November 7th, 2009

zelda garden

Where to live... (Or: More obsessing over money.)

I was recently granted a raise at work. My earning power has now become higher than I honestly expected it to be, and when I first saw the new figure, I had to close my office door, turn off the lights, and sit on the floor quietly for a while, asking myself if I was actually okay with it. Besides meaning a higher paycheck, I felt it also demanded even harder work from me, and I wasn't sure how to react because before the raise - which came as a surprise - I had been actively contemplating the idea of leaving my career entirely and picking up something new, somewhere else. Even going back to school. A higher pay grade made the idea of leaving seem absurd. That was kind of a blow, because I'd grown fond of the idea.

But I also like my job. It already paid well, and now it pays surprisingly well. The hours are perfectly suited to me and the commute is tolerable. The work itself is compelling, and I'm appreciatd for it. The only problem is, there is just so much work to be done - an overwhelming amount of it - and every minute I'm not writing code I feel a little guilty - for keeping flaws around in a system that is my responsibility, a system that my whole department relies on, one that I can always improve to their immediate benefit. The situation brings out the workaholic in me, and strings me along through week after week of time spent indoors in the dark in a meditative state of mind. It's like jazz music - I love it and it's bottomless, but it can't be all there is.

So, I've thought about it some more, and realized that if I'm going to be doing this for the foreseeable future, and in some part for the sake of a large paycheck, then I need to do it in a way that allows a graceful exit. A way that allows me to counteract all this meditative work in one decade with a different way of life in another decade. That means saving money.

Right now I'm renting. The rent is "reasonable" for this area, primarily because La and I have a housemate. We don't really interact with him as a housemate, though, because he has his own entrance, bathroom, fridge, and living area. The size of the house makes it a pretty sweet deal for all of us.

Combined, the rent that the three of us pay is about 2/3 of what a 15-year mortgage payment would be, if we "owned" the house and were making payments on it. (This is assuming current market value, plus 15 percent cash down, and a 5% fixed APR. Pretty standard numbers.) It's also just under the amount we'd pay a month for a 30-year loan on the same percentages. When I studied these numbers, I found an interesting pattern.

For the sake of clarity, let's say the rent is $2000 a month, for the three of us combined. If we stayed here renting for fifteen years, we'd pay out $360,000 in rent. Then we'd walk out of the house, and move on. That's $360,000 paid, for the services rendered by the house.

Now let's say we're paying off a 15-year mortgage, at $3300 a month. Over the course of 15 years, $300 per month of that goes to property tax (1% per year on a $360,000 house in California), about $1000 of that per month is taken out by the bank as interest (more at first, less later, with some defrayed by tax breaks), and the other $2000 goes towards paying off the loan. At the end of fifteen years, we have our $360,000 loan paid off, and we've also paid $234,000 in interest and property tax, which we can consider the cost of "services rendered" by the house, just like renting.

It's easy to look at these numbers and say, "my gosh, owning is far superior to renting, because it's like paying $1300 in rent instead of $2000! And once it's paid off, it's $300 a month!"

But it's not that simple, really. For one thing, we'd be responsible for all upkeep, large and small. From a busted water heater to a new foundation. And even if we assume that everything works perfectly for fifteen years, there is something more important to consider: If we paid off a 15-year mortgage, we'd then have $360,000 of our money tied up in the value of the house. Is that where we really want $360,000 of our money?

I know, everyone SAYS that real estate values always go up. Even in the face of a huge financial implosion, there are still plenty of people saying, "well, now that the market has corrected, values will only go up ... from now on!" I'd laugh at these people if I didn't detect the obvious undertone of fear in their words. Sure, property values generally trend up. You know what else generally trends up? $360,000 in a savings account. It's called interest, and it's designed to counteract inflation. Will the $360,000 tied into a property do the same? There is no guarantee. If you are depending on the rise in value of your home to outpace the cost of living and hand you a sweet retirement, you're living in a dream that ended last century.

But I'm not here to rail against the tide of real-estate mania, as it swells up for another round. I have another point to make about renting, and about my specific situation. The factor that messes these statistics all up is that there are three of us living here, and the rent is divided three ways between us.

Well, technically, the rent is not quite three ways. La and I pay more than that. But for the sake of simplicity, let's say it's three ways. With our hypothetical numbers, two thirds of $2000 is about $1350 a month.

And there it is. $1350 versus $1300. Now all of a sudden, owning property isn't the clear win it seemed to be. We pay fifty bucks more a month, and in exchange, we don't have to worry about large-scale upkeep, and there are no realtor and bank fees to pay. Sure, after fifteen years, we could own the place, and get locked into a "rent" of $300 a month. (Property tax.) But you know what that means? It means staying here, in polluted, industrial, culture-free San Jose, for fifteen years, and then perpetually.


So if La and I are interested in saving money, and in eventually escaping the rat race, what can we do, that's better than what we're doing now? We have two options to work with - buy and rent. To stay renting and save more money, we'd have to take on another housemate. To buy and save more money, we'd have to buy a house less valuable - smaller and farther away from work - than this house. It's either that, or we become landlords. I have very little interest in becoming a landlord, and dealing with the pressure to recruit strangers to share living space with or face a mortgage payment larger than I can afford. I already have to deal with some of that here, and it's a pain in the ass. I don't even want to do it as a cabal, because the whole thing strikes me as a bit of a Ponzi scheme, after what happened last year.

But in this environment, you're either a renter, a landlord, or an owner. If I don't want to be a renter or a landlord, I have to consider ownership. So we're looking around for places to buy, but we're having a hard time, because of a little personal quirk we both have: We hate debt.

We want to be out of debt as absolutely soon as possible. And neither of us likes the idea of spending fifteen long years in downtown San Jose. What we really want is a place that provides an affordable commute time, and is cheap enough that we can take out a fifteen year loan and make double-payments on the sucker. But that means buying property in the $150,000 range or below. Most anywhere in the world, that would be easy. Around here, it is impossible. Even the houses on the fringe of the valley - beyond my commuting range - with sagging foundations and bad plumbing - are $200,000 or more.

So, we're looking, and hanging in there. We don't want to jump into the hamster wheel of debt but we have to, paradoxically, to save money. Other options have come to mind, but they've been unworkable so far. Put everything in storage and then live out of our van? Buy something up in the boonies and carpool? Cash out our stock and buy a boat in the Berkeley harbor, and live on that? Sell some of our furniture and locate a friendly vegan housemate who doesn't mind a tiny kitchen?