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.