Expensive House vs More in the Market?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply

Would you buy a more expensive house or put the extra money in the market? (After Reaching 401K Contrib Limit)

Poll ended at Mon Sep 24, 2007 6:40 pm

Buy most expensive house I can afford.
2
4%
Buy most expensive house I can afford.
2
4%
Buy standard home and have plenty to put into the Market.
50
93%
 
Total votes: 54

Topic Author
mhill
Posts: 28
Joined: Fri May 11, 2007 1:24 pm
Location: Sacramento

Expensive House vs More in the Market?

Post by mhill »

This is not a rent vs buy question. It's a buy expensive / buy cheap question. I've seen preferences going either way on this, but I'd like to know what the concensus opinion is about spending more on house vs stock/bond market. I bought a larger/nicer house than my family really needs and put a large down payment on it. Would it be best to stay with this approach, or downgrade house by 25% and put more money towards the market. I'm looking for a high level answer in general, but if specifics are required, here are some details.
- Capped $15K/yr already going to 401K
- 50% equity in home
- $0 debt outside of home
- 6% mortgage rate
- 25 years left on mortgage
- 25 years until retirement
- Planning on selling in 25 years and renting at that point.
- Currently $0 money left over to invest
sport
Posts: 9962
Joined: Tue Feb 27, 2007 3:26 pm
Location: Cleveland, OH

Decisions

Post by sport »

mhill,
There is no one right answer to your question. My reaction is that it does not have to be an all or nothing choice. You can compromise and choose something in between. Also, many people believe in "moderation in all things". Accordingly, I would not buy the most expensive house I could afford. Instead, I would buy a house that I would enjoy, be happy with, and would meet my needs. Anything more than that would be an extravagance, and would interfere with other things such as investing.

In fact, we recently purchased a new home. It was not the most expensive we could afford. However, we are very happy with it, and it meets our needs. We never considered spending more, just because we could. It should also be realized that this same principle applies to other spending as well as houses. For example, how much should I spend on a car, vacation, hobbies, etc.

I hope this gives you some insight.

Best wishes,
Jeff
livesoft
Posts: 75121
Joined: Thu Mar 01, 2007 8:00 pm

Post by livesoft »

We did not buy a cheap house, but we also did not buy an expensive house. We bought a 3000+ sq ft 4 br, 3.5 ba McMansion and paid less than $200K for it. We put 20% down; we have a sub-5% fixed-rate mortgage. We are happy with our house. It's in a great school district, a great neighborhood, close to our jobs, schools, shopping, cul-de-sac, within 200 meters of the golf course, yada-yada-yada.

We'd buy the same house/location again. Not cheap, not expensive, nice and in moderation.
User avatar
fishnskiguy
Posts: 2610
Joined: Tue Feb 27, 2007 1:27 pm
Location: Sedona, AZ

Post by fishnskiguy »

Before selling and downgrading, I'd recommened clearing this move with the War Department :)

We are building our final retirement house (yea, sure I said that three times in the last fifteen years) and will draw down 7% of our retirement portfolio to get the house mortgage free. My wife is VERY frugal, but the house is also VERY important to her.

You can't take it with you.

Chris
Trident D-5 SLBM- "When you care enough to send the very best."
FinanceGeek
Posts: 872
Joined: Sun Jul 01, 2007 5:27 pm

Post by FinanceGeek »

We chose to buy a house that could easily be afforded on a 15 yr mortgage on one income even though both DW and I were working at the time.

A few yrs down the road she became a full time Mom (working 1000% harder for 100% less the taxable income), and my income fell, so it turned out to be the right choice for us. Its now paid off, which is prob stupid from an investment point of view (no more leverage or deductions) but very satisfying from a emotional point of view.

Everyone needs a place to live and if you're going to be in one place for many years (I use 10 in my models), owning usually makes sense. But buying more than what you reasonably need is a consumption decision, not an investment one.

I would suggest that if you really want additional exposure to a hot housing market you buy your personal residence on the cheap and use the extra $$ to buy rentals.
Last edited by FinanceGeek on Fri Sep 14, 2007 7:54 pm, edited 3 times in total.
User avatar
White Coat Investor
Posts: 15146
Joined: Fri Mar 02, 2007 9:11 pm
Location: Greatest Snow On Earth

Re: Decisions

Post by White Coat Investor »

jsl11 wrote:mhill,
There is no one right answer to your question.
I disagree. The right financial answer is to buy cheap. Unless the housing market goes crazy (think 2003-2006), this will always work out better. Remember that a more expensive house not only has a bigger mortgage, but also bigger tax bills, bigger utility bills, bigger furniture bills, and higher realtor commissions.

However, if you desire to consume more rather than save, fine. You have to spend your money on something. But financially, the answer is buy cheap and invest the rest.
Last edited by White Coat Investor on Fri Sep 14, 2007 8:15 pm, edited 1 time in total.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
InvestingMom
Posts: 503
Joined: Mon Aug 20, 2007 2:45 pm

My 2 cents

Post by InvestingMom »

I think the key is that you said you bought a house that is larger than you need. Based on that statement I would say you should buy "moderate" and invest the rest.
That being said it would be hard to say if you should sell now because as I am sure you are aware it is expensive to sell a house and move.
grberry
Posts: 234
Joined: Fri Jul 20, 2007 1:16 pm
Location: Boston, MA

Re: Expensive House vs More in the Market?

Post by grberry »

mhill wrote:... I bought a larger/nicer house than my family really needs ...
Your current family, or your potential future family? If you absolutely certain you won't have more kids or take in one or more parents/siblings, I'd consider the downgrade. If your needs might expand, I wouldn't move. Housing is not a liquid investment, and there are significant transactional costs to selling and to buying.
User avatar
gasman
Posts: 827
Joined: Mon Jul 30, 2007 6:13 pm

Re: Expensive House vs More in the Market?

Post by gasman »

mhill wrote:This is not a rent vs buy question. It's a buy expensive / buy cheap question. I've seen preferences going either way on this, but I'd like to know what the concensus opinion is about spending more on house vs stock/bond market.
- Currently $0 money left over to invest
To some exent this is an emotional decision as well as a financial one. I bought the small house and have lots of savings but there are times when I wish the reverse is true. If you are confident that the next house you will buy will be the place that you drop anchor for a decade or more, I vote to stretch a little. Although "$0 money left over" is stretching too much
User avatar
Petrocelli
Posts: 2872
Joined: Mon Feb 19, 2007 6:29 pm
Location: Fenway Park, between 2nd and 3rd base

Once again, I am in the minority...

Post by Petrocelli »

Buy the smallest house in the most expensive neighborhood you can afford. That way, you are actually paying more for the land, and less for the house. Land appreciates and houses depreciate.

I bought a two-bedroom, 1600 square foot house in 1990 for $625,000. Everyone said I was nuts when I bought it. The lot alone, with no house on it, is now worth over $2,000,000.
Petrocelli (not the real Rico, but just a fan)
Topic Author
mhill
Posts: 28
Joined: Fri May 11, 2007 1:24 pm
Location: Sacramento

Thanks

Post by mhill »

Thanks for the replies! My only concern was that most of my net worth has come from a big gain in home value in the bay area, before moving out to the more affordable inland valley. However I know I need to realize that real estate is just as unpredictable as the market, and I can't count on that continuing.
Hopefully the stable job stays stable and a couple raises down the road will alleviate the situation. We'll see how it goes. I'd hate to bite the bullet on transaction costs and downgrade, but it might just be a necessary option.
Thanks Again!
Valuethinker
Posts: 42065
Joined: Fri May 11, 2007 11:07 am

Re: Thanks

Post by Valuethinker »

mhill wrote:Thanks for the replies! My only concern was that most of my net worth has come from a big gain in home value in the bay area, before moving out to the more affordable inland valley. However I know I need to realize that real estate is just as unpredictable as the market, and I can't count on that continuing.
Hopefully the stable job stays stable and a couple raises down the road will alleviate the situation. We'll see how it goes. I'd hate to bite the bullet on transaction costs and downgrade, but it might just be a necessary option.
Thanks Again!
Diversification.

If your net worth is in your house, it is *not* diversified.

There is a graph, it's been posted many times in this board, by Robert Shiller (see also the introduction to the SECOND edition of Irrational Exuberance) of US housing prices since 1890. It shows housing prices in the US have moved up more, in real terms, 1995-2005 than they did in any previous point in history except right after WWII (when ex GIs could buy homes for the first time due to the GI bill and other acts).

So you've made out like a bandit. Will this go on? Hard to know. California is still a popular place. Proposition 13 has made property attractive, by capping property taxes.

But my gut says housing price rises will be more muted (and may fall) for some considerable time.

See also EmergDoc's key point: the bigger the house, the bigger the costs of ownership. Property taxes etc.

Stocks are riskier than houses (in aggregate) *but* they are more diversified than owning your own house.

For me, in the UK where housing prices have risen 4-fold in 13 years, conventional wisdom is now that there is no point having stocks, saving via pensions, it's all about owning and renting out buy-to-let properties. your property is your pension plan.

*that* makes me very convinced that I should own equities, rather than more housing.
Valuethinker
Posts: 42065
Joined: Fri May 11, 2007 11:07 am

Re: Decisions

Post by Valuethinker »

EmergDoc wrote:
jsl11 wrote:mhill,
There is no one right answer to your question.
I disagree. The right financial answer is to buy cheap. Unless the housing market goes crazy (think 2003-2006), this will always work out better. Remember that a more expensive house not only has a bigger mortgage, but also bigger tax bills, bigger utility bills, bigger furniture bills, and higher realtor commissions.

However, if you desire to consume more rather than save, fine. You have to spend your money on something. But financially, the answer is buy cheap and invest the rest.
Excellent point.

Best possible neighbourhood, nearly the worst house in that neighbourhood. The iron law of principle residence buying.

You won't go up as much in a bull market, but you will not fall as much in a bear market. And in a good neighbourhood, houses always sell. So you always have liquidity.

I say nearly because if there is something critically wrong with your house or lot, it can be unsaleable.

It is the iron law of wealth preservation in housing. If you go back to our parents' day, before the 1970s inflation, that was how you bought a house.

As Petrocelli says, it is land that has the value, not the structure on it.
epilnk
Posts: 2680
Joined: Wed Apr 18, 2007 7:05 pm

Re: Thanks

Post by epilnk »

I agree with everyone else about preferring a smaller house when buying, but it seems your situation is a bit more complicated. You would incur realtor fees and transaction costs in a trade down, and your mortgage interest rate would go up. Also, I see you're in Sacramento - I understand the market's having a bit of an adjustment right now. I'm concerned that a 25% downsize might not realize enough savings to justify it.
biasion
Posts: 1417
Joined: Mon Aug 13, 2007 8:23 pm

Post by biasion »

[removed]
1. Do not confuse strategy with outcome | 2. Those who fail to plan plan to fail | 3. Do not assume the unlikely is impossible, and | 4. Be ready to deal with the consequences if you do.
Topic Author
mhill
Posts: 28
Joined: Fri May 11, 2007 1:24 pm
Location: Sacramento

Thanks

Post by mhill »

Thanks,
Some very good points made. It's a good point that my net worth is not well diversified between real estate and other investments. That definitely puts things in perspective.
We're going to try to stay, as it is a very desirable housing situation. However, if my family is ever tempted for some crazy reason in the future to upgrade housing, I'll remember all the advice here and make the smart choice not to.
Thanks!
Topic Author
mhill
Posts: 28
Joined: Fri May 11, 2007 1:24 pm
Location: Sacramento

Re: Once again, I am in the minority...

Post by mhill »

Petrocelli wrote:Buy the smallest house in the most expensive neighborhood you can afford. That way, you are actually paying more for the land, and less for the house. Land appreciates and houses depreciate.

I bought a two-bedroom, 1600 square foot house in 1990 for $625,000. Everyone said I was nuts when I bought it. The lot alone, with no house on it, is now worth over $2,000,000.
Thanks for the feedback Rico. My dad and uncle were big fans of yours.

Matt
Post Reply