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Buy More House Than You Need

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This is a Devil's Advocate post.

I haven’t written a Devil’s Advocate post in a while, the last one was about how you shouldn’t move from job to job (and that one was a month away from the DA post before that), but this one is a doozy and quite appropriate given our current home and mortgage climate. A lot of folks now are in trouble because they bought too much house. They were able to buy too much house because credit was cheap and lenders were greedy, so a lot of riskier ARMs, no credit down, no documentation-type loans are now impacting the rest of us.

This is about the time you say: “Woah woah, Jim, slow down. You’re going to give us a post about how we should buy more house than we need after just telling us that people’s live have been beaten down because of unscrupulous lending?”

Yes. Now, here’s where I pull out a bit of a wordsmith on you, I’m recommending that you consider buying more house than you need, not more house than you can afford. Ah ha! I’m sure you all can appreciate the subtle distinction between the two and it’s the latter that got people in trouble. Here’s why you should buy more house than you need…

You Will Grow Into Your House

I’m engaged and I live in a house with approximately 2400 square feet, four bedrooms, three and a half bathrooms (one of the bedrooms and full bathrooms is in the basement, so it’s a bit of cheating in the listing). Two people don’t need 2400 square feet of space, they could easily live in a 900 square foot apartment and many do. The fact of the matter is that the townhouse we’re in is much bigger than we really need, but the idea is that you grow into a house. Since the transaction cost of a new home is so high, you want to look a few years into the future and consider how much house you’ll need in the future instead of just how much you’ll need now. 900 square feet is fine for two, but it’s not so good if you have more. :)

Happiness Is More Important Than Money

Some would argue that it’s more important to save your money, buy only as much as you need right now, and plan for the future. I would argue that that’s a bunch of crap. Retirement is very important but your happiness right now is just as important, there’s no sense needlessly suffering now just as there’s no sense in ignoring the future and blowing all of your money today. In that middle ground you’ll find that if having a larger home, enjoying the more luxurious features, and living a little in the now makes you happy then by all means get a little more house. I’m extremely happy in my home right now, it’s more than we need, but it’s not so much that I’ve leveraged the future in order to buy it. It’s not a mansion, it’s not ridiculous, but I’m happier in this home than I would be in a 900 square food condominium.

Transaction Cost of Changing Homes Is High

As I mentioned earlier, the transaction cost of changing homes is extremely high. After you consider all the fees, taxes, and other costs related to the selling of your home and the purchase of a new home, you’re talking thousands and thousands of dollars just to change your address. So, you would like to reduce the number of times you need to do this by purchasing a little bit more than what you’ll need right this moment. Ask any mother (or father, whoever buys the clothes) you know and ask them how they purchase clothing for their young children. If her kid is a size X, she’s buying a size x+4 because that little tyke is going to grow out of that size in about five minutes. It’s the same idea, but on a larger scale.

Higher Priced Home Means Greater Appreciation

If your home appreciates at 4% a year, then wouldn’t it be better to have that 4% be working on $300,000 than on only $100,000? Well of course it would be! The higher the price your home commands, the greater is appreciable base is. While you do have greater costs associated with a more expensive home, the fact of the matter is that the nominal dollar amount of the appreciation is going to be so much greater with a more expensive home.

In closing, it’s important to note that when I say, as a Devil’s Advocate, that you should buy more house than you need right now, I also want to recommend that you keep within your budget as well. I mean you might want to consider stretching a little bit but don’t leverage your future just because you “might” need it one day. Consider buying more house than you need, but don’t buy more house than you can afford.

{ 14 comments, please add your thoughts now! }

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14 Responses to “Buy More House Than You Need”

  1. Kurt says:

    Good point about growing into it, although you need to be careful of the maxim that crap abhors a vacuum and expands to fill all available space.
    Good point on the happiness too. Clutter can really make some people uneasy, and to the extent a bigger house alleviates that (see above), the better.
    Excellent point on transaction costs. Selling a house will cost you 6% plus.
    Don’t really agree with the point on higher appreciation. That’s a scaling effect, and not specific to owning a larger house (two smaller houses would be the same thing, for instance, with one for rental).
    A few things I think you missed:
    If real estate is “location location location,” perhaps the house you “need” isn’t in the area you “need.” In that case, you might need to buy a bigger house if none in that area are available in your size.
    Room for friends/relatives can be great. To be able to offer visiting friends a place to stay and a nice bed can mean a lot to out of town visitors. Yes, a spare room can be a waste, but being able to provide for others can bring a deep sense of satisfaction as well.

    Full disclosure: I recently bought a house that appears to mirror yours. 2,200 sq ft, bigger than I need, a lot of “luxury” features I’m surprised to really be enjoying, but easily within the range of affordability.

  2. monika says:

    I do this occassionally – i often travel on business and my company pays for everything. But, just for kicks or when I am having a bad day, I call up the front desk and see if they have a lower rate. If they do, I take it and cancel the original corporate reservation (with liberal cancellation). I do not gain anything monetarily except some sadistic pleasure and my company saves money.

  3. monika says:

    sorry folks – wrong website posting. this goes into “A Practical Way to Save Money on a Hotel Room” posting on Free money finance. Too many windows open :(

  4. vh says:

    i luv these Devil’s Advocate posts…and especially love it when people appear to take them seriously.

    But seriously (really): Once when considering a house that cost more than I wanted to pay, it actually DID occur to me that if houses appreciated at about 6 to 8 percent (as they did around here before the Bubble), in 10 years the return on a 400,000 house would be significantly more than the return on a $300,000 house.

    Uhm…is this another illusion of the math-challenged?

    Mercifully, I didn’t buy the pricier shack; the old house was paid off & I didn’t want to pay more than the proceeds from the sale of the old house. So I’ll never know if taking on a $50,000 or $80,000 mortgage was actually a way to get rich.

  5. This was interesting to read. Recently Yankee Bill and I bought a new house (which we are still stripping, painting, cleaning etc as we speak) that is over twice the size of our current 1400 abode. One of my blog readers wrote in very upset over the purchase-I guess s/he felt that this went totally against the principles of Frugality that I blog about.

    I wrote a detailed post about our reasoning-the two main salient points echoing two of yours-#1, we can afford the larger house very comfortably and #2 lifestyle is worth something (in this case cutting down on the clutter by having room for our stuff and saving our sanity by not having the children playing in the middle of the livingroom with all their toys constantly).

    http://frugalupstate.blogspot.com/2007/08/our-new-house-philosophy.html

    Could we have done with a smaller house (hello, 3500 sq ft is rather insane)? Yes-but to be honest their weren’t any that met all of our requirements in our geographic location-and we’ve been looking at anything that came on the market for the last 3 years. For us this was the right choice.

  6. MoneyFwd says:

    Your devil’s advocate posts are usually a lot more extreme, and some of this may actually be good advice. A post a few years ago on Yahoo! talked about buying a house that is appropriate. The point was that some people this person knew bought 1 bedroom condos or studio condos when they were just married, thinking they would just upgrade when they had children. Then the market dropped on them and they had children and couldn’t afford to move into a more appropriate living space. I don’t think people should go crazy and buy a ridiculous house, like 2 people in a 5000 sf house, but if you can afford a 3 bedroom house and you’re thinking a few years ahead to children, it’d be a better idea than going for the one bedroom condo just because you don’t really need a bigger house just yet.

  7. Kyle says:

    Excellent points. For a young couple just starting a family you have to balance getting a house that you can grow into but still afford. Often this is a very hard balance.

  8. sandy says:

    I was in a single story 3 br, 2 ba 1,250 sq. ft. home for 10 years. I moved 30 mins. north to a location not as desirable because it put me further from Santa Barbara, so got a 2-story 1,850 sq. ft. home, 4 br, 3 ba in a very nice neighborhood, for a lot less than my smaller home. I live by myself and I Love the extra space – just love it! It has a downstairs bedroom which I use as a home office. I can picture myself being here for the rest of my life and feeling satisfied – will never outgrow it.

  9. eric says:

    If you buy more than you need now and have any thoughts that will someday need it, you will be a leg up by not having to sell and buy a few years down the line. I have already had 3 places in less than 10 years, and I am now looking for a 20+ year house that my family and I can be comfortable in. The losing game is to fall into the circle of buying a new house every time your salary or needs increase. Every time you sell and buy bigger, you hand over your appreciation to someone else. Not to mention realtor fees, attorney fees, closing costs. Unless of course you are moving from a great market to a low market. I have already done that in 2 of my purchases which has paid off handsomely. That is a different game, however, and not the norm for a lot of people. Most people follow the sell/buy rat race their entire lives and at retirement are still paying off a huge mortgage. I want to stretch a little now and lock in my price. Then, pay it off prior to retirement to remove that living expense from my retirement plan or use that money for a 2nd home, etc. Robert Kiyosaki writes about this in his book, “Rich Dad Poor Dad”. I do not agree with all of his points regarding house purchases. In fact, he discourages the idea of buying more than you need, but I took away a slightly different message.

  10. I’m glad you ended your post with a warning about not buying more than you can afford because this is exactly what people have been doing with self-cert mortgages causing the current sub-prime crisis. By taking out these self cert mortgages where they don’t have to prove their income, they have overstretched themselves and have obviously got into trouble as interest rates have gone up.

  11. We bought more than we need with the intention of staying put a long time, needing space for a family. But we moved from 1 bd condo to a 3 bd townhouse. It’s not like a huge single family, but instead we wanted more space. We didn’t need more space, but it’s cheaper than trying to move later for personal reasons.

  12. Julie says:

    I did that, buy a 2400 sq ft house thinking we’d like to have kids and it’d be expensive to move.

    However, I’d just add that what we “need” may be influenced heavily by the current culture in our society without us really realizing it. Our house is bigger than what we “really need” and we are paying extra for heating space we don’t use, paying higher property taxes, higher landscaping costs, etc.

    If I were to do it again, I’d buy a little smaller. Still comfortable and still something that would be attractive to most families. And having it at a price point that would make it accessible to more families might make our return on investment more secure.

    What is the right size of course is highly personal. Just wanted to share somethig I learned myself, that a bigger than you “really need” house can feel “too big” (not as comfortable in a cozy way) and be more expensive to maintain in all respects, even if you have no problem affording it.

  13. Jane says:

    I did this as well. I’m single and live in a 2000 sq.ft. 3 bedroom 2.5 bath single family house. I picked this house type because unless I was going to build something outright (which I didn’t want to do) I needed to in order to get the things I wanted. I wanted my own yard, I wanted to have a true guest room as my parents like to visit but the live several states away from me. I wanted quality building, hardwoods, solid surfaces etc.

  14. Mark says:

    Should read “Higher Priced Home Means Greater DEpreciation”.


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