The median size of a new home in America has grown from 1,200 square feet in 1940 to over 2,200 square feet in 2008. And it’s not because our families are getting bigger – the average household size has shrunk from 3.7 to 2.6 in that same time period. Discontentment has fueled the false need for more space. Larger families thrived in smaller homes in the old days. And most families around the world live in small homes today. It’s not that we need all this extra space. We just want it.
The problem with our imaginary need for bigger houses is that it artificially inflates home and land prices. These increased prices and our “need” for bigger homes stretches our finances far beyond the amount we can afford.
But It’s a Good Investment!
The myth of a home as a good investment has also led us to believe that more is better. First, look at the costs. What other “investment” can you buy that has maintenance costs of 1-3% a year, is taxed every year, needs to be insured, and needs to be filled with furniture all while appreciating at about the rate of inflation? Yes, mortgage interest and real estate taxes are tax deductible, but the deduction is not as good as you think. Homes have the highest costs for some of the lowest returns of any investment option out there.
Second, for a home to really be an “investment” you have to be able to get your money back out of it. Otherwise, it doesn’t really matter how much it has appreciated – that growth does you no good if you can’t touch it. So let’s look at your options. You can sell your home and downsize, you can get a home equity line of credit, or you could get a reverse mortgage (if you qualify). The HELOC and reverse mortgage are terrible ideas and only detract from the idea of your home being a good investment. The costs for those options far outweigh any benefits of owning a home as an investment.
As for the other option, how many people do you know that have actually sold their home and downsized to access the growth of their “investment”? Some do, but most people look at that option as constricting and undesirable. They’ve built their life around that home and created many memories there. They don’t want to leave if they don’t absolutely have to.
The truth is we only think of a home as a good investment because we fail to track all the costs accurately. If we kept good records, most of us would probably find that it’s pretty much a wash. A home is not an investment. It’s a liability and expense. You’ll save yourself a ton of money if you learn to look at it that way.
The Issue of Space
Once we can stop looking at a home as an “investment” (and stop using that as an excuse to buy more house), the next thing we need to consider is just how much space we really need. If you’re struggling to figure out how you can afford to buy a house, going through this thought process could help you determine that a smaller house would meet your needs just as well.
My wife and I rent a house with about 1,500 square feet of livable space. Based on how we’re using this space, I know we could live in 1,000 square feet or less quite easily. Yes, the extra space is nice, but we don’t need it. If we needed to make cuts in our budget, we could try moving to a smaller place. (Though it would be difficult to find anything for much less than what we’re paying to rent this place!)
Consider your actual space needs before deciding you must have a certain house. Take bedrooms for example. How much time will you actually spend using your bedroom while you’re awake? Unless it’s extremely cramped, you’re not going to care much about how big your bedroom is while you’re sleeping in there. If you have children, can they share a room? Although most kids in our culture today have their own room, it’s not a necessity.
If you feel like you need more space because you have so much stuff you need to store, consider selling or donating the things you don’t really use. The extra space you free up can help you downsize or just give you extra space you can do something useful with.
I’m not saying you should make yourself miserable, but you should carefully consider your needs before stretching yourself to buy more house than you can afford. Just because a bank is willing to loan you a certain amount of money doesn’t mean you should use all of it to buy your house. Just because a Realtor suggests that you can afford a bigger house doesn’t mean you should believe them. They have a conflict of interest in convincing you to buy more house than you really need.
The point is this – don’t convince yourself or let someone else convince you that you need to buy a bigger house than you really need. If you’re going to be pushing the limits of your budget, back off for a bit and consider your true needs. Reevaluate your situation and see if a smaller house would do just as well. Then look for the house that matches your needs rather than the house that’s just under the maximum amount you can borrow.
Housing is by far the biggest cost in most budgets. If you can save a good chunk of money in this one area, you’ll have a much easier time staying on top of your finances and reaching your goals.