There's quite a bit of advice out there about how to avoid buying too much house.
But what I've been pondering lately is whether you can buy too LITTLE house? By little, I'm referring to house value, not size.
There are no "rule of thumb" answers to this question that I'm aware of, and as far as I know none of the mainstream PF writers have written about it. So, this is a "think outside the box" question. Any thoughts or opinions any of you can offer, no matter how off the wall, would be very much appreciated!
As I have pondered this question so far, my answer wavers between "a qualified no" and "well, maybe yes."
I say "qualified no" because there are a few situations where the answer would in my eyes obviously be yes:
- If you are living in a house that is a health or safety hazard (a rat-infested firetrap, for example) and you can clearly afford to buy a better house, then yes, I think you have too little house.
- If you are horribly miserable in your house (family of 8 crammed in to a 1-bedroom house, for example) but you could easily afford a more comfortable house, then yes, I think you have too little house.
- If you buy a house that is very poorly constructed and corners have been cut to bring the house price down, then yes, I think you are buying too little house short-term (tho' given what you will end up paying in repairs, you may be buying too much house long term).
But beyond these fairly obvious (in my eyes) and extreme examples, can you buy a house that is too low in value? As long as the house is safe, comfortable, and well-constructed, does it matter? If I ended the discussion here, it may seem that the answer is "well, no, duh, you can't buy too little house."
But ... Then I start thinking ... Is it possible to have too LITTLE of your net worth tied up in your primary residence?
Historically, house values have kept pace with inflation. You can get better returns than that with almost any other investment, even extremely conservative ones such as TIPS or MMAs. But on the other hand, house value increase does have the advantage of being tax-exempt in many (most?) cases. So this is why I say "well, maybe yes" you can spend too little on a house. Perhaps there is a minimum percentage of net worth you should consider not going below when buying a house?
I'm relying on my memory so this may not be 100% accurate, but I read some Census Bureau data that said the average American household has about 40% of it's net worth in home equity, and the highest wealth households have a bit less than 20% of their net worth in home equity. Does this data mean anything???
And ... When will I stop grinding my teeth when I start pondering how much to spend on a house? 
Please don't suggest that I stop thinking about it so much. I just can't conceive of making the single-largest purchase of my life without thinking about it from every conceivable angle!
Can You Buy Too Little House?
December 29th, 2007 at 09:47 am
December 29th, 2007 at 10:06 am
My house is a little small and not really put together very well. But Its plenty big enough for me and I can afford it.
December 29th, 2007 at 10:08 am
December 29th, 2007 at 11:44 am
We purchases a very nice house that was a total fixer-upper in a not very nice neighborhood, on a lake, in Texas. Family did all of the work, and it ended up being a beautiful place, but it took over a year and a big reduction in price to sell it because of the neighborhood. If it had been anywhere else, it would have brought three times what it brought. A house in a very nice area will appreciate in value.
December 29th, 2007 at 01:00 pm
Buy a house that others would like, a resellable house. For example, I could care less if I have a fireplace, but everybody else wants one!! Everyone wants a fair size kitchen and at least 2 baths.
Gary just finished a nice 1200 square foot house and he did it for about $140,000. Now he is going to finish the full basement for about $20,000 more. They will have a 2400 sq. ft. new house for about $160,000. (they owned the land)
December 29th, 2007 at 02:36 pm
But I guarantee you that there are some pretty dumpy, insecure areas to live in that were not too long ago very nice areas. That is what I am referring to when I say you cannot predict home value in the future. My own neighborhood was full of retirees when I first moved here. They had raised their families here. The woman who sold to me had even been raised in the house she was seling me.
This immediate neighborhood stayed stable and values rose over the years because the same people stayed and took care of their places. Not too far away is a street where, when I moved to this city almost thirty years ago I thought, "Wow! Rich People Be Here." It looked like a good place to buy. Now though, I think something more like, "Wow! Poor People Be Here."
For someone like me who would like to buy a house and live in it for thirty years or more, I just don't think you can judge entirely by present location and niceness. It could change. As a matter of fact, the area where I first lived was ghetto. But today, it has all new single family houses with prices starting well above what my house would fetch in this stable neighborhood. Things change. Investments have risks, and that includes the real estate that one lives in, hoping that it might someday return a profit or at least hold value.
You could spend a little and wind up with little, a moderate amount, or a lot. You could spend a median amount and wind up with the same-- little, moderate, or a lot. Evidently it can happen even if you spend a lot. Maybe the trick is being able to see when to hold on and when to sell. (But I'm so glad the generation before me was satisfied with what they had, held on, took care of it. I believe they did a service to their own generation and to mine by not seeing their homes only in terms of dollar signs.)
December 29th, 2007 at 03:42 pm
You buy big in a great neighborhood you run the risk of not being able to afford your mortgage and taxes through lean times and you run the risk of it not fitting your future lifestyle - you aren't able to physically keep up your property.
You buy big in a bad neighborhood and you run the risk of it becoming nearly worthless or you not being able to get services for the taxes you pay. If you pay taxes for police services but the police don't come because its a crappy neighborhood...
You buy small in a great neighborhood and become dissatisfied by watch the Joneses, or your tax assessment goes through the roof, or the neighborhood changes and there you are.
You buy small in a bad neighborhood and wait for things to get better, maybe. But then what?
Buy what you enjoy and what you can comfortably afford. Personally, I don't think you can buy too cheap if the size is perfect for you.
December 29th, 2007 at 03:45 pm
The best thing about our cheap place is that, if we pay our mortage off in the next ten years or so, we'll be living in a free house -- with a big chunk of uncommitted money to do with as we please (or to continue to save). Not possible with a McMansion!
December 29th, 2007 at 07:30 pm
It might be easier if I saw my house as either strictly a place to live or as strictly an investment, but I think of my primary residence as BOTH!
Also, my DH's thinking on how much to spend has been like a pendulum, swinging wildly from one extreme to another. I've realized that a big part of my job during this househunt is to figure out at what price point do I stick out my hand and grab the pendulum to stop it from swinging.
December 30th, 2007 at 06:00 am
I think as mentioned above, location is pretty key. Beyond that, without a crystal ball, who knows.
I just wanted to add that moving to a Lower COL Area really changes the rules. I am just not sure it matters that much. For us when we made the move, we didn't change our budget at all. At home we felt we could afford $300k comfortably. At home that was a small condo. HEre it was a large house that was everything we thought we would ever need. We didn't change our thinking at all, just went with the price. I am sure most people would say we bought too much house or tied up too much equity in our home. BUT from our perspective it was dirt cheap. We had been looking at paying $500k for a MUCH lesser home. We got out easy. The traditional net worth rules don't apply in this case.
We have talked often about moving again. For a long time we could have put a good $400k in the bank and paid cash for a similar home elsewhere. (Maybe $200k cash). I am sure the "rules" are much different. But who cares. The only reason we would leave the area is for more financial freedom. The point would be to put much less into a house ("too little" house).
Anyway, for this reason I think that you can't get caught up in the net worth numbers. Go for something you like. Set a firm price limit. Go from there. I remember when we moved here we were rather enticed by the $400k houses. We could have stretched easily enough for those. (Though those houses hit $1 million for a time too! But I'm still glad we stuck with a lower price). But we finally set a firm limit of $300k, so we wouldn't get blindsided by some of the REALLY nice houses that we really could have afforded. We just had to remember why we moved here, to get a cheaper payment. Not to buy more house.
& beyond all that, remember that this is no a forever permanent decision. If you buy too little, you can always move up later. If things change, you can reconsider. Not that we want to move or sell property more than we have to. But I wouldn't get too stressed about finding the perfect house. All you can do is try your best. You might find it in a few years; so be it.
Finally, don't go too small for the #s, if it's not what you really want or comfortable. I think that's why it's good to set a price limit. Then you can find the most luxurious/perfect house in that price limit without guilt. Our price limit didn't fit any personal finance formula. Just our comfort level. & I can say it was very comfortable, even 6 years later.
Incidentally we ended up paying $40k less than our price limit because we found the house that had it all finally. Phew. But yeah, I NEVER want to house shop with dh again. We don't agree on much. LOL. Good Luck!!!!!!!!!!!
December 30th, 2007 at 07:57 am
Yes, you're right that moving to a lower COL area really does change the rules. And paying cash makes a really big difference too. When we bought our last houses (a condo & then a house) we really seriously considered cost and affordability, but that consideration gets magnified many times over when you are paying cash. In fact, now that I've been on both sides (having a mortgage and paying cash), I'd go so far as suggest that people who are buying a house with a mortgage pretend that they are going to be paying cash; if they did that, I'll bet that many people would end up buying much less house.
January 10th, 2008 at 11:12 am
Well, maybe for some folks. But when you move to a cheaper city, no. Buying on price rather than based on your needs makes no sense. And, if you're like us. We have other things we want to do with our lives than slave away to pay an "appropriately"-sized mortgage. We want freedom, and without a mortgage you have a lot more of it.
January 10th, 2008 at 02:36 pm
We've had exhausting conversations just like this with a "friend" of ours, who keeps jeering at us because we bought a condo instead of a house, and are planning to pay it off. This guy keeps telling us that we're supposed to buy the biggest thing we can afford, and keep paying on it forever. "We want to be mortgage free within x years," we tell him, and he just stares blankly at us, drooling, or tells us that's crazy. May be crazy for him--his mortgage is gigantic and roommates are a necessity, as he's recently discovered. Nothing wrong with that, if that's how you want to do it. We don't lecture him on HIS choices, however.
Why do people who are resigned to remaining in debt permanently constantly give other people smug and misguided (if not flat out wrong) financial advice? It's one of the mysteries of the universe.
January 10th, 2008 at 06:20 pm
January 10th, 2008 at 08:00 pm
thriftorama - In our case, it's actually not a question of "appropriately sized mortgage" since we'll be paying cash. Like you, we moved to a much less expensive area after selling our paid-off home. On top of that, we are planning to downsize to a smaller home. Hence the question of whether your home (paid-for) can represent too small a percentage of your net worth? I think the answer is "no" but can't help fretting whether there's something I'm missing.