Should You Buy At Your Top?

Dear Pat,
I’ve been house hunting with an agent for a few weeks now, but we’re not finding anything in my price range that appeals to me. My agent says I need to spend more to get what I want in our neighborhood. Although I qualify to buy at a much higher price, I’m reluctant to spend more just because the “right” house isn’t available at the moment. Any comments?
---Don’t want to be house poor

Dear House Poor,
This is a question that comes up all the time, as sticker shock leaves buyers bewildered about real value today, and apprehensive about future value. Of course every situation is different, and you may have compelling reasons to stay with your plan of buying far below your limits; but generally speaking, I would advise buyers today to go for as much house as they can reasonably afford. It just makes good business sense to take advantage of historically low interest rates. If you buy a $200,000 house today, the payment will be no higher than a $150,000 house just 3 years ago. Now we don’t claim to be professional economic forecasters here, but if I were a betting woman I’d bet the farm that (a) interest rates will be higher in 3 years, closer to the levels they have always been; and (b) that house prices will continue to rise, as they have always done.

Let’s pretend that you decide to stay well within your budget and buy a $150,000 house instead of the larger one down the street selling for $200,000. Where will that leave you, House Poor, when you’ve tired of your smaller house in 3 years and try to move up? Well, that larger house will cost you about $600 a month more (based on a modest 6% appreciation and a 7.5% interest rate) than you’d pay for the same house today. Yet the difference between the two choices today is just $200 a month—small in comparison to the costs of moving up later.

Another advantage of stretching for that larger, more expensive home today: you’ll be getting a generally more saleable, more standard house with a greater appreciation potential as the years go by. And, as I tried to illustrate above, it’s likely to suit you longer both financially and personally than a lesser house, which might soon require another move.

I hope this helps, House Poor. Perhaps it all boils down to perspective: as a renter, you knew that the portion of your income devoted to shelter was strictly an expense, and of course it’s good to keep expenses as low as possible. As a homeowner, however, you’ll be wise to think of your house dollar as an investment, keeping an eye toward maximum future return.