher price takes up more of your net worth now, that is a consequence, not a decision factor, IMO.
Once you get the house price, you work backwards.
a) 20% down is $X
b) the payment with 20% down is $Y
c) the budget you can afford is $Z
d1) if Y>Z then increase X (increase down payment to get mortgage into affordable territory)
d2) if Z>Y, then invest the difference (budget is greater than the cost).
in case of d1, it might drive the ratio (networth to home value) down. In case of d2 it will drive the ratio up up up exponentially.
Again in both cases the ratio is used to express the situation, not drive the decision.