My 2015 Resolution - Buy a Home

Taking the Plunge in 2015

So I realize that I have been a little lax on the blogging and that New Year's happened a few weeks ago at this point, but I did make one important resolution for this year that I think will be helpful to share. My thought process is that if I blog about this and tell everyone that I'm going to do it, I'm more likely to actually make it happen! Based on where my life is at, I think that this would be a good year to purchase my first home! 

Perfect Timing

If I think back to my life one year ago, I never imagined that I would be where I am today. I was suffering through a miserable senior year of college, living in a ramshackle house with little to no heat and I often struggled to figure out how to pay my (very small) bills. But, given the fact that I was a 20 year old student, everything seemed on the right path!

Since then I've graduated, landed a job and become a lot happier. And so rather than focusing on the short term, I can start honing in on some of my long term goals. My biggest goal as of now is to retire young, but more on that another time. So I've set my sights on buying my first home, hopefully right here in Worcester!

The Hard Part - Saving

Abstractly, the idea of buying a home sounds awesome: space that I can use for anything, no more rent payments, maybe a dog! But getting from here to there will require me to save like crazy. So far I've got about $1000 saved, so clearly I have a long way to go. If I actually want to save enough for a downpayment in one year, I have to have a really solid plan, so here it is: save 50% of my income this year.

This may seem crazy, an on some level it probably is, but I'm on track so far. I'm trying to learn to appreciate what I have and find happiness from myself rather than from possessions, again more on that later. As of right now, this all seems pretty much like a dream, but I think that if I really focus, I can make it. This post is really just a collection of some of my high level and as of yet undeveloped ideas, but hopefully I'll be back with some progress in the coming months! 

Is The Housing Bubble Back?

The Housing Market Roars Back to Life

2006 was a seemingly pleasant time for America. Sprawling subdivisions were popping up all over the country, home prices were surging and homebuyers were grabbing up properties at record rates with little to no money set aside for down payments. It seemed that prices would never stop climbing and that wealth would never stop growing.

Then came 2007 / 2008 and everything collapsed. Home prices plummeted, people found themselves owing more than their homes were worth and we were faced with nearly countless foreclosures. Neighborhoods stood abandoned; new subdivisions stopped mid-construction and America decided that we would never create another housing bubble again.

Welcome to 2014

For the past three years, housing has been making a strong comeback. Interest rates have been at record lows and home prices have been steadily rising. But after years of recovery, we may have inadvertently begun to create another bubble like the one that caused the housing crisis in the first place.

This government chart clearly shows the last bubble that was created. This measures the difference between home prices and rental units. More specifically, the light blue line measures what it costs to own a home while the dark blue line measures the would be cost of renting the same home. Between 2000-2006 there was a huge and growing gap between the cost of buying vs. renting. The financial crisis corrected this bubble and brought home prices more in line with historical averages.

Pay attention to the last centimeter or so of the graph. Sometime around 2011, the light blue line began to rise sharply in comparison the the dark blue line. If this trend continues it will indicate that homes are once again becoming much more expensive than renting.

Now here is another graph that is less technical, but perhaps more telling.

This one shows the median and average square footage of new homes. During the last bubble, new homes got larger and larger. It was the era of McMansions. After the crisis, home sizes fell significantly. But once again, home sizes began to creep higher starting in 2011. As of right now, home sizes have actually hit a new record. This means that the average home built today is larger than during the peak of the last housing bubble!

Be Careful America

Right now homebuyers are feeling quite excited. Prices are rising and interest rates are low. Things are looking pretty great. I'm not trying to put a damper on this excitement, but I think that it is important to be cautious. If we are not careful, this type of activity could quickly begin to re-inflate a real estate bubble. Try not to forget what happened last time. 

 

Wealth and Energy Savings

Wealthier Americans Spend Less on Energy

A couple of years ago my family renovated our kitchen. Included in our new kitchen was a set of brand new energy efficient appliances all of which came with tags stating energy usage. For example, our dishwasher claimed to use only about $25 worth of electricity per year. If we assume the average dishwasher uses about $50 - $60 per year in energy, this is a savings of over 50%. Let's assume that my dishwasher cost $700 and an average dishwasher costs $400. If I am saving about $30 per year on energy costs, after 10 years of owning the more efficient dishwasher, it will have paid for itself.

This concept was true not only of my dishwasher, but of all of my other appliances. I know that this in fact is a common trend. Spending more up front on energy efficiency will allow long term savings. After say 15 years of having a kitchen full of high-quality appliances, one will actually have paid less than someone who created an average kitchen up front. 

I suppose that I find this a bit disconcerting. In cases like these, being wealthy actually ends up in a way creating more wealth by generating long term savings. Because not everyone can afford the most efficient appliances and homes, most people end up paying more than they need to over the long term and have lower quality standards than wealthier individuals. Not only do those in lower income groups suffer because of costs, the things that are bought in lower price ranges tend to have more problems and require more repairs over their lifetime thus adding another cost to lower income households. 

On the other hand, if you have extra cash to spare, it might be worth it to upgrade some of your things because you can view these purchases as investments. It seems that many people seek to increase their net worth by increasing income, but it is just as acceptable to spend money to decrease expenses. I personally feel that cutting expenses in ways like these energy upgrades may be more helpful in certain situations. If a person was to become unemployed, they would probably maintain their lifestyle for longer if they were used to living with low expenses rather than a high income.