How much house to buy?

December 12, 2017 12:28 PM

How should I choose between moving somewhere affordable and good for now but probably needing to move in 5-7 years, versus putting ourselves under financial stress to make something longer-term work out?

I like to be pretty conservative about what I spend on housing. We've been looking mainly in the 7X to 8X price range, but it's become clear that if we do that, we may well end up moving in 5-7 years. We have one kid and want a second. That price tends to get us a 2 BR in a decent neighborhood -- not one of the 2-3 best neighborhoods, but the one right after that. We like it there just fine. Right now, there's a 2 BR that we are kind of smitten with there for 7.5X. But we have also seen 3 BRs there that are nice for 8X.

For a price of more like 10X, which our mortgage broker has no problem qualifying us for, we can get into one of the first choice neighborhoods, sometimes even a 3 BR (depending on aesthetics, exact location, etc). It's closer to some of the magnet schools that I could see our child(ren) potentially going to. The way I see it, that's logically what we should do as the better long term plan.

I'm concerned that if we don't think long term, we'll be disappointed and kind of stuck later. House prices are rising by 5+ percent annually, whereas our salaries, well, are not. If we buy something cheaper, the price gap between Place We Will Want in Five Years and Place We Can Easily Afford Now will only widen, making it harder to afford. Not to mention, we will incur hefty transaction costs of buying and selling when we move, and that could easily eat up a year or more of appreciation. So we ought to get into something that at least has a chance of being happily permanent. And if we do that, within 3-4 years of what salary increases we do get, the nicer place will be just as affordable as the cheaper place is now. If we don't, I imagine us looking back and laughing "we thought 10X was expensive? We were so foolish not to just stretch our budget a little!"

But it's not what we want to do. We like having flexibility in our budget. We'd far prefer to just do something well within reach now and not stress. We don't know what it will be like to have one toddler in preschool and an infant child, should we be so fortunate. We'd like to afford a longer maternity leave. And I don't think the mortgage broker has priced daycare recently, JFC. (And we just had to decide between the Cheap Daycare and the Expensive Daycare, and we just couldn't talk ourselves into accepting the difference in quality to save money. That's the kind of flexibility we might lose. But then again, a better neighborhood might be the "right" trade-off to make.)

Is there a way to justify going with the smaller, less expensive option from the perspective of long-term planning? In almost every other situation, it makes sense to defer buying nice things, to live within your means, and to not get yourself highly leveraged. Is there a credible scenario in which buying something cheap now, saving the difference and putting it in an index fund, and then buying something nicer later makes financial sense?

Reading this, the first answer that occurs to me is to rent for now, but my husband doesn't like that idea, and I also feel like we want more stability than that. This region we're moving to always shows up in magazine articles as a new, hot region where both rents and prices are rising.

Thanks for your thoughts!

posted by slidell to Work & Money (19 answers total)

Is there a way to justify going with the smaller, less expensive option from the perspective of long-term planning?

Yes. Literally tens of thousands of people last decade talked themselves into buying the "stretch" option because "the market's always going up!" and ruined themselves financially when the crash came. I despair that this, which happened just ten years ago, is apparently no longer common knowledge. I am assigning you to read or watch The Big Short before you go any further. I am also suggesting that you stop reading about magazines selling the "new hotness." Real estate is 85% scams and hype. If you tend to believe what you read, stop reading that stuff.

You simply don't know what the future holds for you in 5-7 years. You may not have the number of kids you plan. You or your spouse may have lost your job. This means you need to be more, not less, conservative in your planning. You really already know this: "In almost every other situation, it makes sense to defer buying nice things, to live within your means, and to not get yourself highly leveraged."

Finally, you are looking at the wrong number in figuring out what's theoretically affordable. Income is good to know, but it's incomplete without an understanding of the claims on that income. The key figure is debt-to-income (DTI). That's the ratio of all your monthly debt payments (including credit cards and student loans as well as all the monthly costs of the mortgage) to your income. Opinions vary, but you really don't want to exceed 30%.
posted by praemunire at 1:01 PM on December 12, 2017 [17 favorites]

Remember that moving carries with it costs - both in time and money - that are non-recoupable. Not just the cost of closing, selling, packing, moving, unpacking, furnishing, making fixes, making small changes, etc... but learning the neighborhood, figuring out where everything is, making friends with your neighbors. And it such a massive time sink: finding the place, inspections, negotiations, etc. And that's when everything goes right.

Really, if you have no problem swinging 80k with a 10k down payment (which is a ~$650/month 20 year mortgage), than you shouldn't be worried about dealing with a $770 payment (which is what a 100k mortgage should cost). Heck, you can make up the difference by stretching it to a 25 year mortgage.

We were in a slightly similar situation: I had an old place, needed to leave it (kid was born, 4th floor walk up), so we rented for a year, then moved to a new place that just got built. Our costs: movers, seller's agent, contract fees, lawyer's fees, furniture that we needed for the rental but doesn't fit in our new place... about 3% of the cost of the new place. In the US, those numbers would be much higher.
posted by jedrek at 1:03 PM on December 12, 2017 [2 favorites]

We took the safe option and now, eight years later, feel slightly trapped in a tiny house in a not-great school district. It's going to take a significant amount of time, energy, and expense to get us moved into a house that would fit our family better, made more difficult by all the stuff we've accumulated over the last eight years, and the fact that moving logistics are more complicated and free time is reduced now that there are kids in the equation. Also now I'm pregnant with our second kid and financial considerations around maternity leave mean we probably won't be able to afford to move (even if we had the time and energy to deal with moving which honestly I do not!) for at least another year. So the new baby's crib is going to get wedged on my side of the bed and my dresser is moving into the living room I guess. We'll make it work but it's going to feel crowded.

I mean, this is definitely a better situation than not being able to pay our mortgage, but I wish so hard that I could tell past me to push a little harder for a house with two bathrooms and a third bedroom.
posted by beandip at 1:30 PM on December 12, 2017 [1 favorite]

The first three years of a child’s life are the time to have non stressed parents with lots of time and disposable income. It makes more sense to rent until your second child is three and then buy. People tend to say renting is not wise financially because you miss out on the mortgage deduction. But if you have a job loss or a big medical expense you will be glad you rented.
posted by SyraCarol at 1:41 PM on December 12, 2017 [5 favorites]

When we bought, we thought we'd stick it out for 5 years then upgrade. 10 years later, we're happy with our house, and our neighborhood, and will probably stay here for a while. We're also people who don't like to move, and aren't huge fans of change.

I have other friends who have moved houses every 3-4 years because they enjoy it.

Think about whether you'll be ok with moving again in 5-7 years. Think about whether you'll want to learn a new neighborhood and meet new neighbors. Whether you want to pull your kid away from her neighborhood friends. If you've moved a lot and you don't mind it, then maybe go for the safe house. You probably won't make any money on it, but hopefully you'll break even on it when it's time to sell.

If I were in your position, for now I'd get as cheap of a rental as you can. Stick it out for 1-2 years while saving money so you can get the nicer house in the nicer neighborhood. Renting has a way of forcing your hand, so even though you don't want to move, you will need to.
posted by hydra77 at 1:46 PM on December 12, 2017 [2 favorites]

Unlike Jedrek, I am assuming the house prices are $700,000-800,000, with million dollar houses being a stretch (welcome to the new normal). I would go with the higher price house but economise in other ways. I bought a starter home and looking back, I wish I had just jumped into the permanent home and neighbourhood. Being house-poor when your kids are little is fine, they don't need all the expensive toys and whistles that older kids do. Unless you are someone that wants to keep up with the jones' - if so, moving into the more expensive neighbourhood will lead to lifestyle inflation. I don't think there is a "right" answer though. I think there is just a right answer for you.
posted by saucysault at 1:56 PM on December 12, 2017 [3 favorites]

I would look at what various mortgages will actually cost you on a monthly basis and then work out how those costs would work with your monthly budget, as opposed to using guidelines like percentage of income, etc. We recently bought a house and it was really clear to us that there was no way we could afford what our mortgage lender would approve us for, especially factoring in daycare costs and other expenses. On the other hand, someone who has a particularly high income and zero debt might be able to pay more than 30% toward their mortgage every month, just because their other expenses don't take up as large a percentage. We found it a lot more helpful to look at the specific dollar amount we'd be paying on a monthly basis (and in particular, comparing that to our current rent that we knew we could comfortably pay). Our mortgage broker had an app we could download where you'd put in all the details of a property and what we'd been approved for and it would spit out your monthly payment, so it was super easy to compare and set our budget based on that (this was specific to her company, but I'm sure your broker could help you do this too!).

Also this depends on your values and all that, but I would personally vote for enough space in a neighborhood you can afford, versus squeezing into somewhere unsustainable in the theoretically "perfect" neighborhood. I mean, who knows how schools may change over the next 5-7 years, and unless the schools you're looking at are truly dire (i.e. you feel like your child would be physically unsafe or completely neglected), personally I'd say schools are not really as important as parental involvement/influence anyway. (Certainly that was my experience of mediocre schools but very involved parents.) Think about the fact that the extra budget you gain from not being in that #1 school district could pay for enrichment activities, travel, etc. -- stuff that will also benefit your kids.
posted by rainbowbrite at 1:58 PM on December 12, 2017 [6 favorites]

We bought a house that was over $400,000 less than we were preapproved for. We had plans to turn it into a duplex rental and buy a slightly nicer house down the road. Now I can’t imagine moving because I can’t tell you how nice it is to have a good deal of financial wiggle room. No joke, it probably contributes to 75% of the happiness in my life. My husband is a self employed fisherman who was able to cut down his incredibly stressful business to half capacity and we are still golden.

I do want to say that when getting approved income counts for a lot less than I was expecting. There is no way in hell I would have bought a house for the amount I was approved for. Once we have kids we may decide to move but for now we are very happy with our decision.
posted by pintapicasso at 2:16 PM on December 12, 2017 [8 favorites]

Just a data point. We bought a house thinking we would need to move in 5-7 years. Instead we found an alternative public school that we hadn't know existed and let us stay closer to 10. This also let me reduce my hours to part time which was invaluable for my family. At 10 years, we considered We also looked at the possibility of private school for the older one so we could postpone moving for a few more years. But by then, the house had doubled in value, our income had gone up and we were better able to afford moving into a nicer home in a better school district. YMMV - the market could have crashed (making the new house cheaper by more than the loss on the old one) or the difference between old and new might have widened. experience is that is just very, very hard to know with certainty but we made the choice not to stretch too much and it totally worked in terms of income, education and family peace of mind.
posted by metahawk at 2:18 PM on December 12, 2017 [3 favorites]

Anecdata: we bought far less house than we could afford, got stuck in a house that did not appreciate in value while the houses in the better areas did. Just sold at less than we paid plus we spent a decade in a house that didn’t work for us. Wish we’d just bought a real house to begin with.
posted by songs_about_rainbows at 2:20 PM on December 12, 2017 [3 favorites]

Is the magnet school an auto entry for local residents? Magnet schools here are a lottery among qualified students.

Ancedata for my area, the neighborhoods with good schools here don't appreciate nearly as much as the areas with better public schools do. Areas with good schools have almost doubled in 20 yrs but comparable homes with great schools have quintupled. It's not just "location, location, location" or house size. The long term great schools around here are self-perpetuating because they attract the families with the money and desire to keep them great schools/great family neighborhoods which further increases home value. In lower home value neighborhoods, there have been great schools that did not retain their reputation because the parents did not have the resources to help out when district funding got tough or those who did have the money transitioned to private schools as the public schools began to drift.

Also look at the long run through high school, I've friends who moved into the best district they could get into because that meant they did not have to move again for years K-12, whereas others assessed the K programs, then middle school, and then again at high school with some moving each time.
posted by beaning at 2:42 PM on December 12, 2017 [1 favorite]

Man, I would NOT buy more house than I could afford right now. And in my opinion, even 7x-8x with no other debt is not affordable. Rent. Rent rent rent. Put all the money that you would have spent on that enormous mortgage payment under your mattress and buy your house when the bubble bursts / economy collapses.
posted by rabbitrabbit at 3:13 PM on December 12, 2017 [6 favorites]

Really, if you have no problem swinging 80k with a 10k down payment (which is a ~$650/month 20 year mortgage), than you shouldn't be worried about dealing with a $770 payment (which is what a 100k mortgage should cost). Heck, you can make up the difference by stretching it to a 25 year mortgage.

LOL at 80k and 100k mortgages, I am 99.9% certain that those aren't the figures the poster is talking about here.

Honestly, this type of decision is just hard. I would not necessarily delay getting into the market if you can help it. I would stretch but not stretch too hard. It's difficult to anticipate the future and if there's another downturn it's going to affect (or not affect) any of these properties, just to a matter of degree.

Anecdata here: we bought in an "emerging but mostly emerged" neighborhood a month before the market crashed. We bought below market value in a stroke of luck and our valuation remained relatively stable even as the market fell generally. When the market was depressed, ours wasn't that depressed because there was no inventory outside of the foreclosure market. Our "hot" neighborhood stayed pretty hot, others have since come up to that level. The neighborhoods that were not so hot at the time lost a ton more value for years, but they have recovered in spades.
posted by vunder at 5:04 PM on December 12, 2017 [1 favorite]

Consider what the economy is going to do if the tax cut passes and they manage to repeal the ACA so that health care costs go up dramatically. I would honestly wait until Trump is out of office before buying.
posted by Autumnheart at 5:05 PM on December 12, 2017 [5 favorites]

I think 8x is 8 times yearly income?

At any rate, there’s a lot of great research that sending your middle class kid to the best public school doesn’t actually offer much extra over regular Public schools if your kids are already white and middle class.

Sadly, if you’re not white and/or middle class, then disruptions in the economy are likely to hit you first. And if your housing is already feeling like a squeeze, the you lose everything when things fall apart.

Make a backup plan, rent, work extra hours and save like the dickens for the next year or two. Buy enough space in the less nice neighborhood. You can’t guess whether the super school will stay super (and like I said, the research doesn’t bear out the ‘common sense’ push to get into the best possible school district.), and some markets gentrify differently than others.

You can investigate planned municipal actions like road widening, school building, malls (ha!), airport upgrades, stadiums stuff, etc that might effect housing values over time.

But whatever you do, don’t buy more house than you can comfortably afford.
posted by bilabial at 5:17 PM on December 12, 2017 [1 favorite]

I'm unclear what the numbers in the question mean (7 times yearly income? House price or mortgage payment starting with the number 7?) but we bought way less house than we were theoretically approved to borrow, and I have never regretted that.

It will depend on the specifics (and future specifics, which no one can predict with certainty) which of your options will be financially best -- buying now and moving later means paying all those transaction and moving costs, while renting now and buying later means giving up on (hoped for, but not guaranteed) appreciation. If you are seeing your incomes stagnate, I'd be especially wary about stretching to a more expensive house.
posted by Dip Flash at 7:02 PM on December 12, 2017 [1 favorite]

1) Walk in with 20 per cent down. Do not overbuy, wait until you can reduce the initial mortgage.
2) Amortization schedule. We paid off a 30-year loan in seven years and four months. One check for full payment (# 001) and one check for principal on designated payments (# 002 to # 100). Next month write checks (# 101) and (# 102 to # 200).
Make sure that the principal is applied, not put into an account and applied at the end, to decrease the interest. No balloon payments. Go to the same banker in person each month.
3) Scrimp and save and get out of debt as soon as possible. Life happens.
posted by TrishaU at 4:43 AM on December 13, 2017

I'm not sure what you should do, but I have a smattering of semi-related thoughts to consider...
- The rule of thumb used to be not to buy until you'd stay for at least 7 years, I think because of closing costs, moving costs, common new-home costs, and mortgage amortization. Could be outdated and/or have lots of exceptions.
- When you say you'd have to move in 5-7 years, you mention the third bedroom and the neighborhood. Would the latter alone make you move? Or would you stay in the cheaper neighborhood if you bought a 3-bedroom there? (I'm with previous answers on a "good" school being comparable to a "great" one for kids with involved parents.)
- If you'd stay for a 3-bedroom in the cheaper neighborhood, could you eventually build another bedroom onto the house you're smitten with? If so, I'd lean towards buying that one.
- If you can't build on but you would stay in the cheaper neighborhood with a 3-bedroom, I'd lean towards continuing to look in that neighborhood. Smitten happens, and will probably happen again, and it sounds like this time around, what you're smitten with isn't as good a long-term fit as it needs to be. You may find a better fit and be smitten again, but even if not, I'd trade a little smitten for a long-term fit.
- If you'd move in 5-7 years even if you had a 3-bedroom in the cheaper neighborhood, then I'd lean towards postponing (as many others have advised), but it sounds like your husband isn't up for that. So in that case, IF your budget does allow it, I might go for something more permanent for you in one of the nicer neighborhoods.
- I'm frugal and don't like to buy more than I need in any category, and it sounds like you're similar. On the one hand, a house is not a luxury car or a stainless steel appliance -- you don't wave the money goodbye. You work towards ownership of something that is likely to keep appreciating in the long term (though perhaps not without decreases along the way). On the other hand, a more expensive house means more expensive taxes and furnishing and upkeep and pressure to keep up with the more expensive neighbors. If you'd move on from the cheaper neighborhood even with 3 bedrooms, AND your budget really does allow it, I wouldn't rule out the more expensive choice, but like you, it would give me pause.
posted by daisyace at 9:58 AM on December 13, 2017

Check this out: How the tax bill affects home sales (Capital gains)
posted by caryatid at 4:24 PM on December 13, 2017