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I noticed this ongoing trend post housing crash. I'm looking into purchasing a house in the near future and searching out home prices and the amount I want to spend.
I've been noticing people are starting to get ridiculous with savings and how mortgages work. I see posts on this forum and other forums with posters getting ridiculous with debt to income ratios and the amount of mortgages someone should take on.
Example: I see posts with someone making 150K getting recommended to not go over 400K in housing price. To me that's ridiculous. You could easily go much higher. I work in corporate finance consulting and have a degree in finance. Debt and cash flows are what run a business. Why not treat yourself like a business? Rather than stashing all of your money in a low yield savings account or spending it on things that have no value (i.e. cars and other things)?
I saw a poster saying that they make 250K annually and have trouble paying a 350k mortgage? Really? I find that doubtful. Either everyone on the internet is lying about their income, or are the worst money managers in the world.
I'm not saying overextend yourself, but I don't see a problem with stretching a bit to buy a nicer house especially if you have a stable job and want to stay for the long term. Note: I'm talking about a 5/5 arm or low fixed rate, not a toxic mortgage like buying a 850k house on 50k. If you make 150K+ and have low debts with a good down payment, you could easily stretch to 750K (low end) with some smart financial planning.
My parent's stretched to buy their house in Hawaii twenty five years ago and their home value is worth 4 times what they paid and they have nearly 1 mil in equity. Not a bad move for a few years of watching spending until they got settled into their careers.
What's the deal? Did everyone start reading Dave Ramsey (who's a hack and a moron) and walk away from debt? Makes no difference to me but I'd like to hear your opinions.
Housing is only a basic need. Anything beyond "basic" is luxury.
We have doubled the size of our homes in 30 years, with additional bathrooms, etc.
Why is that necessary?
I have worked with too many people who expose themselves to a great deal of stress because they want to max out their preapproval when they buy, with little plan how they will handle a financial misfortune.
Once basic needs are met, and a bit of comfort added, nothing trumps money in the bank, IMO.
When I listen to Dave Ramsey, day after day, he deals with people who are doing/have done rather stupid things, and have lived out of control. Most times, his advice is on the mark, IMO.
Sure, it is a templated model with fundamentals that are cookie cutter rather than individually tailored, but how often does he have debt-free people calling in with great financial distress? I haven't heard those calls.
Um, no real life happened and people have seen that housing is not a fail proof investment.
You should not invest heavy in one area. I have everything in my primary residence bought for $213k in 2008. (On a $34k salary) the only reason I made this move was because it was my only option. I bought the cheapest house (foreclosure) on the market in my zip code. The market has dropped so much that I am struggling to recoup my investment.
Housing is only a basic need. Anything beyond "basic" is luxury.
We have doubled the size of our homes in 30 years, with additional bathrooms, etc.
Why is that necessary?
I have worked with too many people who expose themselves to a great deal of stress because they want to max out their preapproval when they buy, with little plan how they will handle a financial misfortune.
Once basic needs are met, and a bit of comfort added, nothing trumps money in the bank, IMO.
When I listen to Dave Ramsey, day after day, he deals with people who are doing/have done rather stupid things, and have lived out of control. Most times, his advice is on the mark, IMO.
Sure, it is a templated model with fundamentals that are cookie cutter rather than individually tailored, but how often does he have debt-free people calling in with great financial distress? I haven't heard those calls.
I guess I see things different.
Debt is a tool. Just like a saw or a hammer. Can you kill yourself or injure yourself severely with either tool? Yah, but I can also build something great with it too.
I'm not advocating buying a McMansion. But if you live in a relatively stable home price area (like Hawaii), I don't see anything wrong with taking on a bit more debt. Now, if you want to buy a mansion in the suburbs for twice what surrounding houses cost, that's a dumb idea.
I don't think maxing out what you're liabilities is smart either. But, I do think with a bit of planning and stretching you could set yourself up for the future.
Everything is a basic need. Your clothes, food, shelter. Should we all dress the same, drive the same car, and have the same taste in clothing? Same thing with houses. I happen to like living by the beach, and intend to do so even if I have to stretch to buy.
Um, no real life happened and people have seen that housing is not a fail proof investment.
You should not invest heavy in one area. I have everything in my primary residence bought for $213k in 2008. (On a $34k salary) the only reason I made this move was because it was my only option. I bought the cheapest house (foreclosure) on the market in my zip code. The market has dropped so much that I am struggling to recoup my investment.
No investment is fail proof unless you buy treasury bonds. And I think people who buy and intend to "flip" in a few years are stupid. But, if you intend to stay for thirty years, then there is nothing wrong with taking on a bit more mortgage to get in.
As I posted in the Auto forum, there is nothing that cures "new carittis " than not having write that car payment check every month. I think it is the same with housing. Sure, our house is not the finest in the city but it has had major remodeling and is in a great neighborhood with higher priced homes around it. And the best part, it is PAID FOR!! We could have easily sold and bought a more expensive home but I sleep very well at night not worrying about making some house payment with property taxes going up every year.
In my opinion many people lack the basic fundamentals for good fiscal management. It is why people like Dave Ramsey are a good thing for the general consumer.
People have a different tolerance for risk. People have a different tolerance for stress. Stretching yourself is fine for you. It makes you happy and you are comfortable with that sacrifice. Other people get freaked out and stressed out about it. It would be a horrible choice for those people because they aren't happy and aren't comfortable with that sacrifice. We are all different.
No investment is fail proof unless you buy treasury bonds. And I think people who buy and intend to "flip" in a few years are stupid. But, if you intend to stay for thirty years, then there is nothing wrong with taking on a bit more mortgage to get in.
Life changes. When I bought the house it was just me and a child. Shortly after my bf moved in, we had a second house and now we are cramped in my small 1000sq ft house.
But, if you intend to stay for thirty years, then there is nothing wrong with taking on a bit more mortgage to get in.
I agree with most of what you say here. These things go in cycles. Households (and companies, and governments) overleverage, there's a correction, they deleverage excessively, etc., and the cycle continues.
However, I think the above quoted piece is telling. Careers are simply more unstable today than they used to be. Demographics are more fluid and neighborhoods (and school districts) are less stable. Most people just don't know if they'll be able to sink deep roots in their perfect neighborhood and remain there for thirty years, or if it will still be their perfect neighborhood in thirty years. And because you can't time the housing cycle and there are significant transaction costs, a heavily leveraged investment in real estate of an uncertain term is inherently risky for a lot of people.
I agree with most of what you say here. These things go in cycles. Households (and companies, and governments) overleverage, there's a correction, they deleverage excessively, etc., and the cycle continues.
However, I think the above quoted piece is telling. Careers are simply more unstable today than they used to be. Demographics are more fluid and neighborhoods (and school districts) are less stable. Most people just don't know if they'll be able to sink deep roots in their perfect neighborhood and remain there for thirty years, or if it will still be their perfect neighborhood in thirty years. And because you can't time the housing cycle and there are significant transaction costs, a heavily leveraged investment in real estate of an uncertain term is inherently risky for a lot of people.
But if you really do have an income of 150K (or above), you obviously have some sort of skill set that is marketable. If you have a cushion that can pay your lifestyle for a year or two if you get laid off, it’s not too risky. Granted, if you make the leap you have to be willing to take risk and accept the problems that could arise (like the neighborhood changing). But, I see posts where the poster is so worried I would recommend they take their life savings and live in the wilderness. Like I mentioned above, how could you struggle on a HHI of 200K plus to pay a 300K mortgage?
My logic only applies to areas where the market doesn’t gothrough major cycles like cheaper areas around the country. I think if you can keep you’re DTI to less than 41% then you could easily make some sacrifices for a couple of years and get by without any problems. This is assuming that you have a stable job, emergency fund, and retirement accounts that are all adequately funded, and you’re not the type that has to have a new car every three years.
When I see posters recommend someone who has 200K in savings and makes 150K or more a year buy a house in the 300K range, I just laugh to myself.
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