Buying A More Expensive House: Good Investment? May 17, 2007Posted by pf in Expenses and Savings, Retirement, Taxes.
Tags: buy an expensive house, debt, house a good investment, net worth, real-estate, should I buy an expensive house, subprime mortgage
Previously, I had written about our goals of purchasing a new home (Buying a More Expensive House – Smart Financial Move?) and my struggle to determine whether or not it is the best move for us financially.
I am still grappling with this question (and honestly, the whole thing gives me a bit of anxiety) and have been searching and reading numerous articles, blogs, etc on the topic in hopes of coming to some conclusion and then being comfortable with whatever decision I make. My thoughts on this are still developing, but I think I am getting closer. Here is what I’ve gathered thus far:
1) At its most basic level, home-ownership may not be the best investment vehicle to increase my net worth
Home-ownership is expensive. You have the mortgage interest expense, taxes, maintenance, insurance, furnishings, etc. Also, obviously, if you buy more house, all of these things grow proportionally. In a pure economic sense, what I can expect from this investment is probably 3.5-5% growth on an annual basis…essentially, the rate of inflation plus a small uptick if I take a more optimistic view. Conversely, for the same amount of investment, I could direct those resources into equities and reasonably expect…7%? Of course, this will vary and 7% is lower than the historical average and certainly less than in recent years…but I think a fair assumption. Of course, I will have to live somewhere, so I’m not talking about an all or nothing proposition, but clearly whatever I invest in housing, I do so at the expense or opportunity cost of putting those dollars to work elsewhere. Heck, I think we are likely to double our property taxes with our new house…something like $4000-$6000 additional each year. This is real and significant $ that I would normally put in a Roth IRA (for example). I seriously doubt I’ll get the same rate of return for that money having invested it in the house.
2) Rent vs Buy – Not an option…for us
The gut reaction here is “renting is throwing money away”, etc. After reading more about it, I do think there is a strong case for renting under certain circumstances. One compelling aspect of this is the fact that if you are moving frequently (ex: every 3-4 years), on a 30 year mortgage, you are hardly building up any equity in the home, anyway. The National Multi-Housing Council has a number of good articles on this topic, such as “Ownership vs Renting: One Columnist’s Take”. Granted, I sense the organization is a a bit biased, but many of the arguments do make sense.
However, in our particular situation, our plan is that the house we are planning for is going to be the one we intend to stay in for the next 20 years. The neighborhood is upscale and contains homes that will stand the test of time and the size of the home is sufficient to meet the needs of our family as we don’t plan to have any more children. In addition, it is in very close proximity to their grandparents which was another consideration.
Granted, 20 years is a long time and the assumptions we make now may not actually hold true…but given I’m not omnipotent, I think it’s the best we can do. In particular, given their age, I know our children’s grandparents will not be in their same house in 20 years. However, given the likely locations where they would move (downscale), we still think our plan stands the test of time. Simlarly, I could lose my job, etc…but that’s just life.
It’s funny how as you get older, you really get to “know” yourself – both the good and not so good characteristics of your personality. For example, I know that I am a worrier and consistently have an underlying concern about being able to fund retirement and provide for my family over the long term. Of course, I don’t think that’s so different from most people…but I do sense it sometimes affects my decision making more. When faced with decision like our potential home purchase, I go to the “doomsday scenario” and consider what happens if I lose my job (I am the sole earner in our family) and am unable to recoup our level of income. Therefore, I feel as though whatever house we buy has to be able to withstand the “doomsday event” and thus will require a significant down-payment. We are well on our way to saving that amount and my ongoing delaying tactics (ex: “let’s wait until next spring to start building”) should give us the additional time needed for me to get comfortable there.
3) Why are my goals / aspirations for life?
At the end of the day, this is really what it boils down to. All the efforts I make to increase my net worth is a means to an end…not an end itself. What is important to me?
- Creating financial security for my family and being able to meet all their current needs and some of their wants
- Providing adequate funding for the retirement we envision for ourselves
- Making my family and myself happy during this short journey we call “life”
At one extreme, I could force my family to live in a tent and have a much easier time fulfilling the first two…but with some sacrifice to the third. At the other end, I could put an intense focus on the last item, but potentially endanger the first two. Of course, ideally, I WANT IT ALL (doesn’t everyone?). In order to do so, I must try to find a balance.
Therefore, ultimately, while I am now convinced that buying a more expensive house is not the optimal investment for increasing my wealth, I do believe that it will go a long way toward satisfying my last goal while not putting undue risk on the other two.
That is not to say that I don’t still worry about the “doomsday scenario” (I can’t run away from myself), but will just have to take things as they come and adapt accordingly…you know, “live life”.