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  • Writer's pictureBridget Sullivan Mermel CFP(R) CPA

Should I buy a house now? Avoid Becoming House Poor!

The real estate market is hot in many areas right now, with sellers getting multiple offers. What’s a buyer to do? How can you approach this decision and not ruin your financial future? In this episode, we talk about the basic guidelines about how much house to buy and how much to put down as a down payment. Then we get real. Bridget talks about what it was like when she over bought. That’s when we get into what buying a house has to do with camping. John talks about negotiating. When do you have the most power and the best attitude to take into real estate negotiations.


John Scherer: The housing market is red hot these days. What's a person to do? How to think about how to buy a house? We'll talk about that on today's episode of Friends Talk Financial Planning. Hi, I'm John Scherer. I run a fee-only financial planning practice in Middleton, Wisconsin.

Bridget Sullivan Mermel: I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois. John, we both have some basic guidelines that we use for people to help them figure out how much house to buy and how to go about buying a house. My guidelines are to spend on a house two to two and a half times your annual income. It could be you and your spouse together, whoever's buying the house together and put 20% down.

That means that you have had to save enough so that you have 20% down. I'm going to do some of the basic math for you right now, so you don't even have to get a calculator on this one, but you'll probably want to calculate it in your own situation. I'm talking about the gross amount that you make. This is before your 401K, but it's the amount that you expect to make every year. Sometimes if somebody gets a one-time bonus or something like that, I wouldn't include that but I would include-

John: I can buy twice as much house then.

Bridget: Yes, right. Don't do that. If both your spouse and you make $100,000, times 2 is $200,000, and times 2.5 is $250,000, $200,000 times 2 is $400,000, and times 2.5 is $500,000. Those are my basic guidelines if you're buying a house. If you're buying a house that's $200,000, you should have $40,000 put down. If you're buying a house that is $500,000, that means you should have $100,000 to put down. John, what are your thoughts on this?

John: That's pretty consistent with where I am on things too. I have a little wider spread out for people, two to three times income as far as looking to make a purchase with things but you’ve got to be careful for creep on the top. You can keep on going up and pretty soon you get yourself in a position where it's easy to talk yourself into overbuying. Two to three is how I use it and again, similar math right? If you're making $100,000 combined, that means $200,000 to $300,00, $200,000 to $250,000, somewhere in that range. If we're making $200,000, now you're in the $400,000 to $500,000, $400,000 to $600,000 range.

That's a really good metric for four because it's based on cash flow. You've got a mortgage and your income versus cash flow, that's a good transition. One of the things I tell people about this and just being cautious is that real estate is easy to buy, but it's not always easy to sell. It's that sort of thinking like, "Hey, to have these metrics for it keeps us in check." I think it’s really important because otherwise, you end up where you've got this commitment to it. A house is a commitment that you have to make these payments and it can affect other areas of your life that you might not think about before you make this purchase.

Bridget: Right, you could think because the real estate market is so hot right now that real estate is easy to sell, but you would be wrong.

John: Yes, that's right. It might be today, but when you're talking long-term things, that's a recency bias. We were talking about that a little bit before the show, what happened yesterday does not mean that's going to be the same thing in a year or two years and three years, much less 5 or 10 years.

Bridget: I personally have over-bought a house. Before I was a financial planner, I had a tax practice. I wasn't a CPA. I wasn't a slouch with numbers, but I just didn't know. I went out to buy a condo and they said, "You can afford this amount of money." I was like, "Great. I'll go for that." I was over three times my annual income. My house was almost three. It might've even been almost 3.5. What happened is that I lived this experience of having overbought my house. What it was like was that I could save my 10%.

I kept saving money, which now I'm very grateful for, but other than that, I was very tight with other spending. I couldn't do stuff that I wanted to do that seemed appropriate for me at the time, and I didn't have kids. That would have been harder if I did have kids. For instance, I like to travel and I was camping. I wasn't even camping at groovy national parks where you have to fly and rent a car. I was camping at the places within driving distance and not actually splurging on a new tent or something, that kind of thing. I didn't have money for more furniture.

I was lucky because I had a client that was going out of business, so they weren't making any money, but they had a sales tax audit from the state and they happen to make furniture. It was like, "Let's barter."


I bartered for some furniture. That's the kind of experience I had, and I didn't like it. I was like, "I don't like being this constrained with money. I like to have a looser relationship with it, and I don't like feeling like I have no money." I like a house. I like my condo. My condo was great. I had parties at my condo and it was a nice condo but if I knew then what I knew later, I would have bought a condo that was a little less expensive, and it would have been a little farther West, and then I would have been able to afford it, and I would have waited another six months so then I had the 20% down to pay for it. That was my experience. John, what are your thoughts?

John: I think that just that idea is really powerful. Thanks for sharing your story on it, Bridget. It's like you hear about these things in a sort of theoretical (sense) and you've got the experience of, "Hey, what was it like? What's it like when you have this?" I just keep coming back to the idea that it's a commitment, it's this mandatory thing that you've got to do. You can choose whether to take trips or not, and you can choose whether they camp at the county campground or the national park, but you can't choose whether to make that mortgage payment or pay your property taxes.

Bridget: Right.

John: Making this big commitment and having rules around that makes sense but one of the things that I talk with folks about today, those rules that have been proven over decades of experience with some of our colleagues through the Alliance of Comprehensive Planners. This is not just me thinking this, this is hundreds of advisors and thousands of clients like, okay, this works, but today's market, we have folks that are looking to buy a house and a house is on the market for 24 hours and there's 10 offers and all of them are over asking price.

Like, "What do you do about that today?" I'd be interested in talking a little bit about how you advise people or how you think about that. And, I mean, it's crazy. I have a client who was looking to buy a place and their price was almost $100,000 over asking and they didn't get it. It's just these crazy things. And so, how do you think about that today? What do you tell folks about today's environment?

Bridget: Take a deep breath and still try to follow the guidelines. That's one of the reasons why I say two to two and a half because then if you creep up a little bit, you're not going to goof yourself up too badly, but instead, that's why I don't go up to three. But again, realize if you decide to take the plunge anyway, realize that you're in a situation that's overhyped, and you might take a look at what is over-hyping it.

For instance, there are a lot of people moving to the area and just think they're going to stay, or is it just that housing prices haven't gone up in quite a while, and so they've got a little bit of catching up to do. So there are different reasons why housing prices might go up. Is that a trend that's going to just keep continuing and if they're going to keep going up, up, up, up, up, or is it like they're going up and then they'll probably stay?

John: That's the same thing that I'm telling folks too is the fundamentals don't change.

Bridget: Right.

John: At any given time, we've got these changes in what's going on currently. One of the things I talk about with folks is having patience. It's got to be a challenging time. I'm glad I'm not personally in that situation, but how do you think about that? At the same time, we have clients that are making moves and I say, "Listen, you can rent a pretty nice apartment and there's flexibility."

And then one of the things I think about is if mortgage rates go from wherever they are today, three or three and a half, in three years if they're at 4% or 5%, suddenly those sky-high valuations, that red hot thing, you go, "Golly, people can't afford," and those prices start to soften a little bit. Then being in a position where you can be flexible, it's like any other negotiation, basically. The person that has the flexibility has the power; the person that's locked into a result loses their power.

I tell people just to the extent you can, be patient with it, and maybe that means renting an apartment, maybe that means not buying the perfect house right now, but buying something that fits our guidelines on things with the idea that, okay, in a few years we're going to make that move, because those things, interest rates, prices, those things all come through. We've seen it over history.

It doesn't feel like that, we have that recency bias. It doesn't feel like that today, but if you're going to have a longer-term time horizon. That's exactly what I tell people is be patient. Patience wins out. At the same time, I realize that could be really tough to think about, but hopefully, folks can listen to these messages and be proactive and be smarter about making their decisions with things.

Bridget: Yeah. The metaphor that comes to my mind is it's like driving a car. If you generally drive within a certain speed limit when you're on the expressway, but you go out onto, the Kennedy is the highway right by me, that's what we call it. You go out on to the Kennedy and it's the Grand Prix that morning. What do you do? Do you start driving really fast or do you say, I'm going to move over to the right lane and let these people go by me and be safe and ride safer and just ignore some of this hype that's going on over there? That's my take on it. It's like you don't have to let everybody else being hyped up, make you follow that curve.

John: That's a great place maybe to wrap things up and just talking about sticking to your guns, right? Here's our philosophy, here's what we know has worked over time, whether it's driving safely or buying a house, that's worth two to two and a half, maybe three times your income. That works over the years, that works today. Right? So have that discipline and have that patience with things and it will put you in a really positive situation. I guess that would be my one takeaway here. Anything else that you want to add to that Bridget?

Bridget: Yeah, I would say subscribe to our show.

John: Oh, there you go. That's a great action item.

Bridget: Subscribe to our show, helps us with credibility on YouTube, and the other thing is John mentioned the ACP or The Alliance of Comprehensive Planners before, but that's a group that both of us belong to. So with that, let's wrap it up. Thanks, John.

John: Alright. Thanks, Bridget.

At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.

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