For whatever reason, I’ve been obsessed for a long while with buying a home around here. Interest rates are crazy low, and the housing market is insane, and it seems like every other conversation I have around here now is on that subject.
I can’t make decisions on complicated open-ended topics like this unless I can pin down some of the parameters. So here’s what I think I can safely say:
* I don’t want to lower what I contribute toward retirement. Right now I contribute the legal maximum toward my 401(k). (The house shouldn’t crowd out other financially important decisions. I think people tend to think about the house in isolation.)
* I figure that after all is said and done, I can afford to spend 30% of my net income (net of 401(k) contributions, taxes, health and dental insurance, etc.) on housing. 30% works out to about $1600 per month, in regular months (months when I don’t get paid a bonus, etc.). That would have to cover the mortgage, any repairs (whose expected cost I could only guess at), property taxes, etc. (I’m lucky not to have any other debts, having paid off my college loan 18 months ago.)
* With reasonable guesses for property taxes and so forth, and with a pretty low-interest mortgage, $1600/month will get you an approximately $373,000 house.
* If you ask Zillow or whomever, it turns out that $373,000 will buy you a few hundred square feet in Cambridge. Not a lot of space. Prices in Cambridge average $512 per square foot, last I checked; at that price, a 1000-square-foot condo would cost me about $2200 out of pocket every month. (Alternatively, I could put down a quarter of a million dollars as a downpayment toward a 1000-square-foot condo, but I don’t have that much cash on hand.)
* A multi-family home changes things a bit. If you aim to spend $1600 a month, if you buy a triple decker, and if you rent out two of the units, you can buy an approximately $1 million home. Of course this assumes that you put down $200,000 for the downpayment. I don’t have that kind of money sitting around just yet. Give it a year and a half, and maybe I will. It’s also not clear that there are any triple-deckers available around here for that little money.
* If I ask the [newspaper: New York Times] and probably lots of other calculators, and I tell them what I’d expect to pay for rent, and I plug in $373,000, and I don’t assume any appreciation in the value of my home (which seems like the safest approach, even though values are going up rapidly ), then it turns out that owning is only better than renting after six years. I can’t be certain that I’ll be living here in six years. Though if I bought a home here and left after a few years, I could hand it over to a property-management company to take care of for me while I’m gone. (At the moment it does seem like Boston would be the right place for me and my family long-term.)
That’s what I’ve got at the moment, when I try to consider buying a home rationally rather than for the emotional reasons that get pounded into every American’s head. How about you? Do you have any other fixed points of analysis?
 – Would home appreciation even help me? Suppose the value of my home rises at some stratospheric rate every year — like 10%. I sell it in 5 years for 61% more than I bought it for. But now I need to live somewhere else. Assuming there’s nothing idiosyncratic about the place I’ve just sold, the new property I would buy would likely *also* have risen in value by 61%. So I wouldn’t profit off the appreciation.
Seems like some of the only ways to profit off of a rise in home prices are to
1. move to somewhere where prices haven’t risen as much (e.g., the suburbs);
2. borrow money on the increased value of your home and invest it;
3. rent instead of buy; or
4. buy a smaller (hence cheaper) place than the place I’m selling.
If I sold a home in Cambridge, I would likely want to buy a new home in Cambridge, so 1) is out. 2) entails some obvious risks, but is probably the smartest of the 4. And if the market is sane, then the prices to rent and to buy should be approximately equal, which knocks out 3). Finally, 4) makes sense if you’re buying the new property during your retirement years, after your kids have moved out, but the standard arc of a middle-class American life would suggest that your new home would likely be larger than the one you’re selling.