In this episode of Friends Talk Financial Planning, Bridget shares her personal experience of buying a house and the financial planning lessons she learned along the way. With the current real estate market characterized by low inventory and high-interest rates, Bridget breaks down these factors and their impact on the buying process. She also discusses the unique circumstances of sellers in today's market and the challenges they may face in transitioning out of their homes. We delve into the complexities of the housing market and offer insights for those considering buying a house.
Bridget: Hey, John. My husband and I just bought a house. It made me think of Friends Talk Financial Planning. I'm Bridget Sullivan Mermel, and I've got a fee-only financial planning practice in Chicago, Illinois.
John: And I'm John Scherer. I've got a fee-only financial planning practice in Middleton, Wisconsin. And before we hear the story about your new house and what lessons you learned from that, I want to remind everybody to hit that subscribe button. When you subscribe to our show, it helps other people find this content and helps us with the algorithms. So, Bridget, let's dig in. And you bought a new house. Tell us the story. What happened? What did you learn?
Bridget: Yes, I just want to make sure people know what to expect from this episode. We'll talk about what's happened to me, what the current market is, and then our general guidelines and what to think about when you're buying a house.
My husband and I decided to buy a house. And one of the things I really wanted to talk about is what's the market like now. The first element that you hear (and I didn't really know what it meant) is that it's low inventory. And then another thing you hear (again, I didn't know what this meant, because I've never experienced it before) is that it's a seller's market. Another factor that's in play is high interest rates, so I knew what that was.
John: Low inventory, though. I drive past the car dealership and there are only seven cars in a lot. That's low inventory. But there are all kinds of houses around. What does that mean? Tell us about that one.
Bridget: Well, the thing that I've deduced is that because the mortgage rates have been at historical lows, people are hesitant to sell. And because of the Great Recession that we experienced, 10 to 15 years ago, there were not that many new houses being built. And then we had the pandemic and we had supply chain issues, which I think have been worked out. At least that's what I've experienced so far. But those factors are all in play so there are just not as many houses on the market as there is demand for.
It's kind of a weird situation because it's not really driving up the prices as much as it normally would because of this high-interest rate thing. It almost seems like what the Fed is doing is kind of working from a macroeconomic point of view. But what it means is that when you're looking, you might not have as many places to look at as you usually would. And the nature of the sellers is a little bit different. I'll get into that. For the sellers, I am going to compare myself to two other people who I know, and the sellers seem to be people who need to get out for some reason.
It's not as many people who just want to upgrade their lifestyle, it's more people who have to make this decision. In other words, they're not doing it because they feel like they want to. In our situation, as far as selling our current house is concerned, we’re not as intimidated by the high interest rates that other people might have, because when my husband and I first bought our principal residences, the interest rates were at least this or higher. So we know that we can just refinance; trudge along, refinance, do the paperwork, and it'll be fine. So that's what we're planning on. So that's not as big of a factor for us, but for a lot of people, the sellers are problematic. And so, I'll tell you my story if you want to hear it, and then I'll spice it up with some others. But first, let's see if you've got any questions for me.
John: Yeah, I want to hear the whole story (I know a little bit about what went on with you) but it's always interesting to me this idea of supply and demand, the seller's market, and there's not enough inventory. When we have people who want to buy houses, or there are not enough houses that people are selling, does that mean that the buyers are all coming from apartments or other places? Because in your situation, when you want to move to another house, you have your house to sell.
So if I live in a house and I'm buying another house, it seems like it should cycle over and that's not what's happening. There's obviously something amiss because if I move from one house to another house, I should free up one house when I buy another. As a result, that supply and demand should be somewhat level, but again, we're not seeing that. So that reasoning is not right. Can you make any sense of that?
Bridget: Yeah, I don't think it's as level as usual, let's put it that way. We're planning on selling our house, so that would be level. But the people who we bought from are moving into another place they own, and other examples that I have are renters that are moving up. And then there are also people who are in retirement or died, so they're kind of in that stage. It's just a little bit of a different situation than usual, I would say.
Bridget: It's just like the stock market. It's like every situation is always unusual and unique.
John: Yeah. It goes through some of those ups and downs and things and there are so many different factors. It's not this exact comparison. It seems like it should be simple, but it really isn't that. Tell me a little bit about your experience, what went on, and what happened.
Bridget: Well, we were concerned about the sellers actually getting their stuff out of the house. Indeed, when we were there for the final walk-through, which is what was scheduled 1 hour before the closing, they still had the moving van there, and they were trying to get rid of this stuff and really not even taking all the stuff off the walls. And then at the appointed hour for the closing, one of them wanted to take a shower. We ended up with a boat a jeep and two snowplows, all that we worked through at the closing. Does that make sense?
And so, then I talked to my attorney about it because I knew from some other people that this was not normal. I've certainly never experienced this before. I've never really heard about something like this before. And so, I talked to my attorney, and he said, yes, indeed, that is happening more right now. And again, it's because the people have issues. One of my friends bought from a hoarder, and the same kind of stuff happened to her. I asked her, “What do you do?” And then another person that I know bought from a cat hoarder. And I've never known anybody that's bought in these kinds of situations before.
It's just a different kind of market. And I think there are probably deals to be had if you're up for doing some work. That's the other thing. There's a little bit more work involved. We're doing some work on the house because, again, the people were not quite keeping up on it. But it's not bad. It's great, actually. We're really excited about the house, and we like these people. It was just hard for them to detach. That's what I would say about the owners. I liked them. They were wonderful people, and I'm really grateful that they sold us their house, but it was not smooth sailing.
John: Bridget, I wanted to circle back on one thing. In talking about that idea of the market imbalances and where the supply and demand might be, you mentioned that you and your husband are in a spot where you don't need to sell. You're not over a barrel. You sort of wanted to. And I know before we hit record we talked a little bit about your reasons for wanting to, but maybe that would lead to a discussion about how you make that decision to buy. Would you mind sharing some of those things about why you made the move and some of the remodeling things you were looking at with your old place?
Bridget: We put a list together on our current house, which is just fine, about the types of things that we needed to do to be happy with it. And it costs quite a bit of money. And the other thing is that our ages make a difference too. We're both 60 and so that makes you look at things a little differently. It would be nice to get something now that we’re really happy with. What are we waiting for if we can do this? And we also know what it's like to live through renovation given the types of projects that we wanted.
John: And are you saying living through renovations wasn’t fun? 😊
Bridget: No, it wouldn't be fun to live through these kinds of renovations, especially when compared to moving into a new house where we're doing some renovations before we move in. These are not extensive, but there’s some stuff that's actually similar to what we would need to do here, but we're not living there yet, so it's chaotic, but it's not the same as when you're living in it. And so those were the factors that were in play. Also, honestly, during COVID I was driving around Chicago, and thought, “I’m kind of bored. I need to refresh.” And it was just a good time. We've lived in our current house for twelve years and it has appreciated, so that's good. It just seemed like a great time to go.
John: One of the things you talk about that I really appreciate you saying was the cost of remodeling and improving your old house. But in addition to that, it's an inconvenience. But going back to the cost side of it, one of the fundamentals that I often talk about, and I think you do too, is that what you put into a remodel doesn't come out in value, and so oftentimes you're better off buying something different than doing a remodeling project. That sort of underlies what you were describing there, and maybe that would be a good thing to circle back on for viewers about what are the guidelines that you use when you're talking about buying a house and how to think about that.
Bridget: Our recommendations are to buy a house that's two to two and a half times your income. And we've got another episode about if you want to stretch it, that's a whole different topic, but two to two and a half times your annual income. Also, you want to be there for five years, so if you're just going to be there for a year or two, don't do that. Put 20% down.
John: So let me just stop right there for a second. So two and a half times. So if you and your husband are making $200,000, let's say, two times, that would be $400,000 to $500,000 just to put it in some dollars. If $500,000, 20% down is around $80,000 to $100,000 of being able to make a down payment on it. This is just to kind of put some framework and of course, you can kind of do some math, but that's the metric we're talking about.
John: Okay, awesome.
Bridget: So I take a top-down approach to how much house to buy instead of a bottom-up. And that's because in my life I bought a condo and I took the bottom-up approach and I figured out what all my expenses were going to be, what the bank would give me, and all that kind of stuff. And I was house-poor. You consistently underestimate how much a house is actually going to cost. There's a recent study that investigates why it’s so hard for people to save up enough for maintenance costs. Our recommendation is to spend 1% to 2% of your house's value on maintenance costs, but what people actually spend is 4%. That means if you buy that $500,000 house, 2% would be $10,000 a year, but what people actually spend is $20,000 a year.
John: Yeah, we talk with people about budgeting for those, and it’s not so much saying, “Go out and spend this money.” No, you got to sort of have it in mind that it's going to cost this. I've never personally had that experience of it being that expensive on an annual basis, but it can happen.
Bridget: I have, and it might be because my house has been older.
John: Yeah, you got to plan for it. People think, “Oh, I can buy this much house.” Well, you have to be prepared. Don’t be surprised when it costs $5,000 a year just to keep it up. That's one of the costs that the bank doesn’t factor in when they tell you how much house you can buy.
Bridget: Yeah, the bank is thinking about how much risk they can take, and they allow for a certain number of people going into foreclosure. They don't care. Okay, maybe it's 1% of their loans.
John: I don't want to be part of that 1%.
Bridget: But I don't want 1% of my experience to be in foreclosure.
John: That's right.
Bridget: In my hundred years, I don't want one of those years to be in foreclosure. It seems like that's a great place to wrap it up. I'm Bridget Sullivan Mermel, and I've got a fee-only financial planning practice in Chicago, Illinois.
John: And I'm John Scherer. I've got a fee-only financial planning practice in Middleton, Wisconsin. Both Bridget and I are taking on new clients, so if you like what you hear on our show, please reach out. But we're also both members of the Alliance of Comprehensive Planners. If you like what we talk about and want to find somebody who thinks similarly in your local area, you can check out acplanners.org.
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