Tuesday, February 20, 2007

$2,859 per month


What's with this title? Its about a little agreement between my fiancee' and myself. You see, that is the difference between our rent and what we expect our monthly costs for a home ownership. We're going to save that amount every month to see if we can really afford the type of homes we want.

Now, I admit that the home is nicer than the apartment we have contracted to rent. Much nicer. Our rent is $1,735/month. Home ownership in total is estimated at $5,544 (with tax benefits getting us $2,859). Ok, you have two analysts getting married... be afraid, very afraid.

For this excercise, we're talking about a $850k home with all of the associated taxes, insurance, and such. Yes, taxes go both ways... that's part of the number we came up with. Maybe you'll assume a different number here or there. $100 either way shouldn't really matter. :)

Do note this is only one bit of monthly expenses. We also plan to save "10%" of net pay too. For that would be our target once we do purchase. The rest of our take home will go to enjoying our honeymoon year. :)

We're cheating a little bit. Estimates for "home repairs" go to the 2007 furniture fund. So this won't be a one for one comparison to the ultimate level. Cest la vie. Close enough. This is only an excercise for her and I. Let's put it this way, what happens if we cannot put $2,859 that month into our "slush fund?" Ummm... we don't. We consider why we missed our payment and then move on.

If we realize this is too much... We have tempered our ambitions. She thinks we can afford a certain monthly payment... I think we should back off about 10%... Most of me hopes she is right. :) If its too much of a struggle? We aim downmarket.

Notice I said nothing about a down payment? That we already have saved. None of this money if for that. It is for a "slush fund" after we buy a home so that life isn't so tight that we hate our experience. We also excluded utility differences, the need to buy appliances, etc. There is money set asside for purchasing stuff around the house, so let's leave it out of the equation today.

1. This is for a home we would like. For a home that we could love is probably too much dinero.

2. Why the lack of cost analysis? Simple, a home will have far more space, etc. As I've noted before, I place a high value on the benefits of home ownership. But that implies a certain level of amenities we won't have in the apartment:
A. Easy parking. Ugh... one thing I dislike about apartment living. Yes, we'll have a garage. That doesn't help with friends.
B. Fruit trees. We love them and enjoy the experience of picking our own fruit.
C. Yard space.
D. View.
E. Not having to move again for a very long period of time! (We're buying for 10+ years.)
D. Attic space. Oh... we could use a bit of attic space. Already! Yikes!

Besides, I know rent/buy ratios. This post is in another direction.

3. Why not rent a house? For the next year I'm looking at 60+ hour mandatory weeks anyway. I didn't want to worry about yardwork, etc. Yes, that can be bought, but no home that we was on the market with an experienced landlord. Hence, we went for an apartment.

Convieniently, this leaves us out of the housing market until mid-March 2008. :) I'm expecting my current duty to exent until august or so... Then back to Redondo Beach!

Now, isn't this conviently near the Fall 2008 "buying window" I'm expecting. :) Actually, I might have manuevered in job position a little to optimize a bit here or there... ;)

Expect an occasional blog on this. We do plan to live well while saving. This excercise will see if we can really love life at the spending level home ownership will impose.

Again as I've noted so many times.
I cannot lose by waiting (to buy a home).
The housing Bulls who chant "buy now or be priced out forever" probably cannot understand this strategy.

If nothing else, we'll see if we can budget well as a couple without the stress of having to make it every month.

Got popcorn?
Neil

ps
This is HER idea. :)
Not that I wasn't going to suggest something similar... But not right away.

16 comments:

Anonymous said...

Like the way you look at REALITY. Sounds as if you found a real lady, instead of an air-head. Congrats!!!

-Mrs. Jones

wannabuy said...

Mrs. Jones,

Thank you. I do love her. :)

She does have a head on her shoulders.

We've been discussing tonight how to do budget. Its looks like we each will get $500 a month of "mad money" and the rest is going to go to a mutual pool... and budgeting will be tight. (excluding the mad money we each spend as we see fit)

This is actually really complicated! Thankfully, we're doing this "playing" before it becomes reality.

Whew. The logistics is going to be very tough! We're both savers, but now is the time to merge our "styles." And we need to properly account a "virtual bill." Oh boy... my Quicken is going to have a melt down! ;)

Its already effecting our outlook on what car my fiancee' replaces her old Honda with. When I say old... I mean a car that first drove when the Aztec's still had an empire. ;)

Its fun. But I have to admit, if we were doing this for real... it would be the most stressful thing I had ever done.

So I'm very glad our honeymoon year will be "playing house" rather than buying.

Got popcorn?
Neil

GoBig said...

I like your style because it reminds me of me. However, I got lucky, I sold my home in Oct. 2005 and I've been renting since. My wife too is a saver and very analytical, hell, we are both Engineers. Wat we are doing is saving with her paycheck and using mine to cover everything else. Good luck and you'll see, we will all prevail...we just need patience.

betamax said...

It's a good plan; that's essentially what my wife and I are doing right now.

We also have a deposit, but there's nothing wrong with a larger deposit and cash for some new furniture when we buy in ~2 yrs. I don't really notice not spending so much, and it's nice to see the money add up every month.

P.S. - you don't need an attic; just get rid of your unused stuff. Sell it if it's worth $$, or give it to charity organizations if it's small change (they'll use it or sell it and appreciate whatever they get), and you'll feel better for it. Clutter causes stress.

TJ & The Bear said...

$850K? Don't want much, do we? ;-)

Yeah, yeah, I know... that's just a shack on the west side, but it's still a huge chunk of change.

I dunno Neil... our rent is basically the same as yours and that's not chump change. Parting with almost triple that amount monthly is downright scary.

What kind of an equity (i.e., downpayment) and/or savings cushion are you planning? That kind of obligation requires a backup plan. If prices were to just stay flat you'd lose 10+% ($85K+) on transaction costs if you were forced to sell.

p.s.: Don't get me wrong... I love the idea of testing yourselves first!

wannabuy said...

TJ,

The idea of losing 10% is downright scary! Hence, the testing first.

My fiancee would be unhappy if I posted our entire financial profile. That payment was assuming a 20% down. We're leaving enough of a cushion to buy all of the stuff a home needs (curtains, a mower, a few rooms of furniture, etc.) and will keep 6 + of expense money on hand.

Some of this assumes I can get some of my best friends negotiating ability. He bought in 2004 15% below the market! So if I can do that... I'm talking about purchasing a house listed for a cool $1 million. :) We'll see.

Eventually we'll buy and the expenses will rise... the question is how much. If nothing else, we'll know our limit.

So let's chat in a year about what's wise to buy. I'm predicting a 20% price drop by then and a larger drop in prices in 2008. :)

My bearishness is partially fueled as I keep hearing about the big aerospace companies having no choice but to get their technical workers out of state. Very few have actually been transfered. This summer a few thousand already announced transfers will occur. However... I'm getting word that a few thousand more might be expedited in 2007 and a few thousand additional for 2008. Are my sources accurate? Even they don't know... but we'll see. What I do know is the consultant market in LA is brutal right now... hmmm...

Got popcorn?
Neil

TJ & The Bear said...

Heck, I can already guesstimate your finances pretty close. ;-)

Nice to see someone actually planning a 20% DP!

Another thing... you know that phrase "debt is fact; equity is a matter of opinion"? Well, replace equity with your work expectations. That 60 hours a week is not guaranteed, so you should not be counting that overtime 20 as part of your qualifying income.

TJ & The Bear said...

p.s.: By "qualifying" I don't mean formal loan qualifications as just your own comfort level. I've no doubt you'd qualify for the loan.

TJ & The Bear said...

Yet another thought... don't you find it hard to part with so much investable cash for that DP?

BTW, please pardon all the tough questions, but I'm simply giving voice to fears me & my better half have expressed regarding a home purchase.

wannabuy said...

That 60 hours a week is not guaranteed, so you should not be counting that overtime 20 as part of your qualifying income.
We're not. :)

Its going towards a vacation fund. :) Its a one time splurge and not what I want during my honeymoon year... But I'll take the cash and bank it.

Need I mention once more that I expect my Quicken to melt down? ;) We have to have a spreadsheet going in parallel to convert actual income to the "virtual after tax income" and then move into accounts our "virtual expenses" while seperating bonuses/overtime from the income stream (as my company mixes them in freely... Hey, for extra cash I'll do the accounting).

My fiancee and I have the goal of living as if we were on "minimal income" (no bonuses, no overtime, no wedding year gifts, etc.). I doubt my income in three years will match 2007. :( Cest la vie.

Do I have trouble parting with all the cash? Yes. That will be a tramatic check to write! However, we're "expensing it" as if its already gone.

I've bought a home before. Unfortunately, I came out $7k poorer for the experience after my company did their "loss matching." :( (Note: The relocation package was very fair... I just spend on items they didn't consider reimbursable.) So I'm a little cautious.

But eventually we'll *need* a lot more space and we both place a value on ownership that is probalby higher than your premium. Cest la vie.

But I'm not crazy enough to buy into a market that's obviously about to tank.

Did you hear about how margined the stock market is? Oh boy... we're in for a wild ride.

Got popcorn?
Neil

TJ & The Bear said...

But eventually we'll *need* a lot more space and we both place a value on ownership that is probalby higher than your premium.

Maybe, maybe not.

Although it's only us and our dog, we've never looked at anything less than 3000sf in nice areas. That said, we just couldn't justify spending $850K on anything less than spectacular.

These days $850K gets you only "nice". Next year it should get you "nicer", but we want even more for less -- and I believe we'll get it. If not, well, we'll just be busy looking for places to stuff cash ... no problem there. ;-)

Please keep us apprised of how this experiment progresses throughout the year!!!

p.s.: In the meantime, I'll keep trying to convince you you're not bearish enough!

wannabuy said...

Please keep us apprised of how this experiment progresses throughout the year!!!

p.s.: In the meantime, I'll keep trying to convince you you're not bearish enough!


Rotfl.

You'll get updates... but expect a quarter to pass before I write anything more. Wedding plans have priority.

As to me becoming more bearish... That could be scary. I'm already expecting a 30% to 60% nominal price decline in socal real estate, a stock market correct, a drop in the dollar, and 1 million US jobs lost (net) in 2007. Not to mention restaurant sales are dropping; not customer counts, but dollars transacted (High end booze is down).

Oh... its because I do not expect a depression. :) We'll still have credit when this is done, businesses still are sitting on a lot of cash, and warehouse inventory has been held in check outside of automotive and housing. Basically, planned obsolecence will help us: HDTV, HDTV-DVD, HDTV-satellite (yea... for someone who watches 2 hours of TV a week, all on Saturday or Sunday... I sure have faith in Joe Sixpack and his need for the bube tube.) Computers, etc.

I do expect the wired funds to Mexico to suddenly plummet. That could make for some interesting politics... (No jobs... no cash... hmmm...). In effect, we're going to export the depression.

But wait... Its the year of the "Fire pig." Its supposed to have a panic. ;)

Let's see what happens.

Got popcorn?
Neil

ps
Life cannot be too bad if we both are looking at $850k homes! Mind you, not the ones at $850k today... Oh, our floor is more like 2,400 ft^2. And we too are waiting for something better than... Ok.

TJ & The Bear said...

Good luck with the wedding!

I'll hold off on anything more until you're back. Should be plenty of developments in the meantime.

p.s.: We'll see how frequently you post on HBB during that time. :-)

Anonymous said...

Seems a bit overly pessimistic but probably no harm unless you convert your downpayment into Gold. With the housing and stock markets frothy, dry power will be useful.

I've been wondering about the effects of Nissan pulling out of the SB (at least a few thousand jobs including subcontractors). Toyota picked up one of my friends. Hard to see any real effects. I do know a couple people who moved to TN and rented our their house (in case they need to return).

I have a 1500 sq ft'er in Man Bch purchased in 1998 and would sell then rent if wife would allow. Prop 13 makes hanging on ok.

Good luck,
Beach Bubbler

wannabuy said...

anon,

Pessimistic? Or realistic. This will be the third housing downturn I've lived through in southern California. The pattern is slow but predictable.

Nissan is already done and didn't have much impact. LA generates ~30,000 new jobs a year. However... when it goes south... we go south fast.

And this time there is no savings. It won't be like the 1990's where the average aerospace engineer didn't need to work for three years due to their high savings. The pain feedback will be much more rapid this time.

Got popcorn?
Neil

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