bostonbubble.com

GenXer · Joined: 20 Feb 2009 Posts: 703

Yes, you are 100% right that we need to make the best of what we have, and one can not pinch pennies for 60+ years just to retire. I fully agree with that - a certain standard of living has to be maintained throughout.

However, that said, there is the other risk, which for most of us will most likely be quite real. It is the risk that you will live till 100 years old. Have you considered that? Think about it. This changes things significantly. You can not just do what's emotionally satisfying just because there is the other, smaller risk out there. You need to weigh the risk that you'll run out of money, and nobody would help you when you do. Not the government, not your kids. We'll be healthier than our parents ever were, and there won't be too many jobs for 65+ people in the future - their skills will be obsolete (and younger workers including immigrants will compete with them). This is a macro picture. Practically, this means that we have to provide for ourselves, and a house is probably the biggest drain on most people's finances, ever. Most people simply have no money left after they've paid for their house. Downsize at the wrong time? You lose. Huge taxes, high energy cost? You lose again. Many people want to remain in their houses...what happens if you want some money? What happens if you need a LOT of money, say for medical expenses?

The point I'm making is NOT that you should never own, but that you should not buy until you are financially very secure, which includes a good plan for the future, and a solid financial foundation to begin with. This may require a lot more time/money than people realize, but this is the price one pays for risk mitigation - we don't get bailed out. Othewise, anything that goes wrong can hurt your finances, and many people may never recover from it.

GenXer · Joined: 20 Feb 2009 Posts: 703

And I'm sure everybody can do the math - a 30 year mortgage raises the price tag on your house by a factor of 2. Is it really worth it? I'd rather invest this money over 30 years - I'm sure my return would be much better than a return on a house. Is anybody going to bet that their house will double in price at least 2ce in the next 30 years? (Incidentally, this is what you may expect from a typical 5-year CD or a bond, net of all expenses). Or will you have to bail out at the wrong time when your job goes elsewhere? Will you be able to survive every single recession in the next 30 years and not lose your job?

Nothing wrong with buying - just make sure that you understand that buying a house will
1) Not guarantee you a gain on your 'investment' (or even to beat a 1 year CD return) - moreover you may be forced to sell at a loss.
2) Drain a lot of your resources you can use for real investment
3) Will amplify any risks to your financial health unless you are protected by adequate capital

I'd rather buy with cash instead (or at least a good portion of it in cash). In the meanwhile I'd rather invest the difference. So be it if it takes me 18 years to wait until we can get a nice house - kids will still grow up just fine. I know we can't afford a house where we rent right now. So when kids grow up, maybe we'll move somewhere else and buy there. But it better make financial sense to do that - if rent is cheaper, that's what we'll do.

JAP · Guest

Guest · Posted: Tue Apr 27, 2010 5:35 pm GMT Post subject: JAP

Kaidran · Joined: 17 Mar 2010 Posts: 289

The point I was making was that I am a happier person without the hassle of dealing with a house that will take up my time and restrict my job opportunities. This was particularly obvious when the recent floods came and all my friends were freaking out.

Still Looking · Guest

All good points about happiness vs. money. Unfortunately, my options, if I want my child to have some stable friendships through school years are: 1) rent in the town I will like to eventually buy/settle it until the prices become manageable for my finances, or 2)stay in the current school system, but never being able to afford in this town, thereby guaranteeing that I'm a renter for at least the next 12 years.

I would not be able to sleep at night just barely squeaking by on my mortgage. Yes, I do understand that I would not become a homeowner, but rather be renting from the bank. Not having a landlord is a big plus, but I wouldn't be opposed to renting if I thought I wouldn't be evicted suddenly because the LL decides he/she wants to move back into the house, or to sudden jack up my rent 20% because their retirement portfolio tanked. Not things I can control, and both of these things have happened to me.

That being all said, I will probably have to move by summer in either case, as the LL didn't get the increase he wanted last year (almost moved on him and he panicked) and just put in a bunch of work on the place, mostly his unit. I'm thinking I have to pick up the tab on this one, as LL is retired but not always living in our world, so to speak.

Still Looking · Guest

Oh, BTW, did I mention how much I hate moving?

Boston ITer · Joined: 11 Jan 2010 Posts: 269

GenXer · Joined: 20 Feb 2009 Posts: 703

Guest · Posted: Wed Apr 28, 2010 12:20 pm GMT Post subject: CL

My 2 cents -

- Despite the very obvious financial implications, renting vs owning is a very personal choice. Owning (and servicing a mortgage) is a big committment though, so make sure you leave yourself plenty of margin of error in making your decision. Some of the things I suggest include have a very long term view (7-10 years at least, please don't buy a starter house) so you will be fine even if you got stuck, and have plenty of emergency cash (in case unemployment) on top of a healthy downpayment (so you can refinance if possibility arise)

- I do have an optimistic view on Boston. True, living cost is high here (though not as high as NYC and some part of west coast) but you have a big first rate universities and hospital sector here, both of which are 1) immobile thus low/no relocation risk, 2) defensive in nature thus can ride out boom and bust, 3) itselfs produce high earning jobs to support local economy and 4) typically leads to/support new venture/start-ups. It's also a east coast city which makes travelling to Europe a lot easier than say from Texas. Those advantages are very permanent/defensive.

All I am saying is Boston is what it is for a reason. I am not saying it's the best city in the world, but I don't think it's as bad as people think, especially from a job perspective.

GenXer · Joined: 20 Feb 2009 Posts: 703

CL · Guest

GenXer - looking at rent as portfolio insurance is flawed - in portfolio insurance you capped your downside but not the upside (i.e. by paying a monthly premium you capped your loss at say 20% max but you retain all the upside should market rallies). In rent, you don't participate in any gain at all.

A closer portfolio insurance analogy will be buying a house and buying out of money Case Shiller Boston index put.

GenXer · Joined: 20 Feb 2009 Posts: 703

It is true that this is stretching the definition of 'portfolio insurance', but the rest of the proposition is to invest the freed up money (even CDs will do, actually) for 30+ years. This way you will experience very little downside risk (simply by paying rent - the risk you experience is 'reinvestment' risk - having to move or pay higher rent). The upside is also capped by the maximum performance of your CDs or bonds, but ideally you'd start with a portfolio which makes at least the annual rent payment, and hopefully doing a better than that thereafter because you keep contributing to it.

Actually, it is just fine if your upside potential is capped as long as your downside risk is minimal. This is what most people wouldn't mind getting - more predictable returns with less volatility.

Buying a house is a huge risk that you won't mitigate with buying Case Schiller options, unfortunately - what if you have large unforeseen expenses? What if you can't afford payments? Lose your job? Case Schiller might protect you if prices go down, but not from much else. That is, assuming there is a correlation between Case Schiller and the price of your house (a big stretch that is, too). And of course, you have to be able to trade Case Schiller options (which will cost you extra, but will not buy you much protection).

So which portfolio insurance would be best? I'm voting for renting Wink

In effect, you are paying rent and 'protecting' the rest of your money from having to buy a house.

By the way, here's some info on Case Schiller options:
http://blog.adamnash.com/2007/09/17/do-you-know-where-to-buysell-spcase-shiller-housing-index-derivatives/

balor123 · Joined: 08 Mar 2008 Posts: 1204

CL · Guest

I agree the quality of living should be taken into account - how to quantify it to make it comparable though, I have no clue.

As for the appeal of Boston, there are things that I disagree. The VC community is actually quite big, certainly bigger than Texas. There are not a lot of big names, but tons of angel investor/small shops with a focus on specific product/segments & industries. Plus you have the proximity of NYC VC. Remember VC by definition is attracted to new venture, which typcially is a derivation of new ideas, and university is the breeding ground of it. So you will typically find VC/start-ups/etc near MIT/Stanford/CalTech/etc.

Proximity to Europe/LatAm is simply my preference =P

I do think West Coast (say SF) is another place I would love to live, despite the cost. Great universities (even better, UCLA/Berkeley is great too so save on tuition), good weather, educated and diverse population, good high end job prospects.

Personally, I will not say the same for Texas.