Does it make bad financial sense to follow this dream?

[Mjenn]

OK, so here is the deal - I'm the very frugal one in our family, and I have won my husband over by showing him how much more comfortable life is when you have a nice buffer - he has been very positive about living frugally for the last 8 years.

Lately we've watched some close friends go thru some tragadies, though. It's been really difficult, and DH is beginning to feel that 'life is short' and while being frugal is good, he is afraid we are being too careful and missing out on living some of our dreams - the big one here being Home Ownership

I'm hopefully optimistic, but even when we looked at houses last time about 2 years ago, I am the one really dragging my feet here. I don't feel 100% financially confident about this and it makes me nervous.

Here are the arguments we have for and against - but since you guys are a wisely frugal bunch, my question for you is, are taking too much risk by taking the plunge? We are in no rush to buy, it's just that we have been skimming ads and half heartedly looking for awhile and just saw a place that fulfills 9/10 things on our wishlist and its at the low end of our range.

FYI we live in Europe - so somethings are a little different

Positives:

DH just landed a tenured position with a really good salary - this means we know we will be in this region for the long haul - with unemployment this means that if anything happens (which is low risk as it is tenured) he will have 1 year of 80% salary and 1 year of 70%salary minimum.

My concerns:

The housing market here has fully recovered since the mild crisis in 2009 and is now about 13% higher then before the crisis. I don't see housing prices increasing much here for the next few years - maybe even decreasing. We plan to stay in the house for the long term but who knows - there is a rental shortage where we live, so we could always rent out the house if need be.

Unknown expenses - right now we rent a nice little house with a decent rent that includes heat and hot water - if something breaks the landlord comes and fixes it immediately - I am very concerned about how much to budget for for unknown expenses and hesitent to give up this luxury.

Own business - I run my own business, so my income is somewhat tentative. I have had a pretty stable income for the last 5 years, but I have dropped the number of hours I am working at the moment to finish a Masters - this means we might not be able to save very much for the next year.

We spoke with the bank and they have pre-approved us for the loan, but I still would like to feel a bit more confident. The cost of the house is equivalent to our combined salary for about 5 years and we have 10% to put down on it. (part of the reason we don't have more is because DH's job gives him a big salary bump that is effective in January)

Thoughts? Comments? Concerns?

[bjl584]

I advocate a minimum of a 20% downpayment, so I would say to wait until you save more. It sounds like your rental is a nice place with a good landlord, so staying there a little longer while you continue to save shouldn't be an issue. Save up 20% down plus a 6 month emergency fund, then start looking to buy.

[disneysteve]

Originally Posted by Mjenn

The cost of the house is equivalent to our combined salary for about 5 years and we have 10% to put down on it.

This is really the only important info in your post.

Rule of thumb is 20% down and spend no more than 3 times income so I'd say you are not yet ready to buy the house you are looking at. You either need to find a cheaper house or keep saving.

[WesternHemlock]

Unknown expenses - right now we rent a nice little house with a decent rent that includes heat and hot water - if something breaks the landlord comes and fixes it immediately - I am very concerned about how much to budget for for unknown expenses and hesitant to give up this luxury.

This is what makes me the most nervous about buying a house. I rent a smallish house with a lot of small and medium sized problems. It is a house that is not too old, but at the age where many things have reached the end of their lifespans like windows, toilets, appliances, water heater, etc. A few things were replaced right before we moved in or as we moved in, but there is still a lot to be updated or replaced. The most important thing is that this house looks great and none of the problems with this house were immediately obvious. But live in it and yeah, you see that the windows have seals broken, the weatherstripping is completely rotten, the condensation just floods the window sills and runs down the wall in the winter (we moved in the summer). The house is very poorly insulated and would be a high priority to rectify that if we owned it. At anyrate, this experience has made it clear to my husband and I just how expensive home ownership can be simply in maintenance costs. We've decided that it will be another 3-5 years before we would be in a position to buy.

[MonkeyMama]

Originally Posted by disneysteve

This is really the only important info in your post.

Rule of thumb is 20% down and spend no more than 3 times income so I'd say you are not yet ready to buy the house you are looking at. You either need to find a cheaper house or keep saving.

I agree.

I am from one of the most expensive areas in the U.S. so I am not married to the 3 times income rule. BUT, buying a home that costs 5 times your COMBINED income just sounds insane to me. We were in a similar situation, everyone we knew were buying homes at that level, and we decided against it.

Taking the time to save 20% down for the home you want will give you more clarity. Though I am not sure what the norm is in your country, I could not imagine buying a house in that range without at least having 20% to put down.

I would also examine seriously the reasons to buy a house. The reason that is spurring you on is that life is short. I suppose this means you want to grasp some dream of home ownership. BUT, the reality sounds like it is just going to be a lot more responsibility to take on - having to work more/longer, etc. Buying a house seems at odds with your motivation, from my perspective.

Anyway, so why exactly do you want to buy a home?

[DebbieL]

OP - that is way too much money to spend on a house. Keep saving. I am in Victoria, BC, Canada and the house prices here are still very bubbly (severely overpriced). DH and I earn 2x the average household income for Victoria, and we wouldn't DREAM of buying an overpriced house here (average is over $600K - and believe me that's for nothing special). I don't ever want to be house poor. Plus, renting does give you lots of freedom/mobility.

[EEinNJ]

Mjenn, it sounds like you're financially sensible and are in a very good position to buy a home. It's always better to put down a bigger down payment, but there are other risks. One is, prices may go up more before you can save more money. The other is, when you buy a home it's good to have a reserve for improvements and repairs.

Owning a home is a lot of things- a big step towards financial security, a responsibility, a long term investment, most important- a place to live, which we all need. I wouldn't, though, make it a "life is short" bucket list item. After you've owned one for a while, or moved on to another, you take it for granted. I don't think anyone on their deathbed is glad they bought a house any more than they wish they spent more time at the office.

[LivingAlmostLarge]

What's it look like with the salary bump? Are we talking we make $200k and want to buy a $1M home? Or more like $100k and buy a $500k home?

[disneysteve]

Originally Posted by LivingAlmostLarge

What's it look like with the salary bump? Are we talking we make $200k and want to buy a $1M home? Or more like $100k and buy a $500k home?

what's the difference?

[elessar78]

Mjenn,

I don't have much else to offer in terms of the financial aspect of the question, but I'm in a similar boat.

I'm apprehensive about the unknown costs of home ownership. Aside from the stigma about being a renter, I really don't have a problem with it. Although now we "have" (special circumstance at the moment) decent jobs in our area, I'm not sure that I want/can see us staying here for ten years—to make home ownership worth it.

But I've always been a non-conformist (is being frugal non-conformity?) so there's that aspect too.

I do want to own a home one day, a nice home with a lot of land around it but I don't think that time is now. Like you we have a nice rental, with a good landlord. We've lived there 3 years and they have not raised the rent yet!

I just wanted to let you know where I stood, because from my perspective I find very few people to bounce my feelings on the subject on. I get the "it's a good investment" and "American Dream" party lines all the time without considering our particular situation.

[Mjenn]

Really great feedback as usual from everyone, so thank you. It's why I keep coming back to this forum.

I know that 20% is usually the ideal downpayment, I guess I just got focused on, could we handle the monthly payments longterm - we've always had 2 uncertain incomes, that has always been what we have focused on. (one small biz owner and an academic).

I'm also convinced that the housing market where we wre is rather unsustainable. We live in a region where many people make around the same thing we make, and houses start at about 5 times our income, I'm not one to keep up with the joneses, but it's an issue. One we are trying to make peace with. I figure if we plan on being there for a really long time, so even if the market crashes, I think in the long term it won't matter. It sounds a bit like Ontario.

But you guys made some really good points, rents here are heavily controlled and our landlord is the town we live in. It is def. Cheaper on a monthly basis to rent. I think it is just that we cannot really choose what we want when we rent, the waiting list for a place is years and you take what you can get.

I think the issue was that we decided we would just kind of look at what was out there and ended up finding something we loved. We thought it would take years, but it just came along. I realize something else will also come along, but I know DH has a hard time with the ups and downs of house searching.

I do really need to stop and think, why home ownership. I know it is part of dh's dream, I just don't know how we are going to find the time for all of the stuff homeownership entails.

I think for now we will wait,
Ps sorry I'm posting for my phone and cannot edit out the bottom phrase



Im less into the home ownership thing than DH,

[disneysteve]

Originally Posted by Mjenn

I guess I just got focused on, could we handle the monthly payments

This is a very common and very large mistake that people make. Just because you can afford the monthly payment doesn't mean you can really afford the purchase or that it is a good idea.

I'm also convinced that the housing market where we wre is rather unsustainable.

If you think prices are unsustainable and destined to crash, why would you consider buying anytime soon? Save up your money and wait for the crash to happen. Then you'll be in great shape to swoop into a buyer's market and have your pick of great homes. And you won't have lost tens of thousands of dollars on the home you already own.

[graceful]

We bit the bullet and purchased our first house in 2009, mostly for the kids' schooling. BEST decision ever... for our kids. So, I would do it all over again.

That being said, homeownership is 100% times more expensive than the cost of the actual house and we bought a "move-in ready" house.

Honestly, if "life was short" I wouldn't buy a house at all! I'd rather rent and have a HUGE cushion in the bank. I'd want the freedom to be able to make major changes in a few years if needed. I use to travel a LOT more before we bought the house. I had a lot more discretionary income to "blow" as frugal as I normally am.

Now every time we get an oil delivery, I cringe at the bill and think that would have paid for our plane tickets to WDW. Lol. Hard to make the change from 2 trips to WDW a year to once every 2 years.

We also had to move further away in order to afford a house we LOVE. I really love the area we live in now. However, the daily commute really sucks, excuse my language.

Was it all worth it? Yes, for us. But it is a SACRIFICE too. I would never call it "freedom" or "living for the moment" or I need the house because "life is short." It is a golden albatross around our necks. If it weren't for our kids, we'd be renting in a NY minute. In the meantime, we will enjoy the house and everything else that comes with home ownership.

Good luck with whatever you decide. I would definitely WAIT until you have more downpayment saved and a HUGE safety cushion before buying anything yet.

[disneysteve]

Originally Posted by graceful

Honestly, if "life was short" I wouldn't buy a house at all! I'd rather rent and have a HUGE cushion in the bank. I'd want the freedom to be able to make major changes in a few years if needed. I use to travel a LOT more before we bought the house. I had a lot more discretionary income to "blow" as frugal as I normally am.

I thought the same thing. If the argument is "life is short" that would speak to not buying. Why become an owner and build equity if you're worried about the future? Live cheap and spend your money doing fun stuff, not painting and carpeting and fixing appliances and paying exterminators and all of the other things that crop up when you own.

[Mjenn]

Originally Posted by disneysteve

If you think prices are unsustainable and destined to crash, why would you consider buying anytime soon? Save up your money and wait for the crash to happen. Then you'll be in great shape to swoop into a buyer's market and have your pick of great homes. And you won't have lost tens of thousands of dollars on the home you already own.

It's because I have been saying the same thing since 2005 and it hasn't happened yet. And the longer I live in this country the more I realize that even if things were to go south here, the government would probably do everything within its power to keep people in their houses until the market improved, which would mean that while there would certainly be some houses available - I don't think there would be a huge amount of people who would have to get out. Unlike the US, you owe the money, even if you cannot make your payments and the bank sells your house. You still owe the bank the difference.

Also, the area that we are in has expanded exponentially and due to a current project is expected to grow even more in the next 10 years - which is pretty certain - a huge EU complex which will bring in a lot of jobs and international movers. Which means even fewer houses available.

I can see why the Life is Short argument doesn't seem to hold a lot of water. From my perspective I am the type of shopper who always goes 'Do I want this? Do I really need it?' then I walk away and if I'm still thinking about it a week or so later, I might decide to get it. DH and I have talked for a really long time about wanting a house, we've been saving up for years to get one, I think he's just at the point where it's like 'I want to stop talking about it and do it. What are we waiting for?'

I know the answer to that question - but I am also someone that has never carried any debt, never taken a loan, and has always been in the black - so for me to suddenly loan all of this money feels like jumping off a cliff.

Thank you for making me feel slightly more rational.... (although I did ask this question on this board, and not some of the other boards I go to, for a reason )

[disneysteve]

Originally Posted by Mjenn

DH and I have talked for a really long time about wanting a house, we've been saving up for years to get one, I think he's just at the point where it's like 'I want to stop talking about it and do it. What are we waiting for?'

I know the answer to that question - but I am also someone that has never carried any debt, never taken a loan, and has always been in the black - so for me to suddenly loan all of this money feels like jumping off a cliff. )

Just to be clear, I'm not at all opposed to home ownership. My wife and I own one after all. But we bought with 20% down and paid less than 2 times our annual income. There is no way in hell we would have paid 5 times our income or put down less than 20%.

I understand what your husband is thinking if this is something you've been working towards for a long time. He just needs to cool his heels and realize that pulling the trigger and buying before the money is there is a huge mistake that will sink your finances for years to come.

At the same time, you need to realize that buying a house is probably the largest single purchase you will ever make. For the vast majority of folks, it does require taking on debt and signing on the bottom line is kind of like jumping off a cliff. But that doesn't mean you shouldn't do it. You just shouldn't do it until you are ready to do it and you guys are not yet ready to do it (at least not with the scenario you've spelled out). If you can find a more affordable home that fits your budget, that would be different.

[MonkeyMama]

From another perspective, we've actually owned 2 homes. I did say we decided against it in insane expensive city. But we came up with alternatives.

#1 - owned a condo (far less expensive than owning a house). Of course the primary reason we did this was financial. Owning cost about half as much as renting.

#2 - We moved and bought a house elsewhere. This was more of a materialistic type dream, but since it didn't cost us any money (over owning condo in expensive city), it has been a wonderful experience. If I had to stretch so much financially (5 times income?) I can't say I would be so happy. The thing for us, is we found a way to reach a goal while cutting significantly the amount of money we would have to pay to reach that goal. So though "buying more house" doesn't sound like the most zen goal, "buying twice the house for half as much" was a pretty rewarding experience. We simply don't have to work as much as we had originally expected in our 20s. Simply to afford our shelter...

I share as alternate scenarios to reach your goal.

I can tell you specifically the reasons we prefer home ownership:

1 - In our case, it's just cheaper (I understand this is not the case for most)
2 - Stability - this is maybe extra important to us since landlords where we live sell/foreclose very often.
3 - Personal space - we really value a larger home and more personal space than we could realistically afford in our old city. Sure, some people are happy to live in a box. We are just not those people!

If I could find some stability and/or save some money by renting, I would so totally be a renter. I can tell you that much!

I think it's important to meditate on what you want in a home, and what home ownership will give you that renting doesn't. I still haven't got a firm sense of what you are looking for. & I think waiting is a good thing - will give you time to think about it.

[LivingAlmostLarge]

Did the similar to MM and similar COLA so we both get what you are going through. Homes here average $750k in good areas and $500k buys you barely 3/1 bath old homes that need lots of work. New windows, oil heating, no insulation, etc. So another $100k in repairs minimum. Lots of tear downs and complete renovations.

Anyway though, I think the more money you make the more disposable income you have so even if housing takes up more of your income it's okay because if you make $400k buying a more expensive home isn't the same. If it eats up 1/4 your income, the 1/4 to live on is still $100k!

So to me it does matter what people make. So how much home and how much income are we talking about? Perhaps buying with 10% does make sense.

[dojo]

If you've been saving for years and only have 10% to pay upfront, then it's indeed a better idea to hold on. I didn't know about the 3Xincome rule (phew, good to be in this forum, that's for sure) and from what many of our friends here did it was even 7xincome and they're in DEEP TROUBLE now.

Life is short indeed. TRAVEL. See the world. Have sex, eat healthy stuff, do sports. Don't buy a home though, especially when you're not ready yet. If renting in your area is decent, then use this and save more money. In few years, if you put the money you get from that 'salary bump' you might pay 30% of the house or even more. Now that's gonna be a good position to start from.

NEVER enter debt just because your salary increases. This is told by someone who bought a car (4 year payments) and lost the job next year. You have no idea how hard it's been. You never know, god forbid, what happens. Nothing in this life is certain, but death .. sorry for being so grim, but it's the truth. Just enjoy that raise, SAVE MORE and have fun