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 Post subject: Setting goals when you're on track...sorta
PostPosted: Fri May 04, 2007 3:38 pm 

Joined: Wed Apr 04, 2007 9:50 pm
Posts: 752
Location: Vancouver, Canada
So my husband and I are essentially on track with our goals. We thought we'd be upgrading to a bigger home by now, but housing prices here have doubled since we got into the market. Our new plan is to wait to upsize till our son is in school, which would be in 3 to 5 years.

Other than that, we're on track or ahead with all our other financial goals. The housing issue is a pretty big one, though, as houses now cost about $500k more than they did three or four years ago. So we're never really going to be on track. For all the money we've thrown at our mortgage, we're still going to need to save another $50k in savings to upsize. We can do that, but it certainly smarts to know we could have afforded it all a few years ago without having paid down the mortgage any more at all, let alone having to save this money up.

But, in spite of that, we're on track with everything else. Is anyone else in this "hindsight is 20/20" conundrum? There's nothing we can do to change the mistakes of the past. No one could have predicted the market would double. Traditional wisdom would have been to opt for a smaller home and not stretch yourselves to the max.

I don't mean to gripe so much. We're on track for all our other savings. I just wondered how anyone else was shaking the "we were stupid to be so conservative" thoughts.

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 Post subject: Re: Setting goals when you're on track...sorta
PostPosted: Fri May 04, 2007 4:41 pm 

Joined: Sat Apr 07, 2007 2:03 am
Posts: 872
Location: Taishan, Guangdong, China
consultantjournal wrote:
But, in spite of that, we're on track with everything else. Is anyone else in this "hindsight is 20/20" conundrum? There's nothing we can do to change the mistakes of the past. No one could have predicted the market would double. Traditional wisdom would have been to opt for a smaller home and not stretch yourselves to the max.


The housing market cannot continue to appreciate at recent rates -- you already hear stories about housing slowdowns across the country. Now, you may say a 5%-10% drop still won't get you back to the pre-100% gain level. No it won't but that's shooting for a homerun. Think slow and steady - all you need is growth less than your other investments. Suppose you had flat growth for 5 years -- inflation alone drops the price by 17%. 10 years of flat growth and that's a 30% real drop. A nominal price drop over an extended period will end up being a big discount as long as your money can continue to beat inflation.


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PostPosted: Sat May 05, 2007 4:53 am 
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Location: England
You've made a sensible decision, the fact that it turned out not to be optimal is neither here not there. You did what you thought was the best thing at the time.

MossySF is right, if there is little or no growth in the housing market, then prices will come down in real terms, and they will come down even more compared to your savings if you can find an account that will beat inflation.

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PostPosted: Sat May 05, 2007 2:04 pm 

Joined: Wed Apr 04, 2007 9:50 pm
Posts: 752
Location: Vancouver, Canada
Mmmm...but a $1m home appreciated at 2% per year is going to go up at $20k a year. It would be hard to get those kinds of non-taxable gains on savings. :)

Yeah, we did what we thought was the right thing at the time. I really hope this housing market slows down. It's just so disappointing to have lived frugally for our whole lives, then to see people who stretch themselves thin get $500k in equity. In fact, friends who got in even earlier have seen $700k gains. Oddly enough, my friends who bought houses early on all had major credit problems before buying houses, while my husband and I have never been so much as late on a payment. It just seems like following the sensible advice was totally the wrong thing to do!

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PostPosted: Sat May 05, 2007 3:27 pm 

Joined: Sat Apr 07, 2007 2:03 am
Posts: 872
Location: Taishan, Guangdong, China
consultantjournal wrote:
Mmmm...but a $1m home appreciated at 2% per year is going to go up at $20k a year. It would be hard to get those kinds of non-taxable gains on savings. :)


The math here is wrong on so many levels. Just reading the statement strikes a dissonant chord in my brain. If you want, I can go through a line-by-line breakdown of all the mathematical nuances ... but I think I will get to the heart of the issue.

You cannot go back in time to alter your decisions - stop regretting it.
Save up and intelligently invest your money - if prices drop over time, upgrade when you get the chance.
If prices don't drop, well nothing you can do about it - live your life to fullest within your conditions.

Your friends got lucky in their housing choices -- it happens. Luck happens all the time. The flip side is if our economy had gone in the tank with your friends overextended on the mortgage, the bank would have foreclosed on them and then issued a 1099 for the auction price difference. Imagine ruined credit and a huge tax bill to pay the IRS. Would you have taken that gamble just to get a few more rooms in your house?


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PostPosted: Sat May 05, 2007 4:23 pm 

Joined: Wed Apr 04, 2007 9:50 pm
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Location: Vancouver, Canada
MossySF wrote:
consultantjournal wrote:
Mmmm...but a $1m home appreciated at 2% per year is going to go up at $20k a year. It would be hard to get those kinds of non-taxable gains on savings. :)


The math here is wrong on so many levels. Just reading the statement strikes a dissonant chord in my brain. If you want, I can go through a line-by-line breakdown of all the mathematical nuances ... but I think I will get to the heart of the issue.


I agree with you about ending the regret. It's just challenging when even now those homes are appreciating at $120k a year. But how is my math here wrong?

If the house to which you want to upgrade (a starter-level home in my town) is $1M and it's appreciating by $20k year, given 2% appreciation, you'd need a sizable set of investments to keep pace. Even with $100k in the bank, you'd need to get 20% on your mutual funds, which are taxed at about 40%. So, you'd need to be earning $35k a year from investments to keep pace. (I live in Canada -- mutual funds and other investments are taxed, but homes in which you reside are not. Perhaps this is what causes the dissonance?)

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PostPosted: Sat May 05, 2007 7:41 pm 

Joined: Sat Apr 07, 2007 2:03 am
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Location: Taishan, Guangdong, China
consultantjournal wrote:
I agree with you about ending the regret. It's just challenging when even now those homes are appreciating at $120k a year. But how is my math here wrong?

If the house to which you want to upgrade (a starter-level home in my town) is $1M and it's appreciating by $20k year, given 2% appreciation, you'd need a sizable set of investments to keep pace. Even with $100k in the bank, you'd need to get 20% on your mutual funds, which are taxed at about 40%. So, you'd need to be earning $35k a year from investments to keep pace. (I live in Canada -- mutual funds and other investments are taxed, but homes in which you reside are not. Perhaps this is what causes the dissonance?)


It's much more simple than that. 2% on 1M = 20K only applies if you bought the house completely with cash. Think the logic through. You don't need to keep up with the overall house price. Your savings just needs grow faster than the required down and your income needs to grow faster than the monthy payment. And if your current home grows at the same rate, what you're really looking at is [ new home / current home ] as the ratio -- not the full price of your desired home.


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PostPosted: Sat May 05, 2007 9:14 pm 

Joined: Wed Apr 04, 2007 9:50 pm
Posts: 752
Location: Vancouver, Canada
MossySF wrote:
It's much more simple than that. 2% on 1M = 20K only applies if you bought the house completely with cash. Think the logic through. You don't need to keep up with the overall house price. Your savings just needs grow faster than the required down and your income needs to grow faster than the monthy payment. And if your current home grows at the same rate, what you're really looking at is [ new home / current home ] as the ratio -- not the full price of your desired home.


When I run these numbers and assume houses appreciate at 2%/year while income increases 2%, I still end up needing to make another 5% a year on top of that to keep pace.

With 5% appreciation, I still need to make another 21% a year on top of those increases.

The only way this would make sense is if there is 2% appreciation and wages increase 5% a year. Or if there's 5% appreciation and wages increase 7% a year. I really doubt either of those situations would arise.

On top of that, homes in my neighbourhood do not appreciate at the same rate that houses in more desirable neighbourhoods do. See what I mean? The only way it works is if the market stays relatively flat or falls.

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PostPosted: Sun May 06, 2007 10:44 am 

Joined: Sat Apr 07, 2007 2:03 am
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Location: Taishan, Guangdong, China
consultantjournal wrote:
When I run these numbers and assume houses appreciate at 2%/year while income increases 2%, I still end up needing to make another 5% a year on top of that to keep pace.


Certainly more doable than your initial math of $40K in pre-tax investments to beat the $20K in house appreciation. I don't know about other fields but in the IT field, 5%+ is quite common for those who improve your skillset and switch companies every 2-3 years.

consultantjournal wrote:
The only way it works is if the market stays relatively flat or falls.


When runups happen, it seems like it will never end. The question to ask is why are prices suddenly going up? Did everybody's income triple to be able to afford it? Did the population double so you have twice the number of buyers fighting for the same houses? If not, then the runip is just speculation -- people have overextended themselves on credit gambling on housing and prices will return to their fundamental levels (whether by drops or by inflation). Let's take the runup to the ultimate extreme -- houses keep doubling every few years. In 10 more years, that 1M house is now worth 5M. Who is going to able to buy it? There aren't that many super rich around. Remember that house prices go up only if there's a buyer willing and able to pay the price.


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PostPosted: Sun May 06, 2007 2:56 pm 
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Joined: Sun Apr 15, 2007 1:45 pm
Posts: 84
Location: New Jersey
consultantjournal wrote:
Yeah, we did what we thought was the right thing at the time. I really hope this housing market slows down. It's just so disappointing to have lived frugally for our whole lives, then to see people who stretch themselves thin get $500k in equity. In fact, friends who got in even earlier have seen $700k gains. Oddly enough, my friends who bought houses early on all had major credit problems before buying houses, while my husband and I have never been so much as late on a payment. It just seems like following the sensible advice was totally the wrong thing to do!


Another way to think about it -- those friends with the $500k in equity are, probably, never going to want to live in a "cheaper" house again. If they move they will use that equity to pay for the new house. They don't actually "have" that money, they just have a house with an artificially high price tag. Unless they're willing to sell that house and not buy another one, that's just pretend money that doesn't really matter. And when (if) the housing market collapses in on itself, you get the last laugh.

A house to live in is a terrible investment. That's not why you buy one.


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PostPosted: Sun May 06, 2007 3:03 pm 

Joined: Wed Apr 04, 2007 9:50 pm
Posts: 752
Location: Vancouver, Canada
Yeah, we've got the longest run-up here ever. Vancouver is a highly speculative market, which is why we underbought a few years ago. We knew that this market tends to drop 20%-40% after every run-up. At that point, we were at the longest market run-up in 100 years. But it's just kept going and it seems like it's going to keep going till the Olympics. I can't believe the average house for the entire region is about $750k when the average household income is $55k. The only thing keeping this market going is the equity people already have. You need to make $100k a year just to buy a 1BR condo now. This is not Manhattan -- the salaries don't justify it. However, many people have rented out their attics and basements, which may explain part of it. Many people I know also rent a room to foreign students or work extra jobs. But how long can the majority keep this up for? It just doesn't seem like normal middle class living, at least not in comparison to the rest of the country. I used to be certain that there would be a market correct, but the market has been going up at double-digit rates since the late 1990s. It hasn't even started to flatten.

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