Relocation: A Guide to Moving and Housing Affordability

We’re out on the road in search of our next home, our sights set on home ownership once again. In this post we examine the complicated process of relocation and the sticky, tangled spiderweb of housing affordability. Is housing in America becoming less and less affordable?

In this post we discuss:

• Costs to consider during relocation
• Home price and income metrics to affordable housing
• National trends on housing affordability
• How much a retiree should spend on a home
• Our process for evaluating relocation options
• Ways to make housing more affordable

Relocation: An Introduction

In August, we closed on our house in an incredibly hot Denver market and hit the road in our little A-frame camper. We received a gaggle of offers on our home in 24-48 hours and were under contract by the end of the weekend. Great news, at least for a home owner not looking to buy the next place a quarter mile away in that same hot market.

Can We Really Sell High and Buy Low?!

I am hoping to benefit from an admittedly speculative hybrid approach as we continue our relocation search: sell high and buy on a deal, perhaps many months later. Prices are surging due to two primary factors: (1) very tight inventory (most people are staying put in a pandemic) and to some degree; (2) an influx of folks from more cramped and expensive cities who can now work remote.

However, we’ve been sensing all along that the economic effects of the global pandemic are far from fully developed. This is especially true in the United States, which continues to lag behind virtually every advanced nation in curbing the spread of the virus.

Virus up, economy down.

What does this have to do with the housing market? In the spring and early summer, not much. Many of the jobs being shed are in retail and hospitality, industries with a young demographic otherwise comprised of folks less likely to own homes.

Are Prices Set to Fall?

However, as the pandemic persists, more and more industries and jobs are at risk, thereby hanging renters and mortgage holders out to dry. My former industry, oil and gas, is announcing layoffs day after day. Perusing my LinkedIn feed is truly depressing. It seems like a third or more of my friends and former colleagues are without work. Many of them surely own homes and have bills to pay.

So, with housing prices rising and incomes potentially falling, what is the future for home prices and housing affordability?

Relocation: Costs to Consider

The original purpose of the trip we’re now on is to find a new home away from the Front Range, Colorado metro area.

The challenge in relocation is not in finding an ideal location from a natural beauty or vibe standpoint – that’s easy. The challenge is finding a location that is reasonably affordable once the major cost-of-living factors are included. Here is a list of major one-time expenses, as well as recurring expenses that must be considered during relocation. This list is focused on potential homeowners, so renters can disregard taxes, insurance, and maintenance. However, understand that the landlord (or property owner) is recouping those costs in the price of rent.  

• The cost of a new home, including any potential initial renovations. We will make an all-cash offer, so no mortgage payment is being considered.
• Property taxes. Highly variable across the nation.
• Home insurance
• Home maintenance. Reasonable assessment of yearly home maintenance, amortized
• Income tax
• Healthcare costs
• Income and Earnings. Obviously, a drastic change in income can heavily affect the affordability of a new area. As a financially independent household, our income is whatever we decide to sell of our investments. We plan to stay in a range of 3.25-3.5% for a safe withdrawal rate, at the most.

What Makes a Home Affordable?

Housing affordability is a fleeting concept in America, particularly in the highly desirable western cities.

The old adage is that the sale price of a home should be no more than 2.6 – 3 times your annual salary.

In other words, a family with a combined salary of $100,000, can theoretically afford a home worth up to $300,000. I’d argue that even initial renovations should be considered, as most people do some sort of work to their house upon moving in (kitchen or bath remodel, etc). In this case, with a combined income of $100,000, I’d look no higher than a $260,000 – $280,000 house, with the expectation of spending up to $20,000 in potential renovations or repairs.

For an individual or family already carrying significant debt, I’d go no higher than 2 times income.

Bottom Line: Prospective buyers should ideally make offers on a home within 2.6 – 3 times annual income. Families already carrying significant debt should perhaps consider a multiplier of 2 times income.

Home Price to Median Income Ratio: Is Housing Less Affordable?

Prior to the housing bubble of the early to mid-2000’s, home prices were typically in the range of three times the median annual income.

Longtermtrends.net shows us two concerning trends:

1. Nationwide, as of June 2020, the Home Price to Median Income Ratio is 3.8. In many desirable cities, as we’ll soon see, the ratio is much higher. For comparison, this ratio reached a high of around 4.6 during the housing crisis in the mid-2000s. With rising prices in July, August, and September, I’d venture to guess that the ratio has been driven even higher since June.
2. Home prices have been less affordable since roughly January of 2001.

Americans Are Taking on More House Than They Can Afford

There are a few takeaways here. The first is that Americans are indeed taking on more house than they can afford. Certainly, there are some larger market and society forces at play, but I suspect there is also an element of behavior and the undying belief that home ownership is a good investment. As we’ve seen, home ownership isn’t the best investment.

Relocation: Consider Income Changes

Second, moving from a high to low affordability city or town should ideally coincide with an increase in pay. High housing costs are the number one way to limit the ability to grow wealth.

Potential For Home Price Adjustment?

The third takeaway is that the higher the price/income ratio is above three, the greater the potential for downward home price movement. I’m not saying this is necessarily true, but cities with very high price/income ratios are simply out of equilibrium, but less so than the years preceding the 2008 financial crisis. Unless, of course, incomes begin to rise as well. Time will tell.

Perhaps some of the recent upward price movement in smaller towns is being driven by high-income earners moving from larger cities. While Zillow captures nearly real-time housing price data, local income data will lag.

Bottom Line: Home ownership is less affordable for the median income earner, a trend observed for nearly twenty years. However, if the home of your dreams is less than 2.6-3 times annual household income, housing is still affordable in your world.

Are Americans Over-Spending to be Homeowners?

Here’s the problem: where in the west can you find a decent property for $300,000 or less for the family with a combined income of $100,000? For a full-on house, the options are very limited. Even for a small condo, trendy cities and beautiful mountain towns are out of the budget. For folks already living in those towns with home ownership dreams, well…

So, what happens next? Folks buy a house anyway. Individuals or families may spend 4x, 5x, or even 10x earnings to secure a mortgage on a home, and lenders will often happily lend. This phenomenon is happening at increasing rates, an alarming national trend particularly noteworthy in western cities. And families who are over-leveraged are at risk.

Who Am I to Judge?

And who am I to judge? I loved being a home owner. And now after only three months of road life and official homelessness, I’m ready to be a homeowner again. It’s not just the camper life either.

I don’t want to rent, at least for the long-term. I don’t like living under the rules and guidance of a landlord. Such a lord, with little warning, can raise my rent or tell me to leave my home entirely. I also don’t like having fluid housing costs in a period of no traditional income. There’s nothing I can do to prevent paying rent, or to prevent it from inflating, no matter what’s going on with the market. Having a paid-off mortgage, on the other hand, offers a highly reduced fixed living expense.

So, we can either complain about the changes in the wind, or we can adjust our sails.

(Related Post: How to Destroy Your Finances in Your 20s and 30s)

Bottom Line: Americans are increasingly stretching the affordability rule-of-thumbs. However, I can relate. I’ve seen the tangible and intangible benefits of home ownership, and I too wish to reenter the world of home ownership.

How Much Should A Retiree Spend on a Home?

Let’s look at the case of a retiree, be it traditional or early. In our case, we’re entering a phase of no traditional income and living off our investment savings. By that definition we are at least temporarily retired, although I don’t embrace the term.

As a general rule of thumb, a retiree should hold no more than 20-30% of net worth* in the value of their home. Wealth should be spread widely over a variety of diversified assets.

(Related Post: The CC Family Investing Strategy, Part 1 and Part 2)

We tend to fall on the conservative side of things when it comes to our money, so we would ideally like to spend no more than 25% of our net worth on a home. In my mind, this value includes an estimate of all initial renovations and repairs to get it livable and up to our (admittedly low) standards.

The good news is that the proceeds from the sale of our home in Denver should cover us for many towns we’re considering, even allowing for up to $100,000 of cash to be reinvested elsewhere. Of course, we’re modest folk here, and we have no ambitions of life on the country club or probably any neighborhood with a sign that ends in “estates.”

(Related Post: Net Worth: It’s Going to Matter Someday)

*Note: In the linked post describing how to calculate net worth, I advise leaving the value of a home out of the equation. However, in this case, we want to consider total net worth, including the value of a current or prospective home. Disregarding home equity is useful when determining safe withdrawal rates, i.e., the 4% Rule.  

What is Our Plan for Relocation?

A 20-something version of myself had precious few considerations when moving across the country, as I did a number of times.

Mountains? Check.

“Cool vibe?” Check.

Job potential or I’ve been selected to attend the university? Check.

Sweet, load up the truck!

Now the mid-30s version of myself is drunk on adulting, so Mrs. CC and I made a really fun spreadsheet!

As you can see in the exciting spreadsheet below, we’re running the numbers on a variety of cities and towns we are considering. Some of these towns are for more likely candidates than others, but we wanted to paint with a broad brush.

When it comes to home affordability, it should be obvious that home value or rental price is the biggest knob. However, we also must fully consider recurring expenses such as property taxes, insurance, and to some degree, maintenance (for home owners). It’s no secret that contractors and repair services charge higher rates for nicer or upscale neighborhoods. And whether moving or not, we should all be considering the potential for drastically higher healthcare costs. The unsubsidized cost of ACA healthcare plans varies tremendously across the country.

Our process:

• First priority: evaluate sale price + renovations/repairs of houses “we like.” Admittedly, the houses “we like” are typically above median price in a number of cities or towns being considered.
• Assess a reasonable estimate of yearly property taxes and home insurance premiums.
• Assess overall tax structure of the state or city. Some states are zero income tax states, but will crush you in property or sales taxes. We still believe that as “early retirees” income taxes are less concerning, and even sales taxes won’t break the bank – perks of the frugal life.
• Healthcare costs. This is a big one to consider for the future. If the ACA subsidies are eliminated without a damn good replacement, healthcare costs could skyrocket.
• Everything else: Let’s not get carried away. We’re not picking our home based purely on left-brain spreadsheet musings. We are real people who share many of the same desires. We want a good community, a reasonable number of like-minded folks, an abundance of nature in close proximity, good weather at least six months of the year, and some damn good rock. A reasonably sized airport is a plus, as is a number of other factors not being discussed in this post.

Make Housing Affordable Almost Anywhere!

Once we settle, we hope to secure a property with rentable space. This could be something as simple as a guest bedroom that we occasionally list on Airbnb, a mother-in-law suite, or an entire detached property suitable for a long-term tenant.

We also plan to spend anywhere from three to six months a year traveling, at least in the near-term. When we leave, we would like to have the opportunity to list our primary residence as a short-to-medium-term rental, allowing for more “luxurious” travel or otherwise drastically reducing our living expenses.

In our chart above, we’ve inversely colored rental cost (green for high rates, red for low rates). If we can monetize our primary residence, areas with higher rental rates will be more beneficial. Rental rate is admittedly not a huge consideration for us, as any additional income is gravy.

So, for those who may find housing costs unaffordable, is there a way to monetize or otherwise reduce expenses? Is there an empty guest room? Are roommates an option? In many cases, the answer is probably yes. The solution may not be preferred, but I’d argue the alternative of mounting debt is less desirable.

Bottom Line: Securing rental income as part of a primary residence is a fantastic way to increase home affordability or reduce living expenses. We are strongly considering these options for our relocation bid.

Relocation: A Summary

In recent years, home prices have surged, outpacing income growth across the nation. Amidst the pandemic to date, housing prices are continuing to climb as inventory stays tight and demand remains strong.

Will home prices fall? Perhaps a little, but I wouldn’t hold out for a 50% sale.

Here’s the skinny:

• Relocation cost considerations include, but are not limited to, home or rental prices, taxes, healthcare costs, and potential changes in income.
• Prospective home owners should aim for properties within 2.6 – 3 times annual income.
• National trends suggest Americans are increasingly spending beyond this suggested rule-of-thumb.
• A home should constitute no more than 20-30% of a retiree’s net worth.
• We will continue to evaluate a tiered process for determining our next home. Our primary goal is to limit the home purchase to 25% or less of net worth, while also balancing the non-quantitative aspects of what makes life good.

What do you consider when making a big move? How have you sold in one city and relocated to another?

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