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November 24, 2009


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One note. A new home, even a much larger one, can have much lower utility costs than an old one due to better construction and more insulation.

i think age limitations should be added to your formula for financing a house and what is REALLY affordable. im 50ish and i have soooo many friends jumping off into $150,000 -$200,000 additional house debt. they are never gonna get to retire and they are probably gonna retire broke. people used to never retire with home debt and now they do. crazy.

I see this very clearly with my my inlaws. They have a house worth about $500k (probably spent $300k 20 years ago on it). They live around the corner from a country club in a very nice area. He works in insurance and financial planning which according to him requires a persona of wealth. They have 3 luxury automobiles, a country club membership and they enjoy a lot of hobbies. His company is having a very poor year and they are now looking to sell the country club membership, they have 2 cars on the market, and cut back on a bunch of other things they do. They have not paid their house off and are having trouble making bills. My mother in law has made comments like "We already went through this when we were young, I shouldn't have to sacrifice in this stage of my life like this."
I compare this to my parents who moved to a nice area but not the newest neighborhood. The neighborhood is filled with people of different incomes. There is not much expectations and feels very different than my inlaws with a neighborhood full of luxury cars and boats.
I know I am very much generalizing around two very different people but I have to agree that the house/neighborhood does influence your spending habits beyond just utility bills.

I don't agree with one suggestion in FMF's formula for buying a house, namely move to a cheaper part of the country.

Young people are generally going to live where they can find a good job.
Retirees are generally wealthier than young people and generally retire to an area that has no snow, mild winters and lots of sunshine. In my case I didn't have to move since I was already in an area with no snow, mild winters and lots of sunshine.

Possibly retirees with insufficient savings might find that a cheaper home releases quite a bit of cash but you also need to strike a balance that takes the quality of life during retirement into account. I did my share of snow removal and sliding around on icy roads years ago when we had a ski cabin at Lake Tahoe, but at 75, the thought of living in an area with cold winters and having to deal with snow is very unappealing. There's also the danger of taking a fall and breaking something, particularly for my wife with her two artificial hips.

As has been talked about by many contributors, one's home should be paid off ASAP and then not considered to be a future source of cash unless of course at some point you need to move into an assisted living community.

Which is why when I got divorced, I kept the down-market 1970's-era house that my ex & I bought when we were students.

Yeah, I had to invest $50K on deferred maintenance issues & a new kitchen, but it will work well for my kids and me for the next 10 years at least and as a bonus my kids didn't have to switch schools and I know all the neighbors and their kids.

In contrast, a similar-size late-model house in a "better" neighborhood in my town would start at least $130-150K more (not counting moving expenses) and probably wouldn't have landscaping, a deck, or a finished basement (which mine does). It also wouldn't have a kitchen with granite countertops & top of the line appliances (I do looove my kitchen--when I'm not at work, I'm in it cooking!).

And did I mention that it will be paid off in 5 yrs? I'm feeling really good about that!

Oh and Ol' Limey, I so agree with you! I hope to retire somewhere where the weather is more optimal and civilization is within easy reach. Far from the flyover rural upper Midwest/Siberia country where I am currently stranded due to my job.

Me, I dream of moving to Colorado or Utah, somewhere near the mountains. No more awful winters but still some good skiing, and then an early spring and a hot summer with good hiking and beautiful scenery. Or maybe San Diego's perfect weather & the beach..... mmm!

Umm.. Why Many Homeowners are Having a Tough Time..? You forgot the biggest elephant in the room.. you know.. the 8 Million people who've lost their jobs since the start of the recession..

I am sorry to read that your marriage didn't work. One of my daughters is in her third marriage and the other one divorced about two years ago. Apart from having to suffer through all the legal issues, divorces split up the assets and play havoc with future plans but I'm sure you know this already. When my wife and I left England in 1956 the word 'divorce' was not in our vocabulary because there hadn't ever been one in either of our families and we didn't know of anyone that had been divorced. Unmarried people living together was also something that just didn't happen in those days. Back then England had a very homogeneous population but now it is fast becoming a melting pot like the USA.

We used to spend a week every year in San Diego with our granddaughter when she was young and I can vouch for the fact that it is a very nice place to live. It is most desirable near the ocean because as you move away from the ocean it becomes more and more arid. We lived in Denver for two years and found the weather not too bad, it was very hot in the summer, low humidity, not too much snow in the Winter, definitely far better than back East, and the beautiful Rockies were only a short drive away. We also lived in Toronto, Canada for two years - if I tell you it's across the lake from Buffalo, NY, I think you can get the picture. The California Bay Area is as good as it gets, but real estate prices are very high indeed and jobs are almost impossible to find at this time.

To add to malingerer's post,

Many are having a hard time as they lacked sufficient emergency savings. When many faced unemployment or reduced incomes, they lacked the ability to fall back on savings to get them through the rough times.

In the good old days when I applied for loans, whether it be for a car or a house I had to complete a very comprehensive net worth statement with nothing left out and I also had to include a copy of our joint income tax return. It sounds onerous but the advantage was that only well qualified borrowers could obtain a loan. That's the system that worked successfully for generations.

Fast forward a few decades and the greedy real estate agents, in cahoots with the greedy mortgage brokers and mortgage lenders, who were in cahoots with the greedy banks, lowered the requirements drastically. The net result was that what might have been a very minor recession turned into a collapse in real estate prices, massive job losses, and what would have been a Depression if it had not been for massive government intervention leading to out of control deficit spending.

An example close to home was when my son was young and had no financial sense whatsoever he become so deeply in credit card debt that he declared bankruptcy. About a year later he fell in love and decided to get married. The next step was to buy a home in Southern California. He applied for a loan and was naturally turned down because of the bankruptcy. The realtor then became very creative and decided to apply for the loan in his wife's name. My son told her, "There's a small problem, my wife doesn't work". The realtor's reply was, "Don't worry I'll make up some income for her". She did just that and the loan was quickly approved and they bought a beautiful, large 2-story home in Corona, CA for $200K. Five years later they sold the home for $500K and moved to Northern California where they currently live in a condo that I own. While they were down South they also used the same technique to buy a condo in the Mammoth ski area and doubled their money again when they did a 1031 exchange into a ski condo at Kirkwood, CA.
Bottom line - He went from bankruptcy at 35 to having $390K at Fidelity (incl. his 401K), plus a Condo worth $500K, fully paid for, and he is now only 45 and makes well over $100K as a salesman for a German Hi-Tech company.

Even though the sub-prime loan fiasco has been a disaster for the country as a whole there are a number of people like him that got out near the top of the market and have done very well. Hopefully the lessons have been learned and history will not repeat itself.

My wife and I have made do for years with cheap furniture. Our goal has been that when we actually buy furniture, it has to be something that we expect to keep for the rest of our lives. Nothing that will wear out and can't be repaired. Nothing that will go out of style. A few months ago we finally put away the card table and folding chairs we've used for the past 9 years and bought a dining room set: all solid wood, no upholstry, beautiful in it's simplicity and functionality. I expect that this is a piece of furniture we can pass on to our daughter, just as much of our furniture was inherited from my grandparents. Compared to buying lots of new furniture, this is more financially sound, has less environmental impact, and feels more meaningful because we have associations with our furniture beyond a shopping trip a few months ago.

Old Limey --

Are you saying that good jobs can't be found in locations where the cost-of-living (and thus homes) is reasonable? Or maybe you're saying that good jobs are only in high cost-of-living areas? The data refutes the latter for sure -- the claim that good jobs/wages offset the extra costs of living in an expensive area(see this: ) and I don't believe you're saying the former, so I'm unsure how to comment.

Regarding living in a better climate, you can obviously live in a very nice climate without spending a fortune in housing. I lived in a great spot in Tennessee several years ago -- 2,200 sq. foot home in nice community for $170k (probably more now, but you don't have to spend so much on housing that it breaks the bank.) People can live in much of the south and southwest, have wonderful climates, and not spend $1 million on a home.

In the end, if you do what I suggest (maximize income, keep expenses low -- including housing, save, invest, etc.), you'll be able to pretty much retire anywhere you like. Then again, if you save like most Americans are saving for retirement, you'll not only be shoveling your own snow at 75, but looking to shovel other people's to earn some extra money. :-)

Old Limey,

Sounds like your son lucked out with the market. If he had made those moves in the last couple years, obviously, it would be a different story.

I have not benefited much from rising home prices. Currently, I am facing a relocation. If my home does not sell, the company will buy it out (which gives me some relief). As we have been good savers we will be paying cash for our next home ($400-450K range).

Just reading thru the posts it sounds like the greedy lendors/brokers are the ones taking most of the blame. Lets not forget about personal resposibility the buyer needs to have. For example, my wife and I were approved to buy a home up to 300k but after going thru our income and bills we decided not to spend more than 225k. Looking back, it would have been a huge struggle and a lot of stress if we spent all that we could have. If your not smart enough (finacially) to figure how much you can afford or know that there is always the possibility of losing your income, maybe you shouldn't buy a house!

ole limey, nice fable

Old Limey,
Congrats to your son for committing mortgage fraud.

The point I was making was that young working people will relocate to wherever they can find the best job opportunity. When you have a family to take care of, getting a job is #1. When I obtained my final job where I spent 32 years I had mailed out 3 resumes to Boeing in Seattle, Lockheed in Burbank, and Lockheed in Sunnyvale and received 3 offers at almost identical salaries. My reason for choosing a very large aerospace company was that I knew they would help pay for me to get an MS degree. I made my choice then based totally upon the climate and general desirability of the locations. If the only choice had been in a less desirable location not on the West coast that's where I would have gone. I went through a few periods early on where my department had layoffs and it was a very worrisome time, which is why we kept an emergency fund of about one year's income.

In retrospect one mistake I made in 1963 was buying our new $27,000 dream home and spending far too much money on custom carpeting & drapes, expensive furniture, and landscaping improvements. What I should have done was to have bought a new $34,000 home, by the same builder, in a more prestigious location and made all of the improvements gradually over time. That $27,000 home that I no longer live in is appraised at $750K whereas the $34,000 home would now be close to $2M. At the time nobody realized that the prestigious locations would appreciate like they did as our valley transformed from the fruit growing Santa Clara Valley into the Silicon Valley and the buildable land was all used up. The prestigious locations are around the edges of the valley in very small towns where it's prettier, more wooded, and with even nicer micro climates. Land in those prestigious areas now goes for $2M/acre. One such area is Woodside, where Larry Ellison, CEO of Oracle has his $79M estate on 23 acres.

At one point in time we thought of buying a better home, we looked at 1 acre lots and actually turned a gorgeous lot, priced at $20K down. I have been kicking myself ever since. Today that area has homes in the $3M - $5M range. Some of the families that have been in the valley for generations have kicked themselves for selling their orchard land to builders. Where I am sitting right now would have been in the middle of an orchard in 1960. A house on the edge of an orchard where we used to buy cherries a few years ago was the last orchard to go and is now home to a gigantic Kaiser Hospital.

There is one huge tract of land right in the center of the valley owned by two scruffy old Italian brothers. They grow corn on it and have a market called the Corn Palace. I spoke to them one day a few years ago and they said, sometimes they have more realtors making offers for their land than they have customers. They said, all we know is how to grow corn, we're not selling, even though the next generation want us to.

Old Limey --

"The point I was making was that young working people will relocate to wherever they can find the best job opportunity."

I agree. But there's often not just one choice. Granted, there may be less choice given today's economy, but oftentimes someone looking for a job in a new locale will have more than one option. In those cases a variety of factors (including cost of living) needs to be considered.

Hey Old Limey...

I use to live in England too. In the 60's. Great Maplestead, In Essex. Where you from?.. I also lived is S. Cal..Victorville. Never bought a home there. Wish I had. Might of made out like your son. ;-)

I was born and raised in Bournemouth and lived at the Fire Station where my father was a fireman. As you know, Bournemouth is on the South coast about 30 miles West of Southampton. One vivid memory is that on D-Day, as a 9 year old, I walked a couple of hundred yards to the cliff top and saw the D-day Armada stretching from horizon to horizon, more ships than I had ever seen. I found out later that my future wife was there also because she lived fairly close to where I did. Another day I also saw a German FW190 fly over the house in the direction of France, he was so low I could see the pilot. He was being chased by two RAF Hurricanes and jettisoned his bombs which destroyed a hotel, 100 yards away, and also a large department store, killing a lot of Canadian airmen that were in the hotel.

"Are you saying that good jobs can't be found in locations where the cost-of-living (and thus homes) is reasonable? "
FMF - this really depends on what you do and how interested you are in your job and what your ambitions are. You seem to think that anybody can move anywhere and do anything. When you look at a surway of salaries, you only look on salaries, not on specific professions or the type of available jobs. This is not really true.

There are professions e.g. in performing arts or finances where specific job may only be found in Manhattan. But it depends on what you want, what your ambitions are. Jobs aren't all created equal, not if you want to get satisfaction from what you do and not just earn money and go home. A CS graduate with MS/CS who wants to do boring programming work in business or other applications may find a job in many places. A software engineer that wants to do R&D and work with state of the art technology has a number of specific companies to choose from most of which are found on the coasts. I think you understand that somebody who has a job offer from, for example, Google in California or NYC is not likely to be satisfied working for some small company in mid-West writing boring business applications. Similarly, a chemist with an advanced degree developing new drugs for Pfeizer may not find a similar job in Ohio.

In other cases, jobs may be scarce, then people take what they can get.

People who keep suggesting moving to a cheaper place either have a job that can be done anywhere or don't really understand that comebody may actually be interested in what they do.

Kitty --

I understand that there are exceptions to every "rule". But just because you can identify situations where something isn't true doesn't mean that it's generally true -- and the best option for most people.

In addition, there are many more options than people realize. Want to do finance? Many of the big banks have branches all across the country. Or what about corporate finance? There are big companies in Cincinnati, St. Louis, and Minneapolis.

So, yes, if you want to work for a specific company in a specific field, you're going to limit your other options (such as where you can live). But if you have a wider view of what you'd like to do -- such as work for a "name brand" firm in "marketing" -- you have all sorts of choices about where you could go/live.

"In the above, there's more keep-up-with-the-Joneses stuff going on."

This is so true. A House (as well as a car etc etc... ) is a "status" symbol. So when you move in wit the big dogs you have to become one. And many people just can't hang.

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