To buy or to wait
Question: My wife and I are having a disagreement and I hope you can help settle it. We are considering buying a house when our lease is up at the end of June. We have about $14,000 in savings, which my wife would like to put toward a down payment. I am 26 and in graduate school; she is 25 and is finishing up her first year teaching kindergarten. Student loans are not an issue for us, but we are currently paying off a car.
We're looking at houses below $100,000, and here's where the disagreement comes in. After having looked at our options, I want to wait a year and build up our savings so we can put enough money down without completely wiping out our savings. My wife is concerned that, due to a recovering housing market, it will be more expensive in the long run if we wait, and that will be worth the short-term risk. Should we wait or go for it now? Andrew, Milwaukee, WI
Answer: You both have a reasoned argument and a reasonable case. Before I weigh in, I want to suggest a way to think through the issue, since what matters isn't what I would do but what is the right for your household. I would have a long conversation or two about your risk capacity and regret.
It's a simple yet important insight: We can't parse the investment fog of the future, whether it's the outlook for interest rates, the economy or the housing market. There's no certainty. Risk management means coming up with an idea, a measure, a gauge of how much downside risk your household finances can realistically absorb if you buy a home. It involves thinking about the security of your wife's job and income, how financially exposed will you be if you don't get a job right away after graduate school, and so on.
In other words, "What's the realistic downside? What could go realistically wrong?" And if things go sour, can you still weather the storm with a decent lifestyle?
Risk capacity is the most important measure. I've also become convinced over the years that regret is something to consider, too. It's a useful psychological way to judge an investment. A major takeaway of behavioral finances -- the psychology of money and markets -- is that we should take regret seriously. "Regret is painful enough when we face our paper losses, but the pain of regret is searing when we realize our losses, because this is when we give up hope of getting even by recovering our losses," writes Meir Statman, a behavioral finance professor at author of What Investors Really Want: Discover What Drives Investor Behavior and Make Smarter Financial Decisions.
So, which unfavorable outcome would it be easier to live with as a couple? Let's say you decide not to buy now. You wait and save for another year. Yet it turns out that your wife was right. You missed an historic buying opportunity. How much regret will the two of you feel? Alternatively, you don't wait. You buy. A year from now, you could have bought your home even cheaper. Your down payment is worth zero. Which regret is worse?
What do I think? Well, I'll almost always lean in favor of a stronger safety net. I don't think the housing market will run away over the next couple of years, let alone the next year. I'm comfortable missing the market bottom. I also think there is risk embedded in getting a graduate degree. For most people, a graduate degree pays off financially, and hopefully emotionally, with a more rewarding career. But how soon will the graduate degree pay off is a question mark. I'd like to know before I made a move.