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Where You Buy Matters

Buying a house is one of the biggest decisions you’ll make in your life. Perhaps I’m not really qualified to write about this yet, as I have never purchased a house. But I am planning on purchasing a house in about 4-5 years, so I think there’s great value in learning as much as I can now so I’m better prepared when it’s time to start house hunting.

Reading about other financially-savvy people’s experiences has given me a perspective unique to most of my friends. Before I became consumed with finances, I thought I would buy a $500k house in the area I live now. We’d put down whatever we could, and pay off the rest slowly but surely. I had resigned myself to the false reality that being a stay at home mother was not possible in this economic climate. My fiancé and I would have to work for decades to pay off our house, and we’d try to get our parents to help out with child care as much as possible to avoid the costs of day care. We’d spend afternoons wondering how we’d ever pull it off, and if it was really even possible.

Then I opened my eyes. When I started getting interested in personal finance, the goal was to figure out what I could do to make my plan come to fruition. But instead, I learned that my plan was horribly flawed. It was based on one huge faulty assumption.

That faulty assumption was that I had to settle for the housing market in the area I currently live. Sure, we have ties to the San Franciso Bay Area that will make it difficult to leave, but buying a house here would be signing away any hope of being a stay at home mother, and setting myself up for a difficult financial future. That’s a big sacrifice to take just so you can live closer to your family and friends. After all, communication is easier than ever, and there are plenty of great lower cost cities that are a short flight or day-long car ride away.

It seems that pretty much everyone I know is living under this assumption as well. Many of whom don’t even have local family as an excuse!

Another excuse they may offer is, “sure it would be cheaper somewhere else, but I wouldn’t be able to make as much money there.” It sounds like a reasonable concern… until you actually do some research.

A quick Google search turned up a comparison in salaries between the high cost of living San Francisco and the relatively lower cost of living Portland. According to simplyhired.com, the average salary of an administrative assistant in San Francisco is $48k, and $39k in Portland. The Portland salary is about 19% less than the San Francisco salary. Other professions showed similar salary disparities. According to city-data.com, the median house or condo value in San Francisco is $751,600, and only $296,100 in Portland. The Portland house is about 61% less than the San Francisco house (and it’s probably bigger)! Call me crazy, but I’d be willing to move a 90 minute plane ride away from my family and friends to see a 61% decrease in housing prices with only a 19% decrease in salaries.

Inertia is a powerful force that keeps us from acting in our best interests. People do some crazy things just to avoid moving away from the place they call home. Here are a couple things some of my friends have said to me recently:

“I can’t wait until our PMI is gone. Just five more years!”

Since they couldn’t afford to put 20% down on their house, my friends had to purchase private mortgage insurance (PMI). PMI is insurance that protects the bank in case you can’t pay back your loan, but you’re the one who pays for it. It’s completely wasted money from which you get absolutely nothing back. My friends bought their house a year or two ago, so that means that after putting down a down payment, it would still take them six to seven years to build up 20% equity in their house. I have to imagine that they must have bought their house with practically nothing down for it to take so long to build up 20% equity. They would have been better served renting a small, less-than-ideal apartment for a few years while they aggressively saved up for a sizable down payment.

“Pre-qualifying for a mortgage loan will give me a better idea of what I can afford.”

No. No, no, no. Pre-qualifying for a mortgage loan will give you a better idea of how much money the bank will loan you. It will not give you any idea whatsoever of what you can actually afford. When I talk to home owner friends, they sometimes admit that they were amazed at how much money the bank was willing to loan them. All of a sudden, houses that you thought were completely out of your price range seem positively affordable. After all, why should you question the bank? Well, because the banks don’t have your best interests at heart. If you don’t want any children and would be happy working until you’re 70, by all means, buy the most expensive house the bank will let you. But if you want to have children, help them pay for their education, and save for a comfortable (and possibly early) retirement, you need to do your own math to figure out how much house you can afford.

So I beg of you, recognize that inertia is all that’s keeping you in your high cost of living area. Stop making excuses for why you can’t leave. Stop pretending that everything’s ok because the bank says so.

I’ll reiterate the point I started out with: buying a house is one of the biggest decisions you’ll make in your life. You must consider every aspect of your current and future finances before purchasing a home. Throw out all your assumptions about what you “should” do and start from square one. Hell, just look at real estate listings for other areas and you’ll start to wonder why on earth you should pay $750k for a house when you could have a, likely better, house in another great city for 61% less.

10 Responses to Where You Buy Matters

  1. I definitely agree that you gotta be smart with your money and remember that the banks don’t have you best interests at heart. They are a business after all and want to turn a profit, so make sure you do lots of research before doing anything. Great post!

    • Thanks. I have a feeling that when the time comes to get pre-approved for a loan, I too, with all of my research and preparation, will still be swayed by how much the bank is willing to lend me. Hopefully 4-5 years of immersion in personal finance will give me the strength to do what I know is financially responsible!

  2. I was just discussing this topic over on Financial Samurai last week. I grew up in San Diego and moved to Utah to go to college, then decided to stay here since, in my opinion, it is so much nicer. (Lower cost of living, lower crime rate, short commutes, cleaner air, friendlier people, etc.) Of course the one thing I do miss is the weather, but it’s not worth the extra cost of living to stay in CA. I’m in southern Utah, so my temperatures are more like Vegas than SLC. Here is part of one comment I made:

    When I was looking at BestPlaces, they had some jobs in Provo and San Francisco posted on the side. A Senior Software Engineer at Oracle in SF is offering $101,039. A Senior Software Engineer at Novell in Provo is offering $92,981. That Oracle job is like getting a $48,895/year job in Provo. The Novell job is like getting a $192,141/year job in San Francisco.

    Those numbers are based on the CoL calculator on BestPlaces. The large majority of CA jobs don’t come anywhere close to offsetting the extra cost of living, especially in SF. Since I can work from anywhere, I chose a location that I enjoy and can really get ahead in life since I live on about 34% of my after-tax income. I built my house when I was 23 (paid cash), so I have been rent/mortgage free for seven years. When I want to go to my office, I have a 1.8 mile commute. I remember growing up in the San Diego area and people used to commute 60 miles EACH WAY from Temecula to downtown San Diego because it was cheaper for them to do so. Then, when gas prices quadrupled, it wasn’t so cheap anymore, but they were stuck with their living arrangements if they bought a house. I can’t imagine being stuck in CA paying high taxes, high rent, etc. Talk about being stuck in the rat race.

    There are so many good options for people in California to relocate. That’s why so many people have been leaving California for the last 10+ years. Oregon, Washington, or Colorado. Texas, Utah, or Arizona. I know even in my own small subdivision there are at least three other families from California that I know of. I bet there are even more than that, but I’ve just never asked.

    If you are wanting to really get ahead in life, I HIGHLY suggest moving out of CA. Unless you’re on the fast-track to become the next CEO of a high-flying tech company, it’s not really worth the expense.

    • It’s so true that the cost of living out here is out of control. We’re staying put for the time being because we have a really sweet deal on housing. We live in a 3 bedroom house that’s completely falling apart. The driveway and back patio are hopelessly torn up, the cheap carpets haven’t been replaced in I don’t want to know how long, I worry that when my cats play on the roof they’ll knock shingles off, and the owner refuses to do any maintenance. So we have obscenely low rent for the area. We couldn’t find a studio apartment for what we’re paying now.

      If that situation changes and we have to leave the house before we have a down payment ready, we’ll have to figure out a Plan B.

      But as long as we can stay in the house and keep the ultra low rent, our plan is to spend a few more years building up a down payment and then move to Oregon, Washington, or Colorado and start a family.

  3. It’s true that the bay area is one of the most expensive cities to live in America. It’s also true that the demand to live here is not declining, but rapidly increasing. Since inventory is so low right now, it’s basically a seller’s market, which drives the price even higher up.

    As a prospective homebuyer, I can understand how this can be frustrating. At the same time, it can also be reassuring to know that if you invest in property here, it’s most likely going to appreciate in value. In the end, the people will always flock to where the jobs are.

    I can definitely understand why you would want to relocate to a more affordable area, since it makes more economic sense. Have you thought about rental properties? I purchased my first rental in July, and have been renting it out ever since. The rental income is enough to cover the mortgage and pay most of my own rent. This form of leveraging might help you more easily own your own home someday, should you want to stay in the bay.

    Take care.

    • I really don’t have the kind of capital necessary to purchase a rental property. We also would like our first home purchase to be the one we live in for many years to come, rather than buying a starter home and then turning it into a rental property once we find another house for us to live in.

      My fiance and I both like the idea of a rental property, but it would probably be something we’d do many years down the road once we’re already established in our own home.

  4. Luckily, our ties are all out here in the Midwest where housing is gernerally cheaper, so we’ve never had to make too big of a decision. However, I did live in Chicago for a few years. That taught me all about inflated pricing.

    I think my favorite thing that you mentioned is that getting prequalified for a loan does not tell you how much you can afford; it simply tells you how much the bank will loan you. That is so true. When we’ve bought in the past, we actually buy somewhere between 1/2 and 1/3 of what we would actually be able to borrow.

    • I sometimes wish I had settled in a different city to begin with so I wouldn’t have to deal with this decision now, but then who knows where my life would have taken me?

      Since I’ve never applied for a mortgage loan before, I have very little concept of how much the bank will offer us. Our plan is to build up roughly $50k for a down payment and then get a house somewhere around $200-250k, even if the bank would lend us $500k. I think most people probably get into trouble because they haven’t run the numbers themselves before going to the bank, so whatever the bank says, they just assume is what they can afford.

  5. I would agree. Where we live is one of the most stable places to live in Canada and that is why we decided to stay here. Plus the cost of living is reasonable too.

    • That’s a great situation to be in. There’s something pretty unsettling about living somewhere that you really can’t afford. We’re completely tied to the house we’re in right now because of the low rent that we wouldn’t be able to find anywhere else around here, and that’s not a great situation.

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