Telling a friend to buy a house

[LivingAlmostLarge]

So I've a friend who has rented for 16 years in the area. They always wanted to buy but never could. It always was just beyond their reach. When prices were lower they made less. They make more but housing has gone gangbusters in the past decade. The truth is that they have super cheap rent $1750/month but to buy would be triple that if not more. So they are getting a stellar deal.

But I really think that they just can't afford to live where they live. It would be one thing if they could buy a house and were saving the excess money say $3k/month because they like renting and it wasn't a big deal. But they can't afford even double. I told her since she got a job to save her income in a separate account for a downpayment. The problem is that they also don't have a downpayment so they could do 3% FHA loan but at the end of the day they still need to afford the payment.

I pointed out that it's fine to rent, but in 20 years at 65 (they are 45) are they okay having not owned anything? She said the problem is they like where they live and quoted YOLO. Do you give up liking where you live and buy a home somewhere you don't like because it's affordable? I personally say yes. Because you can't afford to buy where you rent maybe you should rent where you can afford to buy? I don't know, but I feel in my gut that living somewhere 30 years and renting even at a below market rate you do not end up ahead of someone who bought a house.

The friend mentioned being 45 and has maybe $100k in her retirement and her husband the same. They haven't been stashing away money left and right and living super frugally FIRE. They live modestly but still have CC debt annually they work on paying off and stuff. The normal living. But if they didn't have cheap rent it would be even worse. If they were renting even market rate where she lives it would not be a feasible budget.

My suggestion was to maybe buy in the next year or two and then do the 3% DP and move to somewhere they can afford.

[kork13]

It comes down to priorities, and the bottom line is that they're being short-sighted.

Thus-far, they have not prioritized financial strength or stability (saving for retirement, home DP, living within their means, etc.). Rather, they have prioritized living in a great area they love, at an affordable monthly rent. They may not necessarily be entirely wrong, but by making those decisions, they are limiting their options for the future. Unless they buckle down & save aggressively, and/or move to a different location, they will likely be stuck renting a home for the rest of their lives. They'll never own the ground & home beneath their feet, and will probably always be saddled with debts.

Probably the 3 greatest financial secrets are just those: (1) Live within your means; (2) Save for the future; (3) Control your living costs.

You can't force people to change. All you can do is show them the potential future that could await them, and encourage/motivate them to decide they want a change toward that future.

[Jluke]

If they can’t afford the payment why push them to buy. Seems like a financial disaster waiting to happen.

I imagine you are thinking of the home as a lottery ticket since California seems to be a hot location over time.

best to do a buy vs rent calculator (New York times??)

home ownership is expensive. If they can’t afford the mortgage payment where will they get the money to maintain the home? Property taxes? Utilities? Etc.

what happens to their jobs if they move to a more affordable area? Maybe they are remote now but that could change.

[crazyliblady]

So I've a friend who has rented for 16 years in the area. They always wanted to buy but never could. It always was just beyond their reach. When prices were lower they made less. They make more but housing has gone gangbusters in the past decade. The truth is that they have super cheap rent $1750/month but to buy would be triple that if not more. So they are getting a stellar deal.

But I really think that they just can't afford to live where they live. It would be one thing if they could buy a house and were saving the excess money say $3k/month because they like renting and it wasn't a big deal. But they can't afford even double. I told her since she got a job to save her income in a separate account for a downpayment. The problem is that they also don't have a downpayment so they could do 3% FHA loan but at the end of the day they still need to afford the payment.

I pointed out that it's fine to rent, but in 20 years at 65 (they are 45) are they okay having not owned anything? She said the problem is they like where they live and quoted YOLO. Do you give up liking where you live and buy a home somewhere you don't like because it's affordable? I personally say yes. Because you can't afford to buy where you rent maybe you should rent where you can afford to buy? I don't know, but I feel in my gut that living somewhere 30 years and renting even at a below market rate you do not end up ahead of someone who bought a house.

The friend mentioned being 45 and has maybe $100k in her retirement and her husband the same. They haven't been stashing away money left and right and living super frugally FIRE. They live modestly but still have CC debt annually they work on paying off and stuff. The normal living. But if they didn't have cheap rent it would be even worse. If they were renting even market rate where she lives it would not be a feasible budget.

My suggestion was to maybe buy in the next year or two and then do the 3% DP and move to somewhere they can afford.

It sounds to me like them buying a financed home would be a fast track to bankruptcy. It takes discipline and patience to manage money well - saving, budgeting, and paying off debt. They need to make a budget and stick to it. It is possible that they should not buy a house at all.

[ua_guy]

There comes a point - for me, it was 40 - when I realized taking out a 30 year home loan would mean I'd be older than 70 when I paid it off, if I rode it out the full 30 years. No thanks.

But in this instance, I'd have to ask, what is affordable? I agree their retirement savings is pretty sparse for their age. But also, owning a home with a high value can be a huge asset in retirement - something that can be sold to downsize, or live in, borrowed from, or reversed-mortgaged during retirement. Owning a home in retirement significantly reduces the amount of retirement savings needed...

What are their incomes? How much is the house? What are current interest rates? Do they have any other sources of potential income - pensions, or inheritance?

[LivingAlmostLarge]

If they can’t afford the payment why push them to buy. Seems like a financial disaster waiting to happen.

I imagine you are thinking of the home as a lottery ticket since California seems to be a hot location over time.

best to do a buy vs rent calculator (New York times??)

home ownership is expensive. If they can’t afford the mortgage payment where will they get the money to maintain the home? Property taxes? Utilities? Etc.

what happens to their jobs if they move to a more affordable area? Maybe they are remote now but that could change.

What is affordable? I think they make $125k annually on one income and with her working more like $150k. I think they should probably buy based on $150k because she does have potential to make more, that's part-time. Owning a home in retirement will be less than $1750 in 20 years. I guarantee that it won't be $1750, actually since their landlord does raise it $50/year that will be $2750/month in 20 years. To cover that much in retirement seems like a stretch, I highly doubt they will have a $1m saved plus social security. So where will they live in 20 years? In 20 years they will not be able to afford rent, my guess sooner rather than later.

I think a house under $600k would be affordable. Probably something closer to $500k to be honest would be where I would cap it at. At 5.5% i think it would be manageable. I might even go to $450k and do a 15 year loan so it'll be paid off by 60. Starting at 45 means it'll go to 75. I might just bite the bullet and pay it off faster.

I don't think it's a lotto ticket but in most places in the USA if you are staying somewhere for 16 years let alone 30-40 years you will make money on your home. You will have a hedge against inflation with a fixed rate mortgage. When it's paid off you will pay only taxes and maintenence and insurance. In expensive areas it's even more important to get in early and lock in your fixed costs. Your income grows but your mortgage payment stays relatively lower (except for property taxes).

But $600k buys nothing where we are. They are priced way out far away. But what else can they do?