Open season

[nickjong]

Sarah and I embarked on our housing search yesterday by attending a slew of South Bay open houses. Escaping our miserable Victorian flat in San Francisco is among our top priorities for 2011, so we were relieved finally both to feel well enough this weekend to get out of the house and get started. This time, we won't allow the amazing walk scores

Comments

[medryn]

[begin unsolicited advice, bordering on obsession]

Don't do it! Rent/buy ratios are still seriously out-of-whack in the Bay Area. Keep renting and investing your excess cash, and you'll come out ahead in the long term.

[end unsolicited advice]

How soon do you think you might move south? We were hoping to see more of you and Sarah in the post-thesis era, since you do live less than 2 miles away :-)

[zml]

The advice here really depends on how much money you value for "quality of life", under the assumption that by owning your own home, you can improve quality-of-life by changing your home arbitrarily, versus within the confines of a rental agreement. However, rent/buy is so out of whack in your area that you have to *really* value home ownership. (A further consideration is that the total cost of ownership of a home is harder to compute, whereas a rental is fairly easy.. so you have to REALLY want it.)

That said, I also bought in a market where things are silly to buy, so I feel ya'.

Also also, I have faith in a real estate recovery, so it could be a good time to buy. I feel like there's a fairly high downside margin of safety on the investment, with a large potential upside.

[nickjong]

Yeah, every indication is that we might value home ownership more than the average couple. Particularly given that for Sarah's health we want the freedom to install or upgrade the home's air filtration and insulation.

On the other hand, I am wary of being too strident when assessing the risk we're adopting here. I think I've been very fortunate financially in my life, and I don't want just to assume that I'm immune to the risk that bit so many American homeowners in the last few years. But objectively our financial situation seems fairly robust....

[zml]

The health consideration sounds like a very good reason. This is advice I offered a friend recently, too, who was considering whether to remodel his house, partially for quality of life and partially for investment. As long as you're comfortable with the pricetag of the quality of life section, go for it! For things like health, it's hard to even put a price on it.

I think you're looking at a good time to buy, to be frank. My somewhat obtusely worded last comment was saying this: I think prices might drop slightly more, like the 10-20% range, but I think there's not a whole lot more room to drop (hence "margin of safety"). I think they'll stay flat for quite a while after that - there's a 3 year supply of bank owned foreclosures that need to get dumped before you'll see much appreciation - but long term, I'm bullish.

[nickjong]

We were wondering how long it would take for you to speak up. :-) In all seriousness, I appreciate that you don't want to see us commit a serious financial mistake. Thank you.

But as Zach suggested, we don't see the decision to rent or buy as a purely financial decision; our goal is not simply to maximize our net worth. I've been spending some time playing with this buy versus rent calculator at nytimes.com, but I'm not looking at the crossover point when buying becomes more profitable than renting. I'm looking at the financial advantage of renting, even in pessimistic scenarios when the house loses value every year and rent never increases. I still find it easy to imagine that we would get sufficient utility out of owning a home to make this cost reasonable for us. It would take a catastrophic decline in home value for us to really regret buying (or of course if we choose our home poorly). Although I admit that assessing risk is difficult, my gut tells me that the probability of a catastrophic decline in home value is