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brazil84 comments on Rational Home Buying - Less Wrong
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I agree, but I would add that in some situations, the difference might come into play very quickly. For example, if you there is economic turmoil; the housing market turns south; you get laid off from your job; and you need to sell the house very quickly. In that case, the money you saved by buying a 2-bedroom cottage in a neighborhood of 3-bedroom houses will be quickly lost when you discover that it's really hard to find a buyer.
If you don't have a sufficient emergency fund to weather lay offs without being forced to sell your house, you don't have enough money to buy a house, so this is a non-issue.
I think I probably disagree with you, but let me ask you this:
Suppose that a man earning $150,000 per year wants to buy a house which will cost $450,000. He will put up $90,000 as a down payment and take out a mortgage for the rest. The monthly payment on his mortgage will be $3500 which he can make somewhat comfortably on his salary.
First, how big should his "emergency fund" be?
Second, assuming he is laid off and 6 months later finds a job 1000 miles away what should he do with the house?
Depends on his assessment of how secure his job is, and of how long it would take him to get a new one in his same geographic location.
Aside: I do not consider a $3,500 mortgage payment comfortable on $150,000 salary. I don't agree with the 3x salary multiplier. That's a recipe for being house-poor. (I'm not claiming you're wrong about anything in particular, just adding info to shed more light on my personal views here. A lot of finance varies based on individual risk tolerances, and I have no problem with someone else being more or less risk tolerant than I, as long as they understand the potential dangers and payoffs of their choices.)
In what profession does this sort of thing occur? That would be terrible. I should be more thankful for the IT industry, I guess.
My preferred answer to this question is to pre-empt and look at why someone bought a home in an area with such a poor economic outlook. But, given that they already made the mistake of long-term settlement behavior (home-buying) in a place where one manager's whim can force you to have to move a thousand miles, I agree with you that they should have something more saleable or rentable.
Let's suppose that he thinks that there is a 20% chance that he will be laid off in the next 10 years, and that if he does, there is a 85% chance he will find a new, similar job within a year in the same geographic area and a 15% chance that he will never find a new, similar job within the same geographic area.
Why do you assume that the area has a poor economic outlook? It could just be that his industry is shrinking in that area and growing in another.
Besides, it's difficult perhaps impossible to predict in advance which way the economy will go and how it will affect local housing markets. If you disagree with me, then you should be able to make a fortune by investing in real estate in areas where the market will be strong.
85% chance within a year? Then I would prefer a combination of one year of emergency fund (to cover minimal livable expenditure, not normal job-having level of expenditure) along with some excess to pay for actual non-job-loss emergencies and the cost of selling one's home and relocating.
To clarify: Poor relative to the individual in question, not overall. Overall economy in the area could be booming, but if jobs in your field don't exist in your geographic area, that's all I meant by poor economic outlook.
Nothing I proposed requires predicting local housing markets, only one's own job outlook. I am highly confident in my own ability to assess this for myself, and so presume, perhaps wrongly, that others should be able to get reasonably good estimates of their own.
The unpredictability of local housing markets that you mention is part of my justification for being more risk averse with respect to home-buying than you seem to be.
I don't understand this at all. Why do you need money to cover the cost of relocation if (by hypothesis) you have enough money " to weather lay offs without being forced to sell your house"?
Well obviously jobs existed when our hypothetical guy bought his house.
Ok, then please tell me the 3 areas where it will be easiest and hardest for a recently laid off IT worker to find a job 5 or 10 years from now.
Well one of the ways I dealt with the risk was by shopping for a house which would be easy to sell in a down market.
Because you stipulated there was a 15% chance of having to move if, after a year, no job was found locally.
Obviously one job did. It is not obvious that that job could be readily replaced. I can find one or two jobs in each of various "middle of nowhere" places right now, but that doesn't mean IT jobs exist in Eugene, Oregon to a similar extent to Washington DC. One has a poor IT job outlook relative to the other.
Easiest (and I assume in the U.S.)? In no particular order, DC, NYC, Bay Area. This may turn out wrong in 5 or 10 years, but I would bet good money that they remain in the top 10 places to find IT work. Bay Area I'm least confident about, because a social network bubble pop could leave lots of IT unemployment in that area, the way the dot com bubble did.
Hardest? Way too many to be a good question, would need to take a look at an already narrowed-down list of places a person is considering moving to.
No, I said that there is a 15% chance that the man will never find an equivalent job locally. I think your position is that with a sufficiently large emergency fund, you will never ever have to sell your house and that you should not buy a house unless you have such a fund. So I don't understand why the fund needs to include money for selling the house.
Again, I am confused. You said you were "confident." So I don't understand why you would hedge yourself by saying "This may turn out wrong in 5 or 10 years." What is the probability that in 5 or 10 years DC will turn out to be a lousy place to be looking for an IT job? Same question for NYC and the Bay Area.
Well let me put it this way: What areas would it not be a mistake for an IT professional to buy a house in right now?
Yes, you said that, which I take to imply that he has to move, because he would be unable to afford his mortgage otherwise. What else did you mean by it, if not that?
Well that's just silly. Nothing is 100% ("never ever"). That should be a given here at LW, shouldn't it?
If we want to be closer to "never ever" having to move, we could stipulate having enough money spread over "safe" fixed-return bonds such that the interest on those bonds pays for the mortgage. But that's well beyond "emergency fund."
As above, since nothing is 100%, I'm confused at your confusion. Of course any assessment of the future could turn out wrong. Of course I can still be confident in my assessment. How confident? Hmm... 75%? 85%? I'm not going to put the time in to assess & calculate better than that, since nothing of import actually rests on it -- I am not in the middle of re-evaluating my own job-and-financial-security scenario, with which I am quite comfortable.
Side question: Why do the exact percentages I have for my scenario matter to this discussion? Why does it matter which areas are a mistake or not? What are you getting at? That you think this is too impossible to determine? You really think you can't compare place X and place Y and get a good gauge of where it's financially safer to live, and that it's just a waste of time? Or is there something else you're after?
Six months salary is usually given as a minimum for liquid assets. At $150k his take-home is maybe $7500-8500 depending on various with-holdings and insurance premiums. So $45K would be the low-end. Note this does not include assets in retirement accounts or other accounts where the funds cannot be withdrawn without a penalty.
And you agree that even with 45k in cash sitting around, there is a decent chance that our hypothetical home buyer might need to sell the house in a hurry?
He would have a little more incentive but the costs of a house sitting vacant are pretty straightforward and anyone would have an incentive to avoid those. This could come about unexpectedly due to a lay-off but could come about for other unexpected reasons as well. It doesn't really matter if he's laid off or not, these facts remain:
To a large extent, I agree with both your points. The reason I was asking about the size of one's emergency fund is to demonstrate that for your typical person, you can't just rely on having an emergency fund to avoid the possibility of having to sell your house.
The sensible (dare I say "rational"?) thing to do is to rely on both strategies, i.e. have extra financial resources AND try to buy a house which will be easy to sell if you need to.