Lifestyle creep can ruin home buying plans

Lifestyle Creep and priorities - house keys and dollar cash floating around gift bags and credit card

Lifestyle creep was a new phrase to me not long ago, but I understood the meaning right away: giving oneself a lifestyle upgrade with pay increases or milestones achieved.

What does lifestyle creep look like?

When life improves, particularly if more money is coming in, a somewhat natural inclination may be to spend a little more of it on oneself and splurges – things not previously affordable. Here are a few examples:

  • just got a new job
    • buy a new wardrobe, maybe even designer items “because I deserve it”
  • graduated from school, university, or graduate program
    • take an expensive vacation, maybe lasting all summer, to celebrate
  • just got engaged, married, or grew the family
    • buy or lease a new (or new to you) expensive vehicle
    • move to a much larger rental home

More meals out, more Uber Eats, a new car or new rental digs can all feel like well deserved rewards with the better income, combined households, or achievements made. But do they address your long term goals, or put those goals more out of reach?

What we want now versus what we want most

Lifestyle creep can be a threat to hitting long term, important goals which take cash. Whether the big plan is to pay off student loans, save for a down payment on a first or move-up home, or save for a loved one’s higher education, cash is king. If that cash is spent on little indulgences on a regular basis, it can erode the ability to do what is wanted the most.
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You cannot save as fast as the market is going up

Geyser with words Home Prices - you cannot save as fast as the market is going up right nowRight now we are in one of those periods of steep, rapid appreciation of real estate values in Silicon Valley.  It is nearly impossible for first time home buyers to save as fast as the market is going up, so what ends up happening is that affordability falls, and home buyers are priced out of the market.  I have seen this throughout my career whenever we have a steep seller’s market, multiple offers and bidding wars.  In fact, Jim and I were in that same kind of market in the late 1980s when we were trying to purchase our first house.

Awhile back I heard about some nice folks who’ve been renting for more than 15 years while they saved their 20% down payment.  In that length of years, home values have doubled or tripled throughout Los Gatos, San Jose, and Silicon Valley.

Although it would have been hard to buy a home here with a 5% down payment in 2000 or 2005 (it was an ultra hot market then, like today), there were periods when it would have been possible.   We had a couple of corrections in the market when it shifted to a buyer’s market, and at those times, sellers were not so fussy about large downs.

You cannot save as fast as the market is going up when appreciation is this steep

For most people, saving a few thousand a month is a great goal.  Unless you have stock options which will be available soon, though, most people cannot save fast enough to compensate for San Jose area home appreciation.

Today I logged on to MLS Listings and did some research.  For this study, I pulled sales of single family homes in Willow Glen with 1000 – 1500 square feet on lots of 5000 – 7500 square feet, zip code 95125, San Jose Unified Schools.  Here are the average sale prices, month over month, for that segment of the local Silicon Valley real estate market.

Please note in the graph below that the average sale price for February (so far – the month is not yet over) is higher than at any other point, even more than the peak of the market in Spring 2018. The graph provides a good “sense of the market” generally. It’s clear that average home prices are up more than $100,000 over the last month or two. 

 

2020-02-27 Average sale price SFH subset of Willow Glen

 

Many of you readers really love the data, so here are the month over month numbers, for a more precise picture of what is happening. I’ve put a red box around all of the February entries, and a blue-purple one for January and February 2020.

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Working toward long term goal of home buying

First time home buyingHow long in advance should you be preparing to buy your first home?  There are a few common obstacles to purchasing property:

  1. Accumulating the down payment 
  2. Cleaning up or creating a good credit history
  3. Deciding your priorities
  4. Budgeting so that you can live within your means while saving and after buying your home

(1) For most people, accumulating the down payment means saving money.  This is very challenging, especially when people are accustomed to living on 100 – 105% of their income!  This is an extremely common phenomena.  It is always tempting to want to “reward” yourself with expensive dinners, lavish travel, luxury cars and other perks that make you feel like you have arrived. It is harder, but smarter, to see the reward as the fruit of discipline and to chart a goal and work toward it steadily.

How much do you need to save?  There are a lot of variables here.  Getting 20% down means saving a lot on the financing costs down the road.  But if you can purchase with a small down payment (really hard to do with multiple offer situations), you can get there faster and perhaps will pay less than if you wait until you have a bigger down.  A few years ago I met someone who saved diligently for more than 20 years to buy a home.  Think about what has happened to the cost of housing in that time!  Prices have about doubled since then.  So don’t spend too long saving, lest inflation eat away at any benefits you get from the larger down payment.

It should be noted that if you are able to buy with FHA backed financing, your down payment can also be gifted from family and friends.  That can speed up the time frame.  (My 20-something kids will find this of particular interest, I am sure!) (more…)