Thursday, July 1, 2010

To new home it or not

When it comes to finances, Bri and I are pretty sensible folks. I was taught to save my money for a rainy day early in life, having seen my parents go through a couple financial crises, and fortunately my wife understands the value of compounding interest and delayed gratification. We have been paying extra into our mortgage since moving into the home, and the Cary metropolitan area has not declined in value precipitously like many areas. We're roughly even on our purchase price (on paper at the moment).

So...we're looking for a larger house with a garage. We could go BIG or just bigger than now. The pros and cons of the choice:

BIG: Cons
larger mortgage payment and upkeep costs
if real estate drops another 20-40% nationwide as some economists predict, our percentage loss is magnified
The hedonistic treadmill dilemna
More capital tied up long term
Opportunity cost of not buying this house 5 or 10 years from now, when it may sell for a 30% discount

BIG: Pros

Check out my McMansion
Check out my McOffice
Tassie gets a playroom of her own
Neighborhoods and neighbors - I find surrounding myself with successful people brings my "game" up (though they may be upside down and maxed out, re: total fakes, so who knows what value that has as a motivator)
Locking in a sub-5% mortgage rate (they were in the high teens in the 1980s as we combated inflation)

Bigger than now: Cons
Less total room
1 car garage vs 2 possible
If interest rates spike in the next few years, our opportunity to lock a lifetime low rate will be gone, meaning we'll need more capital as a down payment

Bigger than now: Pros
Less mortgage and ongoing upkeep costs
We don't need all that much more room than we have - our current house with a garage and 1 more bedroom or bonus would be perfect
The neighborhood differential is minimal and/or exists only in the mind of the consumer

Our third choice is to sell this home and rent for a couple or few years while the US goes through the painful contraction of the debt supercycle collapse and the recent artificial stimulus (federal government payouts) rolls off and we realize half the country is broke or worse, but I am risk adverse to this choice due to my inability to accurately predict what home prices and mortgage rates will do in the future. Rephrased, the devil you know is often better than the one you don't.

In other news, today I thought: 90% of people in the world will say you can't do or achieve a thing; the other 10% are the ones doing and achieving.


Andrew said...

While I agree national home values will be flat or decrease for an extended period of time, you have to remember that housing is very much local. So when you are considering real estate as an investment, you should focus on what you think the growth opportunities are in Cary, not everywhere else in the country.

With that having been said, I believe you shouldnt think of housing as an investment but rather a place to live. Obviously there is the opportunity cost of NOT having your downpayment in some other investment but there is also the enjoyment of living where you want to live (which you already mentioned.)

With that having been said, rates are never going to be lower and as it turns out there is actually little to no correlation between interest rates and housing prices (even though most think the two are inversly correlated) meaning there is hope that housing values will go up despite rates also increasing.

My advice: if you want a bit more room or a better location, find something you like and make the move but dont get something bigger just to get something bigger.

Steve said...

Rent at a cheaper fixed rate, would be what I would wife not so much!! :)