Rational Home Buying

http://lesswrong.com/lw/7am/rational_home_buying/

by alexandros • 15 years ago

164 72 15 years ago

lesswrong.com

joezydeco3• 15 years ago

Home buying advice from someone who has never purchased a house and is currently not in the market for one? Pass.

petervandijck• 15 years ago

I've both bought and rented.

The location thing rings true, you tend to underestimate it. I've rented 4 places in the past that weren't in an optional location, but cheaper, and 1 (now) in a great location, but smaller. I like the great location much more.

The money thing is also true: you tend to underestimate large costs (20K, say), if they're part of a much larger cost.

And again, the third one (pool) is also true. Pools are really rarely used. Living in the city becomes much more enjoyable once you realize this.

Light and nature, again, spot-on. As a sidenote: I'm enjoying nature almost as much now (in NYC) as when living in the mountains of Colombia. Just to say that living in the city doesn't exclude access to nature (parks!).

And finally, listening to your gut, again, spot-on.

So actually (and again, I've rented AND bought), pretty good advice.

joezydeco3• 15 years ago

I've bought and rented too. I'm on my third house. And I've learned a few things as well.

It's nice to have a modest house in an up-and-coming community with lots of light and easy access to the workplace. But then you discover that the up-and-coming community has a fire and police district that can't keep up with the growth. So either they try to get by with a shoestring municipal infrastructure, or the taxes skyrocket.

Then you discover the county has overbudgeted during the boom times and hasn't cut back on anything. Taxes are going up again to make up for the incompetent government.

Then the poster starts a family. Whoops, that home that was so close to your workplace is 10 miles from the school. Now you're driving the kids to daycare or school or paying for bus service. Or you discover that the nearby school sucks and is full of gangs but the schools in the next town over are light years better and safer. Private school time.

Then the roof goes. The power grid cuts out every time a squirrel farts on a wire. The 100-year flood plain is really a 10-year one these days.

It goes on and on. Trust me, home ownership has it's upside but a lot of it sucks as well.

dagw2• 15 years ago

Just to say that living in the city doesn't exclude access to nature (parks!).

This! I live in the middle of the city and have access awesome parks and gardens where my daughter can run around and play within 20 minutes walk of my apartment. I doubt I could find anything significantly better by moving out to the suburbs.

Dove• 15 years ago

The cool thing about reason is that it uses the experience of the whole community, rather than just your own.

joezydeco3• 15 years ago

The experience of the community has no bearing on whether a specific house is right for you or not.

The original point I was trying to make is that purchasing a home isn't an equation with 5-6 variables as the original poster has tried to point out. It's an equation with 200 independent variables and you won't know the answer to 50% of those until after you move in.

All the rational thought and decisionmaking won't inform you to the fact that the neighbors like to party outdoors until 4am, or the factory across town has decided today to move to Mexico and decimate the taxbase of the community.

You can never get all the variables right. All you can do is give it your best shot and learn from experience.

jpr2• 15 years ago

Rational advice for splurging 500K to 1M+ on a "nice" home? Isn't that an oxymoron?

nopassrecover• 15 years ago

How so? Houses, as a rule, are investments, and like any investments should be considered rationally.

jpr2• 15 years ago

Isn't this the very kind of thinking - thinking that houses are investments and surely the prices will go up - that caused the housing bubble?

true_religion• 15 years ago

He's saying that half a million is too much for a merely 'nice' home.

But this is just a linguistic conceit on the part of home buyers.

There are mansions (homes that you can't afford), nice homes (homes that you can afford, and are in good condition/areas), and there are slums (homes you can afford, and in bad conditions/areas).

No one wants to live in a slum. No one can afford a mansion. So a 'nice' home is the only realistic choice.

jpdoctor• 15 years ago

Rationality will prevail eventually: We'll get back to 3x annual income for the simple reason that the fake appreciation due to easy loans is history.

The thing I fear though is the in-between period. Many folks will hold on thinking that the downturn is "temporary", so prices will stay elevated for a few extra years. As a consequence, you'll see doubling-up and tripling-up in housing that normally would have held only one family.

randomdata• 15 years ago

Looking at the real estate listings for my area, the most expensive home for sale is $1M; and it is a beautiful mansion. I couldn't imagine paying $1M for just a nice home.

usaar333• 15 years ago

Don't imagine living in the Bay Area then. :)

dagw2• 15 years ago

Looking at my area, the cheapest house I'd actually consider buying in an area I'd actually want to live, is north of $600K. House prices having nothing to do with the building, and everything to do with the location. It's (relatively) easy to make an ugly house beautiful.

ww5203• 15 years ago

It just means the dollars have depreciated substantially. Nothing to see.

Seriously, housing is one of the best inflation hedges.

TeMPOraL2• 15 years ago

"The second is the discovery that attempts to make your reasoning explicit and verbal usually result in worse choices. This includes that favorite of guidance counselors: to write out a list of the pros and cons of all your choices - but it covers any attempt to explain choices in words."

Then what should we do? :(

Article says that making things explicit is bad, but on many occasions I read that making them not explicit is also bad - because mind is a convoluted mess and dumping things from head to paper helps see everything more clearly and consider more details, freeing up mental resources for more ideas to come. That's both Creativity and GTD 101.

Am I missing something here?

jannes• 15 years ago

When you write things down for GTD it shouldn't be done to help you make complex and preferredly rational decisions. It is done to help you remember, to relieve your mind from having to remember. Writing a task down is different from writing your reasoning for a decision down.

TeMPOraL2• 15 years ago

Fair enough; after thinking about it for a moment I realized that I probably mixed explicit reasoning with dumping information out of my head.

But still, does that mean that explicit cost-benefit analysis is bad? Or, when I'm confused about an issue I need to decide on, if I do a mind-dump of things related to that issue, does that lead to poor decisions? I'm asking, because so far I find it extremely helpful to do a mind dump, when I feel confused.

Estragon5• 15 years ago

I expected this to be about the wisdom of buying a house in the current US market. It is an interesting article even though it doesn't address that question. But for most people, financially speaking, buying a house at the moment would be a really bad idea. Yes, there's cheap credit, but there is also essentially no chance of significantly appreciating prices for at least the next five years, and a strong chance of prices dropping further as a result of further recession and uncertainty about the legal status of foreclosure procedures.

e402• 15 years ago

People with children should ignore your advice. 1/4 mile from where I live is another city with horrible schools. People living there will need to send their children to private schools, at about $20k/yr. Where I live, the public schools are top notch. I know several families that moved here and bought a house (there is very little rental available, and it's expensive). A family with 4 children will save about $80k/yr living here. That changes the equation quite a lot.

tokenadult• 15 years ago

People with children should ignore your advice.

People with children in any state of the United States that does not yet have public school open enrollment might consider asking their legislators to enact public school open enrollment, which works well in Minnesota, Iowa, and perhaps other states. Public school open enrollment, which has been going on in Minnesota for more than twenty years, gradually encourages public school districts (which are usually local oligopolies who don't have to listen to clients very much) to compete on the basis of quality and flexibility of their programs to gain student enrollment. Public school open enrollment also decouples decisions about where to live from decisions about where to enroll children in school, which is good public policy on several grounds.

http://education.state.mn.us/MDE/Academic_Excellence/School_...

After edit: In relation to comments in other subthreads here, about the cost of paying a mortgage versus the cost of paying rent, the odd thing about the bubble economy in this town is that mortgage payments got to be MUCH higher, even at low interest rates, than prevailing rents for the same or very similar properties. It has been financially advantageous for a long while in this market to rent rather than buy, and perhaps still is for several years to come. The whole issue is fraught with public policy implications and sometimes very difficult economic assumptions.

http://minnesota.publicradio.org/display/web/2011/05/11/hous...

http://www.twincitiesrealestateblog.com/

http://www.usatoday.com/money/economy/housing/2010-08-11-hou...

http://www.boston.com/bostonglobe/ideas/articles/2009/03/22/...

http://www.clevelandfed.org/research/commentary/2011/2011-03...

http://www.clevelandfed.org/research/commentary/2011/2011-06...

mapgrep2• 15 years ago

Are renters suddenly no longer eligible to send their kids to school?? Wow, that's new.

jeffdavis3• 15 years ago

Your analysis leaves out a very important factor: rents. If you don't buy a home, you have to rent.

If your mortgage payment is below the going rents (not too difficult to achieve if you factor in the tax write-off), then one way you can look at that is you give an $X down payment now for a free house in 30 years. If you look at it that way, slow growth doesn't look quite so bad -- the house only needs to be worth about $8X the down payment in constant dollars 30 years from now. Assuming 20% down, that's only appreciating 60% in 30 years, which is only assuming about 1.5% growth in home value per year.

Inflation should probably also factor into your analysis, for those who believe that inflation is likely in the long term.

Buying a home also offers a lot of stability on your long-term housing costs. Even if you buy and sell every few years anyway[1], the fact that you are both buying and selling at the same time leads to a fairly even end result. With renting, you are always purchasing on the spot market[2]. Avoiding risk and having control over when you move both have a value.

[1] Of course, buying and selling every few years is very costly, but it doesn't affect the stability argument.

[2] And it's not just luck when you happen to be moving around. If you are buying into an area because of a new employer, there's a good chance that the employer is hiring, and that a lot of people want that same apartment.

byrneseyeview• 15 years ago

Since the tax-deductible nature of mortgages also applies to your landlord, that factor nets to zero. Inflation also nets out to zero, since both the borrower and the lender (and the landlord and the renter) are using the same currency. Unless you argue that home buyers are systematically better at accounting for inflation than bankers, of course.

The way I would look at it is that I buy housing the way I buy groceries, clothes, and pretty much everything else: I buy it when I need it. I mean, sure, if I bought an orchard I could get apples for "Free" after I'd paid the mortgage, but that's just bad accounting.

The problem with buying a house is that it's a massive bet on your local labor market. Your job (your biggest asset, in terms of net present value), is also a bet on the same market. You're levering up massively in order to bet on one of the biggest un-controllable risks you face, and you're paying 7% transaction costs on the purchase and the sale in order to do so.

A cheaper way to make this bet is to borrow several times your annual income, and bet on your being laid off (i.e. you make money if you don't get fired, and you do make money if you do get fired). That would be a terrible decision.

knowledgesale• 15 years ago

I would love to agree with you as your arguments seem reasonable and it seems you know the subject well.

The only problem is that I have been hearing the very same claims for almost 20 years by now.

Estragon5• 15 years ago

  ...I have been hearing the very same claims for almost 20 years by now.

Not sure where you're coming from with this.. Five years ago, the received wisdom was that you should buy now to avoid being priced out of the market.

ww5203• 15 years ago

One strong leading indicator of house price is rent. When rent is increasing, house price is 1.5 to 2 years away from appreciation. This is because increasing rent means the vacancy in a market is going down, more people coming into the area. Higher rent will push some people to start buying houses. Both factors force house price higher in the near future.

Estragon5• 15 years ago

If you have any pointers to evidence that rents are increasing in the US, and of a historical positive correlation between rental prices and house prices, that would be very interesting.

forkandwait5• 15 years ago

We just bought a house, in a peripheral part of a big urban market. Here is why:

The house was 3x our annual income (well, 2.5).

We can probably rent it for our mortgage. (This for me is the most important thing -- basically we bought the rental we would have lived in).

My job is moderately safe.

We don't expect to sell for 5 years (which is the conventional wisdom unless you are a professional and know what you are doing).

I hated our last four landlords.

We have to live somewhere.

No kids, so no worries about kid like things except in terms of n-hood value.

rcoder• 15 years ago

> We can probably rent it for our mortgage.

I just wanted to weigh in and say how huge this is, not just for the question of "is buying a better deal than renting," but also to allow you flexibility in terms of job relocation and family changes.

My girlfriend and I moved to the Bay Area about 18 months after buying our first house, and were able to do so in part because the rent from our tenants (who are good friends, as well) basically covers our mortgage. Not having to feel tied down to a particular city allowed me to take a risk on an exciting new job that I probably would have passed up if relocation had involved selling our house.

forkandwait5• 15 years ago

Possible rent seems like a really useful metric in buying a house, and it would be really interesting to evaluate a market in these terms.

spamizbad• 15 years ago

So far, sounds like a rational choice. However, how long is your commute and is it done by automobile?

forkandwait5• 15 years ago

Hehe -- 10 min by auto, could be 20 min by bike. I work for the govt too.

beagle3• 15 years ago

> We can probably rent it for our mortgage. (This for me is the most important thing -- basically we bought the rental we would have lived in).

What's your down payment? Unless it is trivial (3 months rent or something like that), there's also the cost of making your down payment illiquid.

Sounds like it is still a good decision, but don't forget that cost as well.

mark_l_watson• 15 years ago

My wife and I bought our very small house 13 years ago because it had huge windows (good lighting, views of Arizona red rock/mountains) and is 150 feet from a national park trail head. I much prefer a small house in a location that I like to a larger house a mile away in an area that I like less.

I also agree with the advice about commuting. I made that mistake when I was 24 and bought my first home. The extra $15/month mortgage payment (this was in the 1970s) for a comparable place near my job seemed like too much money, but after a few years of inflation, transportation costs, and my time, I regretted my decision until I moved and started using it as a good income property, which I still have.

Also good advice in the article was the part of paying attention to relative pricing (i.e., don't spend $35K more because the difference between $735K and $750K psychologically seems small).

I have always favored buying less expensive properties to live in but also have a few income properties.

mkramlich• 15 years ago

I also like to inject into any discusion of home buying the point that nobody truly buys a home, it's just a different variant on renting and serfdom to the state. When I own a ball, it's mine, and absent me using it to hurt someone with it, it will not and cannot legally be taken away from me. Additionally, since I own the ball, and am not merely renting the ball, I do not have to make any monthly or yearly payments to any other party in order to keep ownership and possession of the ball. Where when you "buy" and "own" a home (assuming current US, etc), you are required in 99.99% of typical situations to pay taxes at periodic intervals. If you do not, eventually men with guns will come use violence if necessary to force you out of that home and take "ownership" away from you. If you squint your eyes a bit that should look like renting. Rather, the government entities which claim dominance over the area containing your home have a set of rules which allows you to acquire the illusion of ownership over a home in exchange for paying rent/tax to that government periodically. Whether you call that money transfer rent or tax does not matter as much as the physical event that occurs and it's net effects and consequences.

Now I understand there are some ownership qualities to so-called home ownership, not denying that. There are shades of gray between pure renting and pure owning. But what most people talk about is something clearly in the middle of that spectrum, not on one end. Thus, I think the better description is different variants on renting. Different lease permutations.

jamesaguilar• 15 years ago

In this sense, all work is slavery since you can't take home all you earn. It is good libertarian hyperbolic, but probably not a useful comment in this context.

georgieporgie2• 15 years ago

Since I don't like to downvote without replying, here you go:

If you don't want to support existing infrastructure, I suggest that you become very wealthy, buy an island, and live there by yourself.

The difference between buying and renting is enormously larger than the difference between buying and your theoretical-complete-ownership-of-land. Additionally, in your theoretical ownership world, you would have zero infrastructure to support you and, indeed, would never have had the economic engine to build your wealth in the first place.

JeffL• 15 years ago

To be fair, infrastructure could be paid for entirely by use taxes and not by general taxation.

Water, electricity, and gas infrastructure can be paid for by taxes on those services, and people who don't want them can not purchase water, electricity, or gas from the "grid". Roads can be paid for with gas taxes, and that way are paid for proportionally by those who use them.

And to add to the GP's post, government can choose to seize your land at any time using eminent domain laws are are more and more abused every day. So, whether or not you agree with Libertarianism, I do think he has a point that there are a lot of similarities between buying and renting that a lot of people maybe don't realize.

I think that the choice of paying property tax and living on an island is a false dichotomy. We could theoretically live in a society without paying property tax, where the government can't seize your land.

onedognight• 15 years ago

As you said, you not allowed to just sit on the land and not provide a good to the rest of the country (in one way or another). As much as I empathize with your reaction, it seems to me that the use it or lose it philosophy brought on by the property tax policy is actually an efficient way to allocate land in a country.

forkandwait5• 15 years ago

While some of my best friends are libertarians ... they tend to oversimplify very complex dynamics that aren't really understood by anybody -- not Bernanke, Marx, Milton, or Keynes, much less Ayn Rand.

Flip comments aside: "ownership" of anything -- a ball, a company, a piece of property -- should be seen as a bundle of rights and responsibilities, and as a (overall) benign socially sanctioned fiction like streetlights. Then you can see that it is only in the trivial cases, like a ball that nobody cares about, that ownership is straightforward and implies "It's mine I can do anything with it I like".

So, duh, you pay taxes and have to conform to zoning codes. Get over it.

EDIT: Also, "government entities" aren't some weird uncontrollable force like the weather or an invading army -- you live in a democracy, so get involved.

specialist• 15 years ago

Love it. Both the analysis and "get involved" concluding advice.

forkandwait5• 15 years ago

Just noticed that I cited "streetlights" as a social fiction -- I meant "traffic rules".

njharman• 15 years ago

> people so consistently under-count the pain of commuting.

I find this amazing. Commute (unless done on bus, etc) is lost life. Every day, twice a day. Commute is almost top of my list, although it influences choice of job more than choice of home because the former varies more often and is less important than later. > 15min 1way commute is bad. 30min or more is non-starter. I factor in commute time as "time at work" to compare if one job pays more than other.

mahyarm• 15 years ago

Commute by bike is exercise. Most days it's the only exercise I get.

chaostheory• 15 years ago

> There doesn't seem to be a big difference in price between $710,000 and $745,000 houses

There is a hidden difference. That extra $35,000 may mean the difference between getting financing and not getting it. (I have a friend with good credit who was almost rejected for an 800k house even though he put half down.) I don't feel that most people have an extra $35,000 lying around that isn't used as a buffer.

impendia• 15 years ago

> Try to buy a house ... where you'll be relatively high on the social ladder

This is depressing advice, no matter how many empirical studies back it up. I don't think I'd want to live around people that were wealthier than I'd ever be, but I would certainly want to live around people that were more energetic, socially outgoing, ambitious, and involved in the community than me.

Whatever you value -- you should hang around people that are better at it than you are. If you are a hacker, work with people that are smarter than you. If you want to exercise more, spend time with people who exercise twice as much as you'd like to. Et cetera.

jefftk• 15 years ago

What you're saying is good advice for getting better, but I think the advice is for getting happier.

typicalrunt• 15 years ago

I've been watching the housing markets in Canada (where I'm based) and the US, as it is an indicator of the economy, consumer saving and spending.

What's happening to the housing market in the US is incredible, but in case anyone is interested in a foreign view, read on.

In the US:

- Most types of mortgages in the US are tax deductible.

- Interest rates are fixed for the entire term of the mortgage.

- Houses cost 2-5x average family income.*

- Some states allow homeowners to walk away from mortgages.

http://www.ritholtz.com/blog/2009/02/us-existing-house-price...

And yet with the housing market in the US is still in shambles. In Canada, we don't have the luxury of these three things.

In Canada:

- Canadian mortgages are not tax deductible. http://en.wikipedia.org/wiki/Home_mortgage_interest_deductio...

- The average mortgage in Canada is a 5-year fixed rate mortgage. That means you lock in your interest rate (approx. 5%) for at most 5 years, then you need to re-mortgage. Interest rates can change drastically in 5 years.

- Vancouver currently has a house price to average annual income at 10x. That number is double the value of when the US peaked in 2005-6.

- Homeowners cannot walk away from their mortgages. I think it's called "personal guarantee" or something. IANAL, but bankruptcy doesn't necessarily clear out a person's mortgage debt.

So while the US housing market is terrible, you guys have some amazing perks for home owners. Just remember to never use more than 33% of your monthly income to carry your mortgage, and don't look to your house as a way to make money.

At the end of the day, a house is a consumable and not (necessarily) an investment.

* I'm not counting places like Detroit, where I've heard rumours of plots of land going for < $100.

jbarham• 15 years ago

Give it some time and the Canadian housing market will also correct itself. Same for Australia where the situation is very similar to Canada's (i.e., asset appreciation bubble largely driven by a commodities boom).

As in most things, the Americans are just ahead of the curve. And as a Canadian who lived in Southern California from 2006 to end of 2010, I think our friends there who were finally able to afford to buy a house after the housing bubble burst would dispute your conclusion that the US housing market is "terrible".

marvin• 15 years ago

Just adding to this, the same thing goes for Norway...our home prices are far above the historical average when looking at average income and price growth. You'd typically pay somewhere around 8x anual salary to buy a home, and prices are still growing really quickly.

There isn't consensus that there is a bubble in the housing market, but some economists have produced detailed and convincing analyses that this is in fact the case. The price growth has been fueled by low interest rates, immigration and low construction rates due to bureucracy.

gregpilling• 15 years ago

Vancouver is an odd case though. It is bordered by the US on one side, ocean on the other with mountains to the north creating a large triangle that limits build able area. It also is the warmest big city in Canada. These constraints help push the pricing up by restricting available supply.

theycallmemorty• 15 years ago

Not to mention its proximity to asia.

roel_v• 15 years ago

Same thing holds true for cars. I'm shopping for a car right now, and the paragraph 'don't overshop and don't overthink' was an exact match to what I'm going through right now. Panoramic roof? Didn't know it existed until a week ago - yesterday I spend more than an hour contemplating about several options that did or did not have one, and how the ideal choice would have one. Wanting to be fully informed isn't all that.

Rational Home Buying

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