Buy a starter house, they say. Keep upgrading as you can afford more. Add bedrooms, add square footage, fill them up. Don’t you want more? Don’t you deserve better?
What if, instead, you focused on ‘enough’? To know that what you have right now is sufficient and can fulfill you. What if you choose to get off the never-ending quest of needing and wanting? Breathe that in. Doesn’t it feel just a little bit liberating?
There’s actually a scientific term for constantly resetting our expectations about wanting more, and how that “more” does not equate to increased happiness. It’s called hedonic adaptation, and it’s the reason why we get excited by a purchase – only to watch that excitement fade over time.
Though I have been told I’m crazy, my family of five has chosen to stay put in our 1,400 square foot starter home while investing in a small renovation to raise the ceilings and move the kitchen. (It should be noted that we are a family of very tall people, so raising the roof is a literal necessity for this renovation, but I digress.) Here’s why:
Homes are Mediocre Investments (at Best)
People tend to overestimate the investment value of residential real estate. It brings with it regular costs like property taxes as well as unexpected costs like new pipes or a new roof. If you are calculating the return on your investment, you must consider more than just the purchase price and the sales price – it’s all the other costs along the way.
Additionally, many residential purchases are made with large mortgages, which also distort people’s expectation of return. Loans cut both ways: they can amplify your returns, but also amplify your losses.
For example, let’s say you buy a house for $1,000,000 and put $200,000 down. If that house’s value rises to $1,200,000 then you’ve doubled your investment. Except, if that same house’s value falls to $800,000? Then you’ve lost 100% of your investment.
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Upgrading Costs More than You Think
What if I told you that selling your house and buying a new house at the exact same price would cost you more. Why would that be? Well, this can happen for three reasons:
1. Property Tax Reassessment
Chances are, your “assessed value” is actually lower than the fair market value of your house. When you buy a new house, that new property’s tax basis is reset to the purchase price, which means your carrying cost will likely go up.
2. Transaction Costs
As the seller, it’s typical for you to cover the selling costs for both the buyer and seller’s real estate agents, which means you typically lose around 6% of your sales price. There are also one-time costs like escrow fees, appraisals, and inspections that you don’t get back. This means you have less money to put towards your new house. You would need to supplement that with a bigger mortgage (higher monthly cost) and/or additional cash (which is money that could have been invested elsewhere).
3. Mortgage Re-Amortization
I may or may not have just invented that phrase – now let’s see if I can define it. The longer you have a mortgage, the more of your payment goes to principal over interest (most mortgage providers have cool calculators that show this effect over time). Buying a new house for many people means getting a new mortgage, which means your new mortgage payments will go more towards interest than before. Over time, that means you are paying more in total interest costs.
Don’t Let Your Stuff Control You
I hear people say all the time, “But I have too much stuff!” Hey, I get it. I have three kids under seven, and kids come with a lot of stuff. But you are also capable of hopping off the consumption hamster wheel and opting out any time you’d like.
How would your life be if you had half as much stuff? If you took all the items that you haven’t used in a year and just got rid of it? Would you be less happy?
I’m going to say this in the most loving way possible: spending more money to store more unnecessary stuff is bonkers. The better thing to do – for our wallets, for the environment, for our sense of fulfillment and peace of mind – is to cut down on how much stuff we have and choose to consume. Purge your storage, stop buying so many things that need to be stored, and voila! You no longer need a bigger house.
Smaller House, Bigger Picture
Your lattes are not the problem in your financial plan. It’s generally the biggest ticket items such as housing and transportation where you can move the needle most in saving money.
And money often means time. If you didn’t have to work harder to earn more money to afford a bigger house, what could you enjoy instead? Would you have more time with your family? More time and money to travel, volunteer, or garden?
Our economy thrives when we have that unquenchable need for more and better, and yet our personal sense of wellbeing can suffer from that unquenchable need. It can be a brave (and extremely rewarding) investment in yourself to finally get off that consumption treadmill.
If you would like to evaluate how you’re living and to make a better, more secure investment in yourself, reach out to an Abacus advisor today for a free consultation.