A comment from a reader, Dora, really stuck in my mind. They were spending $4000 a month on their mortgage:
My family (myself, husband, 2 year old, and 6 mo. old) are downsizing. We have lived in a 5800 sq. foot house since our children were born and now: (drumroll please), we are moving to a 1400 sq. foot house. We are making a choice to live below our means. We chose to stay in the same neighborhood, so we are not losing schools, neighbors, etc. We have some financial freedom (an $800 mortgage will do that), so we are considering this an experiment. I would say go for it, worst that can happen is that you want to move back in a couple of years.
Every summer I revisit my desire to downsize, and this summer is no different, especially with Dora’s comment in my mind. However, each time we consider the idea, we end up staying put.
After I went through the exercise of deriving an implied rent  that we’re paying ourselves to live in our house, I found it to be excessive. We’ve always known this, but after putting it on paper our housing expenditures seem downright foolish.
And this summer is no different, I’m going to drag you through my thought process once again! However, a few things have changed this year, which could actually make the case finally sway in favor of downsizing this year, or just keep me stuck in analysis paralysis forever…
New Factors in the Equation
New development in school boundaries. One of the biggest factors that I always come back to is the school system. But now, just like in Dora’s case, we could stay in the same school. Developers are putting the finishing touches on a new, small development right next to ours, so building a new house would mean staying in the same schools.
No competition. In addition, all of a sudden, there are no 4 bedroom houses for sale in our neighborhood, creating an advantage for sellers, which hasn’t existed during the 5 years we’ve lived here. There are actually people renting waiting for houses to go up for sale in our neighborhood; we emailed one family waiting just to test the waters.
Prices are up. Finally. Houses are selling for an average of $175 per square foot right now. And the last few that went up for sale have all sold in 2-3 weeks. Now, we’re at a value still below what we spent to build the house, but one we’d be happy with.
So, the market is right to sell, and we’d have a place to build, some of the limiting constraints in years past.
Current House. Our current house is 3700 square feet. We like our neighbors, our neighborhood, and the school that our son will start kindergarten at in the fall. The long term appreciation of the house should continue to outperform other neighborhoods in our area. Obviously, we have excessive square footage, and maintaining a house this size is more expensive than a smaller one. When you look at it from a cash flow standpoint, this house is a drain; from a long term net worth standpoint though, most of those savings are offset, but you sacrifice liquidity.
New House. Our goal would be to build for half the price of our current house. However, having gone through the building process before, I know that it isn’t that simple. We’ll budget for a maximum of $400,000 ($101,000 for the lot and about 2600 square feet at $115), but our goal will be to come in way below that. However, we’d have to live in temporary housing while we build for about 5 months, which means moving twice. And there’s the possibility of a change in interest rates before the house is completed. In addition, the new neighborhood won’t have the national recognition that our current one does, so I would estimate that the appreciation (or depreciation if Shiller is right) may not keep pace with the current house, but we would have a significant change in cash flow to invest outside of the real estate market, and more liquidity with those investments.
Ready for a data dump of all the numbers to make your head spin? Unless noted the amounts are monthly numbers:
- House Value: $629,000
- Mortgage: $446,079, $2095 monthly at 3.375%, 27 years remaining
- HELOC: $61,500, $166 monthly at 3.25%
- Real Estate Tax: $900
- Homeowners Association: $31
- Homeowners Insurance: $85
- Utilities (water, gas, electric): $267
- 5 Year Mortgage Payoff: $452674
- Value: $400,000
- Mortgage: $320,000, $1414 at 3.375%, 30 year loan ($1503 if you make a comparable loan on 27 years)
- HELOC: $0
- Real Estate Tax: $650
- Homeowners Association: $20
- Homeowners Insurance: $40
- Utilities (water, gas, electric): $167
- Savings for building less than $400,000 budget: ?
- 5 Year Mortgage Payoff: $286410
Costs to Move:
Here are the total costs to move:
- Closing Costs: $6300
- Construction Financing: $3200
- Movers: $2000
- Storage: ?
- Temporary Housing: -$8400
- Lump Sum to Reinvest: $38321
What Should We Do?
I updated my old spreadsheet, which measures the impact to net worth in the long run. But to be honest, my answer goes in circles, and I’m stuck. Without knowing what the rate of appreciation or depreciation on the houses will be, and without knowing what the stock market will do, and what tax brackets  will be in the future, I can pretty much make the answer anything I want it to be by changing those variables.
So, I’m going to put it up to a vote! (Now, I’m not saying we’ll necessarily do what the majority votes for, but I’d love to get your input… and I’m secretly hoping for some eye-opening, earth shattering results!)
In addition, I thought just getting it all on paper would help me think through it rationally! What do you think?
* This poll is closed. *