jhuffman comments on Rational Home Buying - Less Wrong

99 Post author: Yvain 27 August 2011 12:15AM

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Comment author: brazil84 28 August 2011 10:06:15AM 0 points [-]

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?

Comment author: jhuffman 29 August 2011 04:05:00PM 0 points [-]

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 Note this does not include assets in retirement accounts or other accounts where the funds cannot be withdrawn without a penalty.

Comment author: brazil84 29 August 2011 05:51:00PM 0 points [-]

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?

Comment author: jhuffman 29 August 2011 05:57:43PM 0 points [-]

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:

  • You should have a reasonable cushion so that a temporary interruption in employment does not mean foreclosure and financial ruin
  • If you have to move, you want to sell or rent your house as soon as possible. Other things equal, buying with an eye towards the re-sell market is wise.
Comment author: brazil84 29 August 2011 06:18:15PM 0 points [-]

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.

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