Other:
Before tax return on savings (%)
Assumed annual inflation rate (%)
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Big differences on outcome if I change the rent increase from 1% to 3%.
What are the realistic expectations for the above four rates? Is that a whole topic for another post?
I guess I could model the alternative scenarios and see which ones I like, then use that. Just kidding, that is what happens in government projections….[/quote]
What do you mean, “just kidding”? That’s exactly what you should be doing: modeling a variety of scenarios. Given the fact that (1) you’ve been through a default, strategic or otherwise, and (2) you have two young children, you should be doing your damndest to come up with a worst-case scenario now so that you’re not caught unaware in the future when/if it comes to pass. Unfortunately, if you are entirely comfortable with “strategic default” as a financial management tool, it is not among your capabilities to create a worst-case scenario.
This time around, you need to take “strategic default” out of the solutions set for the house-buying equation. Would you and your wife be as enthused about buying again if your experience had been one of fear and helplessness and public humiliation? And I’m not speaking simply of your emotions or your wife’s, but that of your children. If you asked any of the millions of young parents out there, who have been directly affected by foreclosure, to name the single-worst aspect of the experience, 10 to 1 they’ll talk about their kids. The shame of not being able to keep a roof over their heads, looking at their faces when you can’t answer the question, “Where will we live?” The pain of telling them that they’d have to leave almost all their belongings behind, or that their dog or cat has to go to the pound. How impotent they felt when their own fear left them incapable of easing the fears of their kids. The look in their child’s eyes when they were standing in a front yard filled with their belongings, watching the sheriff change the locks on the door.
Believe me, I’m glad that you and your family didn’t have to go through this experience. But make sure that you include that scenario in any that you model, and be sure to give it priority in your decision-making process, because you’re at significantly increased risk for it to become a real-life situation.
If a difference in rent increase from 1% to 3% gives you pause, I’m strongly advising you to step away from the table. In fact, if your landlord limits rent increases to these amounts, I’d try to sign a 20-year lease with him. IAs for what numbers to plug in the other areas, here’s what I suggest: Figure out what you’re able to comfortably pay for housing on a monthly basis, and add in all your other expenses, plus a $500.00 per month savings contribution (aside from retirement or kids’ college). Figure out first if you can cover all of that comfortably. If you can’t, it’s not time to buy (duh!). However, I’m assuming that you can based on what you’re telling us.
Now start plugging numbers into those categories you mention. As soon as you start cutting into the $500 savings contribution, you’ve reached your limit. $500 in your situation is a very small amount of savings, and well below what you should be contributing regularly based on history. If you cannot even manage that on a regular basis, you need to back away from buying, or reduce your price range.
I noticed that one of the categories on the worksheet is “House appreciation rate”. You, of course, realize that it is entirely possible that whatever home you buy will not increase in value at all, or it could drop quite a bit further in value. And in a case like that, I can guarantee that, when value start to rise again, they will do so at a much slower rate than many people anticipate. Again, the early 2000s were a fluke, and the dramatic upswings in that market are the reason for the dropping values now, and for rising inflation and other fun stuff. I’ll ask a question again that was posed by someone else earlier: If you knew the price of the house would drop by 20% in the first several years of ownership, would you still buy?
I sense that you feel like you and your wife earn very good salaries and that you have layoff-proof jobs. Yes, your income is good, but the costs associated with ownership of a $400,000 to $500,000 house will burn a lot of that quite easily. And here’s something you need to know and accept fully: no one’s job is 100% safe these days. Government employees are not safe from layoffs. At some point, public pressure will cause weak-spined politicians to do the previously-unthinkable: cut funding for government jobs. As for your wife, lot of people are rushing into nursing and healthcare because they think it’s recession-proof. The truth is that those in the healthcare field will be handling more responsibilities and working even longer hours at reduced pay in short-staffed situations. Somebody has to pay for all that health care in a recession. With rapidly rising unemployment, there are far fewer consumers for that healthcare because of loss of job-related health benefits. I sincerely hope that neither of you ever is faced with unemployment, but you cannot assume that it CAN’T happen. The unemployment rolls are filled with people who thought the same thing.
I have to comment that you’ve been a really good correspondent through this whole thing. Despite the potential for inflammatory reactions, you asked your question, and you’ve taken what everyone has had to dish out in response. You’ve remained polite and responsive throughout, and I’m quite impressed. I may not agree with all your opinions and actions, but I believe in giving credit where it’s due. And your mama raised you right!!
