Author Topic: How much is too much for a house?  (Read 21483 times)

Ricky

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How much is too much for a house?
« on: April 20, 2015, 09:30:50 PM »
I think one thing that neither MMM or anyone here can come to a consensus on is housing.

I've seen several threads where people throw out the fact that they're either considering or buying houses in the $500k-$1m range or even more and everyone on this forum seems to shudder at the thought.

My thoughts are there are plenty of places where paying that much wouldn't be necessarily un-Mustachian or wasteful, unless the goal for everyone is to work in a HCOL area and then retire to a LCOL. What about when you still want to keep the amenities of a HCOL in retirement?

Even for a mid-COL area like Austin, TX, which I'm currently visiting, housing can be surprisingly affordable or not depending on where you want to be. If you want to be in the more Mustachian, bikeable parts of town, it's going to cost you. Houses are generally $300-500k or MORE. And this is what is considered by most to be a very affordable housing city. Austin is more dense than some cities, but I wouldn't want to live anywhere outside the core since it's just too sprawling for me. The obvious problem with buying an expensive home is the taxes. It doesn't matter if you're maintaining ~1200 sqft if you're still paying ~2.5% on a $400k house.

So I'm wondering what a general rule of thumb would be? Say within 10-20% of the median sales price for any given area?

I know the general principle is to live below your means, it just seems like that is sometimes unavoidable with housing? Are more people here choosing to rent if they live in the city? If they buy, are the choosing to live well outside the core?
« Last Edit: April 20, 2015, 09:37:19 PM by Ricky »

okits

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Re: How much is too much for a house?
« Reply #1 on: April 20, 2015, 09:36:58 PM »
Lots of factors to consider. 2-3x annual income, ideally.  Comparisons to the cost of rent for similar.  It depends on what income you can generate in your HCOL area, so dollar figures aren't a good yardstick (e.g. $5MM is fine if you can earn $2.5MM/year).

HenryDavid

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Re: How much is too much for a house?
« Reply #2 on: April 21, 2015, 07:02:58 AM »
3x the annual income of one of us--we didn't include my spouse's unpredictable income--with 30% down, has worked amazingly well for us.
Minimum payments on this amount are laughably low, but you could make those and bank the surplus if you prefer.  We chose to double up payments and the mortgage has melted away quickly and painlessly. Less than 15 years of low housing costs, and done. Doing this meant buying a house with some upgrades needed, but those could be done at times of opportunity: one year our Canuck government offered a home reno tax credit, so we jumped on that.
Preserve your flexibility and don't overload your life with any more house cost than you truly need. There's so much more to life than your house. It's what you do in it, and away from it, that makes your life.

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Re: How much is too much for a house?
« Reply #3 on: April 21, 2015, 07:08:19 AM »
If you can rent one of those $500k houses for $3k per month or abouts, it is probably too much house.

nereo

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Re: How much is too much for a house?
« Reply #4 on: April 21, 2015, 07:19:24 AM »
I think one thing that neither MMM or anyone here can come to a consensus on is housing.
That's because the decision on whether or not to buy a house requires so many parameters, and how you 'weight' these parameters changes the outcome.  Some are quantifiable (price, rent-to-buy metrics, distance to work/shopping), others are more subjective (pride in ownership, the 'i-love-this-house') and yet more are unknowable or hard to quantify (e.g. duration in an area, job prospects, appreciation).  Not all of those are equal, but depending on whether you place a higher emphasis on,say, future mobility than 'i-love-this-house' it can change the outcome of the "should I buy this" question.

Quote
I've seen several threads where people throw out the fact that they're either considering or buying houses in the $500k-$1m range or even more and everyone on this forum seems to shudder at the thought.
Personally, I don't think the sticker price of the house matters nearly as much as how buying compares to renting in that area.  For example, if I lived in Palo Alto, California again a $750k house within biking distance of work might seem attractive compared with a >$3000/month rental that's requires a car and a commute.

Quote
So I'm wondering what a general rule of thumb would be? Say within 10-20% of the median sales price for any given area?

I think you're asking the wrong question.  It shouldn't be "how much can I pay for a house in this area" - a better question to ask is "what combination of price, location and features will maximize my happiness and freedom".  It might be within 10-20% of the median sales price, or it might be double the median price if it allows me to live car-free in an efficient home with a great floor-plan.

velocistar237

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Re: How much is too much for a house?
« Reply #5 on: April 21, 2015, 07:32:43 AM »
There's a lot of flexibility, but there's some consensus. Don't buy more house than you reasonably need, be willing to move to another city, and if transportation savings offset the increased housing cost, then it could be worth it.

But more often than not, people who want to spend more than 3x their income end up buying more house than they need. If you live in NYC, for example, then you need a studio, or maybe 2 bedrooms if you have kids. If you can do it in one place, then you can do it in another. People might want 3+ bedrooms and a backyard in a top school district, and the pull can be really strong, but they certainly don't need those things. I wouldn't be surprised if someone who bought a house like that would be willing to make the decision to delay their financial independence at the time of purchase, but when they actually start working the extra years, would start to chafe at the loss of freedom.

Who on their deathbed regrets their housing choice? Life isn't about having a nice house. Buy something that gives you freedom of choice, and if you still want a nice house later, figure out how to get it then, when you aren't pushing the cost of the decision onto your future self.

merula

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Re: How much is too much for a house?
« Reply #6 on: April 21, 2015, 07:40:22 AM »
My metric is "don't have a room in your house that you don't use at least weekly". Any house price can be frugal if the circumstances are right: earning potential in a high COL area; close to family, friends and amenities to reduce travel time/cost; and finding a place you're happy to call home.

IMO, what's really wasteful is too much space, not the sticker price on the building. More space has to be heated and/or cooled, furnished, cleaned, maintained, etc. The sticker price can often be made up in the resale, the upkeep costs cannot.

James

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Re: How much is too much for a house?
« Reply #7 on: April 21, 2015, 08:06:20 AM »
MMM himself lived in a high value house himself until last year, it is an area he conciously decided to spend more on, while also feeling like it was too much house as he progressed in mustachianism. So I don't think a high value house is necessarily un mustachian. What is considered "high value" or "too much" just depends on a lot of things including the local market, individual preference, individual finances, and position on the progress to FI. The environmental impact is also a key factor, often overlooked if the focus is entirely financial.

SnackDog

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Re: How much is too much for a house?
« Reply #8 on: April 21, 2015, 08:53:25 AM »
A friend of mine advised me, before our first purchase, "always buy the most home you can afford in the best location you can find".   This has served us well as all the properties we have owned were enjoyable to live in and easy to sell for profits when we moved.  Looking back, we were tempted by homes (which we didn't purchase) in much, much less desirable locations which have turned out to be much less valuable in the long run.

Just remember, in many circumstances purchasing a home may not be your smartest financial move, particularly if there is any chance you will not live there a very long time.

cynthia1848

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Re: How much is too much for a house?
« Reply #9 on: April 21, 2015, 09:34:09 AM »
Agree with SnackDog.  We stretched to buy a house in a good school district and with a shortish commute in a HCOL area.  The house itself was a wreck.  With the work we have put into it and the appreciation of the area, now it is probably worth about 50% more than we paid (7 yrs later).  Our previous condo made us about 20% profit in 2 yrs of ownership.

Kris

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Re: How much is too much for a house?
« Reply #10 on: April 21, 2015, 09:41:03 AM »
To me, the most important factor by far has always been the percentage of my income.  The fact that the "rule of thumb" is to spend 3-4x your annual income on a home is mind-boggling to me. (And of course, there are people who spend much more than that.)  When I got divorced and bought my own condo for the first time, I had to come close to 3x my income, and it freaked me out completely, although I could easily afford it, looking back.  When I met my now-husband, he had a condo that was 4x his income.  He sold it and moved in with me, and now what we pay is about 10% of our annual income.   

Friar

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Re: How much is too much for a house?
« Reply #11 on: April 21, 2015, 09:41:16 AM »
My metric is "don't have a room in your house that you don't use at least weekly" (...)
what's really wasteful is too much space, not the sticker price on the building. More space has to be heated and/or cooled, furnished, cleaned, maintained, etc.

I think this is quite a good mantra to have.

It's all well and good having a spare room for when people come to visit, but if that's only happening for three weekends a year then the room otherwise goes to waste.

I'd be happy offering my guests a comfortable blow-up double mattress on the floor of my living room if they're staying for a few days. For those who can't handle it, and VIPs (read: the parents/in-laws), they can take the master bedroom and my partner and I can use the inflatable.

Ricky

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Re: How much is too much for a house?
« Reply #12 on: April 21, 2015, 09:50:55 AM »
There's a lot of flexibility, but there's some consensus. Don't buy more house than you reasonably need, be willing to move to another city, and if transportation savings offset the increased housing cost, then it could be worth it.
This is what is confusing I think. "More house than you need" is a bit ambiguous. Some 500 sqft homes cost upwards of $500k in some areas. Technically, you're not buying more space than you need, but are you in general paying too much to live in a HCOL area, effectively having access to more things than you really need?

The rule of thumbs really don't work if you consider net worth. If you have a $1M net worth and are living off 4%, it doesn't make sense to say you can only afford a $120K house.

So I guess the answer is that there isn't a true definitive answer for everyone. I was only curious because there are a lot of people on these forums with sub $250k homes and are high earners in fairly HCOL areas so I just wonder where they are finding these deals or if they choose to live far outside the core to save money on housing.

nereo

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Re: How much is too much for a house?
« Reply #13 on: April 21, 2015, 09:56:06 AM »
A friend of mine advised me, before our first purchase, "always buy the most home you can afford in the best location you can find".   This has served us well as all the properties we have owned were enjoyable to live in and easy to sell for profits when we moved.

I'm surprised to see the advice of "always buy the most home [that] you can afford".  To me, that seems like a path to financial ruin (or at least employment servitude).  Regardless of whether I was renting or purchasing-to-own, I've always started with a location that has made the most sense, and then found a place that met the minimum amount for what would make me comfortable.  I could certainly 'afford' a much larger place, but those require more energy to heat, more furniture to fill, and more money to insure. I don't see any positive benefit of buying a place larger than you need.
I do like cynthia1848's approach of buying a home in need or repairs in a desirable location, and then systematically renovating it while you are living there. However, a 50% return over the last 7 years isn't quite as good a run as the SP500 has had over the same time period. 

MLKnits

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Re: How much is too much for a house?
« Reply #14 on: April 21, 2015, 09:59:00 AM »
My metric is "don't have a room in your house that you don't use at least weekly". Any house price can be frugal if the circumstances are right: earning potential in a high COL area; close to family, friends and amenities to reduce travel time/cost; and finding a place you're happy to call home.

IMO, what's really wasteful is too much space, not the sticker price on the building. More space has to be heated and/or cooled, furnished, cleaned, maintained, etc. The sticker price can often be made up in the resale, the upkeep costs cannot.

I like this rule a lot. I rent very affordably in a HCOL area (condos comparable to my apartment are atrociously priced, and don't get me started on houses), but even if the cost differences weren't so stark, I just don't need all that extra. My electricity cost (only utility I pay directly) is $30/month, it's easy to keep tidy, it restricts how much random crap I can accidentally purchase--if anything, I sometimes think my one-bedroom is bigger than I need.

Obviously, families with kids will have different needs--but then, there are lots and lots of those in my building, so do they really?

That said, I have a balcony that I don't use all winter, so I may be breaking the rule myself--but I'm on it every single day in the warm months, let me tell you!

nereo

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Re: How much is too much for a house?
« Reply #15 on: April 21, 2015, 10:02:55 AM »

The rule of thumbs really don't work if you consider net worth. If you have a $1M net worth and are living off 4%, it doesn't make sense to say you can only afford a $120K house.
That would make sense to me - if you have investments of $1M and no other income and wish to live off of a 4% WR, you will have an annual budget of $40k.  It's analogous to someone earning a $40k salary.  So yes, I think a $120k house is approximately how much you could 'afford' under those circumstances.

Of course the early retiree with $1MM in investments could simply get a part time job paying $12k/year and afford something almost 3x as fancy, but that's another scenario.

Ricky

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Re: How much is too much for a house?
« Reply #16 on: April 21, 2015, 10:17:40 AM »

The rule of thumbs really don't work if you consider net worth. If you have a $1M net worth and are living off 4%, it doesn't make sense to say you can only afford a $120K house.
That would make sense to me - if you have investments of $1M and no other income and wish to live off of a 4% WR, you will have an annual budget of $40k.  It's analogous to someone earning a $40k salary.  So yes, I think a $120k house is approximately how much you could 'afford' under those circumstances.

Of course the early retiree with $1MM in investments could simply get a part time job paying $12k/year and afford something almost 3x as fancy, but that's another scenario.
If said person bought a $300k house instead (7.5x his annual income) he would still have $700k in investments, yielding $28k per year.

Add in 1.25% in taxes, 1% in maintenance, $800 in insurance yearly, you have $7.5k in yearly expenses on that house.

This (single) person still has $20.5k a year to live off of, and that's not the definition of being able to afford much more than 3x your monthly income? I think Mustachians can afford much more house since they are frugal in so many other areas.

nereo

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Re: How much is too much for a house?
« Reply #17 on: April 21, 2015, 10:30:50 AM »

The rule of thumbs really don't work if you consider net worth. If you have a $1M net worth and are living off 4%, it doesn't make sense to say you can only afford a $120K house.
That would make sense to me - if you have investments of $1M and no other income and wish to live off of a 4% WR, you will have an annual budget of $40k.  It's analogous to someone earning a $40k salary.  So yes, I think a $120k house is approximately how much you could 'afford' under those circumstances.

Of course the early retiree with $1MM in investments could simply get a part time job paying $12k/year and afford something almost 3x as fancy, but that's another scenario.
If said person bought a $300k house instead (7.5x his annual income) he would still have $700k in investments, yielding $28k per year.

Add in 1.25% in taxes, 1% in maintenance, $800 in insurance yearly, you have $7.5k in yearly expenses on that house.

This (single) person still has $20.5k a year to live off of, and that's not the definition of being able to afford much more than 3x your monthly income? I think Mustachians can afford much more house since they are frugal in so many other areas.
I agree with your math but disagree with your conclusions.  If this person bought a $300k house outright they'd have a much smaller stash to live off - $20.5k vs $40k if they bought no house. 

Could this work?  Sure.  Is does it make financial sense?  Nope.  Here's why:  If this person decided to perpetually rent, he/she would be able to afford up to $1,625/month in rent, and adjust as necessary for inflation.* In just about any market this will allow you to live in a place worth substantially more than $300k.  Alternatively, he/she could spend less to live in an equivalent $300k home and either have a lower WR or have more money for other things, like traveling.

*$1,625/mo based on the 'lost' $19.5k/year when comparing investments worth $1MM and $700k and a WR of 4%

thd7t

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Re: How much is too much for a house?
« Reply #18 on: April 21, 2015, 10:59:20 AM »
A friend of mine advised me, before our first purchase, "always buy the most home you can afford in the best location you can find".   This has served us well as all the properties we have owned were enjoyable to live in and easy to sell for profits when we moved.

I'm surprised to see the advice of "always buy the most home [that] you can afford".  To me, that seems like a path to financial ruin (or at least employment servitude).  Regardless of whether I was renting or purchasing-to-own, I've always started with a location that has made the most sense, and then found a place that met the minimum amount for what would make me comfortable.  I could certainly 'afford' a much larger place, but those require more energy to heat, more furniture to fill, and more money to insure. I don't see any positive benefit of buying a place larger than you need.
I do like cynthia1848's approach of buying a home in need or repairs in a desirable location, and then systematically renovating it while you are living there. However, a 50% return over the last 7 years isn't quite as good a run as the SP500 has had over the same time period.
50% over the last 7 years is almost exactly what the S&P500 has returned (much better over 6 years, because that excludes the crash).  However, I agree that buying a house and hoping to turn a primary residence into a return sounds like speculation.

nereo

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Re: How much is too much for a house?
« Reply #19 on: April 21, 2015, 11:09:43 AM »

50% over the last 7 years is almost exactly what the S&P500 has returned (much better over 6 years, because that excludes the crash).  However, I agree that buying a house and hoping to turn a primary residence into a return sounds like speculation.
From April 2008 to today I calculate 60.3% adjusted for inflation, and 75.8% not adjusted for inflation (all including dividends).  Earlier post didn't specify whether increase in housing price was in real-adjusted dollars, but I suspect not.

That's a pretty big difference.  I'm not saying 50% over 7 years isn't a good return - it is.  But it's always good to compare it with how the market has done over the same time period.  Too many people think the appreciation of their home over several decades made it a fantastic investment, which sometimes it really wasn't that great.

mm1970

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Re: How much is too much for a house?
« Reply #20 on: April 21, 2015, 11:14:49 AM »
There's a lot of flexibility, but there's some consensus. Don't buy more house than you reasonably need, be willing to move to another city, and if transportation savings offset the increased housing cost, then it could be worth it.

But more often than not, people who want to spend more than 3x their income end up buying more house than they need. If you live in NYC, for example, then you need a studio, or maybe 2 bedrooms if you have kids. If you can do it in one place, then you can do it in another. People might want 3+ bedrooms and a backyard in a top school district, and the pull can be really strong, but they certainly don't need those things. I wouldn't be surprised if someone who bought a house like that would be willing to make the decision to delay their financial independence at the time of purchase, but when they actually start working the extra years, would start to chafe at the loss of freedom.

Who on their deathbed regrets their housing choice? Life isn't about having a nice house. Buy something that gives you freedom of choice, and if you still want a nice house later, figure out how to get it then, when you aren't pushing the cost of the decision onto your future self.
Not necessarily (the bolded part).  I know there are some places that are super expensive.  And yes, if we worked really hard we could probably find jobs somewhere else.  But finding two jobs (we both like working) in our two fields isn't easy.

I'd say when we bought our house, it was probably 4.5x our gross income.  It was literally the bottom of the single family market in our town.  2BR, 1BA, no garage, small lot, a driveway that goes to a house in the back.  The house was between our two jobs.  The next town over (about 10 miles away) had 3/2's for that amount (the size of the houses really depended on when they were built.  In our town, 20's to 40's, in the town over, 60's and 70's).

Of course now we both work in the next town over, so hindsight I'd have bought the 3/2 for the same amount of money.

The house isn't too big or "too much" for us with 2 kids.  We could have gotten a condo, but didn't want a condo.  It's just a really expensive area, where only about 5% of the people who live here can afford to own.  Of course, our timing sucked, but whatever.

The other thing to consider is demographics.  Yes, we live in <1200 sf now.  So we could do that *anywhere*.  But some towns are newer than that, and don't have 1200 sf houses.  Some towns only have condos and townhouses that size, and if you want a single family home, they are all bigger.  And some towns only have those size houses in crappy school districts.  Which, I live in a bad school district now, and transfer our son to a slightly better, but still not great, school.  But I've learned my lesson there.  I won't do that again.

thd7t

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Re: How much is too much for a house?
« Reply #21 on: April 21, 2015, 11:19:21 AM »

50% over the last 7 years is almost exactly what the S&P500 has returned (much better over 6 years, because that excludes the crash).  However, I agree that buying a house and hoping to turn a primary residence into a return sounds like speculation.
From April 2008 to today I calculate 60.3% adjusted for inflation, and 75.8% not adjusted for inflation (all including dividends).  Earlier post didn't specify whether increase in housing price was in real-adjusted dollars, but I suspect not.

That's a pretty big difference.  I'm not saying 50% over 7 years isn't a good return - it is.  But it's always good to compare it with how the market has done over the same time period.  Too many people think the appreciation of their home over several decades made it a fantastic investment, which sometimes it really wasn't that great.
I was looking at non-adjusted numbers and getting a 58% return.  I might not be factoring dividends in.  However, again, I agree with you that a primary residence shouldn't be counted on as an investment (for a return).  It can be a great investment in a way to reduce expenses, in the right market, though.

Rein1987

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Re: How much is too much for a house?
« Reply #22 on: April 21, 2015, 12:23:27 PM »
I paid a lot on my house, because I spent a lot of time in the house. I think this is very important to the life quality. I feel, if you can still keep up with a 50%-60% saving rate, it's OK to buy a good house. Because the marginal between 50% saving rate to 70% saving rate does not reduce too much of your years till FIRE, but you can definitely enjoy the life more before your FIRE.

And I also consider house as an investment because I'll move to a relative LCOL area after FIRE. People consider 1M house expensive but do not consider 1M mutual fund expensive, which sounds not right to me. I cannot live in the total market fund but I can live in a good house on my journey to FIRE. No one can predict which one increase more...maybe my house price increase much more than the stock. Or maybe not.

nereo

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Re: How much is too much for a house?
« Reply #23 on: April 21, 2015, 01:02:55 PM »
I paid a lot on my house, because I spent a lot of time in the house. I think this is very important to the life quality. I feel, if you can still keep up with a 50%-60% saving rate, it's OK to buy a good house.
I think this is a good point - if having an expensive home increases your happiness, and you can do it while spending less than you earn, then by all means spend a lot on a home.  To me that's part of what being mustachian is all about - making financial decisions that still allow you to live below your means.

Quote
And I also consider house as an investment because I'll move to a relative LCOL area after FIRE. People consider 1M house expensive but do not consider 1M mutual fund expensive, which sounds not right to me. I cannot live in the total market fund but I can live in a good house on my journey to FIRE. No one can predict which one increase more...maybe my house price increase much more than the stock. Or maybe not.
Sure, no one can be certain whether a specific house will increase more than a specific stock over several decades, but we can use history as a guide.  And overall, homes have appreciated more-or-less at the same rate as inflation.  The market has returned 7-8%/year after inflation.

Moving to a LCOL area after FIRE has nothing to do with it.  If you spend an insane amount on a home (and by insane I mean far more than you otherwise could have in a similar area) then you will have less money when you move than you would had you lived in a more sensible home and either paid off the mortgage faster or invested the difference.  There is no scenario where choosing a home that costs 2x as much as one nearby nets you more money when you retire, regardless of whether you buy or rent.  Telling yourself any differently is just trying to make yourself feel better about unnecessary consumption.  I'm not saying you shouldn't buy a nice house if it gives you happiness - like MMM I also choose to live in a very fancypants home - but I don't try to convince myself every month when i make my mortgage payment that the extra $200 I pay vs something slightly less fancy is somehow making me wealthier.  It isn't.  It's just making me happier now.


velocistar237

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Re: How much is too much for a house?
« Reply #24 on: April 21, 2015, 01:45:42 PM »
I paid a lot on my house, because I spent a lot of time in the house. I think this is very important to the life quality. I feel, if you can still keep up with a 50%-60% saving rate, it's OK to buy a good house. Because the marginal between 50% saving rate to 70% saving rate does not reduce too much of your years till FIRE, but you can definitely enjoy the life more before your FIRE.

I like this line of thinking, though the difference between 50% and 70% is going from 17 years to 8.5 years. That's pretty big. Maybe more along the lines of if it's just a small difference in time, then it could be worth it to some people.

Another thing to consider is that OMY buys a lot more if you wait to get the nice house later and don't have the loan interest working against your investments in the meantime.

And I also consider house as an investment because I'll move to a relative LCOL area after FIRE. People consider 1M house expensive but do not consider 1M mutual fund expensive, which sounds not right to me. I cannot live in the total market fund but I can live in a good house on my journey to FIRE. No one can predict which one increase more...maybe my house price increase much more than the stock. Or maybe not.

Moving from a HCOL area to a LCOL area is smart, but not necessarily if you spend a lot on housing in the meantime.

People do consider the time it takes to get a 1M mutual fund as expensive. The trade-off between working for money and doing something more worthwhile is what MMM is all about.

You can't live in a total market fund, but you can pay rent from the earnings.

No one can predict whether a house will increase in value more than the market, but we do have historical data that says the market is a surer bet, and that "investing" in housing isn't investing at all but speculating on an expense.

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Re: How much is too much for a house?
« Reply #25 on: April 21, 2015, 01:56:05 PM »
I am following this thread with interest because we are considering purchasing and I got (politely) smacked upside the head on another topic for saying we were planning on purchasing a place that costs up to $800k. I know that will buy a tremendous amount in many parts of the country, but where we are, our list of needs/wants is relatively modest: 2/2 minimum (we'd really like 3/2), 1000ft^2 minimum (1200ft^2 would be really nice), good light, located between our two jobs in a place with good public schools. At our price we are only able to consider condos, no SFH. That is just the way it works out sometimes. Then again, we are reaping the many benefits of living where we do which includes a high household income, so that purchase price is not outrageous for us (so we think). :)

MrsPete

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Re: How much is too much for a house?
« Reply #26 on: April 21, 2015, 04:01:22 PM »
As someone else said, this is a question with many variables -- so many moving pieces!

To give an example of why it's hard to give hard and fast rules, I have two rooms in my house that we don't use every week -- in fact, I can't think of when we last used them -- BUT this house is BY FAR the cheapest place we can live right now, and it has increased significantly in value in the time we've been here.  We'll do well when we sell.

I personally would not be comfortable spending more than 2Xs my yearly salary on a house. 

Rein1987

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Re: How much is too much for a house?
« Reply #27 on: April 21, 2015, 04:36:51 PM »
Moving from a HCOL area to a LCOL area is smart, but not necessarily if you spend a lot on housing in the meantime.

People do consider the time it takes to get a 1M mutual fund as expensive. The trade-off between working for money and doing something more worthwhile is what MMM is all about.

You can't live in a total market fund, but you can pay rent from the earnings.

No one can predict whether a house will increase in value more than the market, but we do have historical data that says the market is a surer bet, and that "investing" in housing isn't investing at all but speculating on an expense.

My past experience of house investment beats the stock market. It gave us 500% tax free return in 4 years (total mortgage payment in 4 years + down payment vs money got back after selling). It's true that not always this case, like history data suggests. But still, house can be an investment. It's more like picking an individual stock, not a total market though.

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Re: How much is too much for a house?
« Reply #28 on: April 21, 2015, 05:35:23 PM »
I find the whole topic very fascinating. I'm so used to living in the midwest that its hard for me to calibrate to HCOL areas. We bought our house three years ago, and at the time it cost 56% of our gross income. It's way bigger than we need, great location, great neighbors, and I have no desire to move or upgrade as long as we live in the area (Peoria). Really, the reason it was so inexpensive is simply because most people are scared to send their kids to Peoria public schools, so they all buy "expensive" houses in the suburbs with no character and no trees.

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Re: How much is too much for a house?
« Reply #29 on: April 21, 2015, 08:15:04 PM »
Simple answer: 3x the main income earner max, with 20% down. We're in a HCOLA as well, did this and went with a 15-yr mortgage. Now, just a few years and a few raises later, we owe about 1.5x our main income earner's salary. We *could* have purchased a much more expensive place, but concluded it was definitely more house than we need, more real estate exposure than wise in the event of a downturn and would tie up cash such that we'd lose out on other investing opportunities.

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Re: How much is too much for a house?
« Reply #30 on: April 21, 2015, 08:33:39 PM »
Where I live, 3x the average income might buy a 1 bedroom apartment.

I'm looking at buying in a couple years, and not looking at spending any more than 5x. That'll get a two bedroom unit about 15km from the city, a 1 bedroom apartment about 5-10km out, or a house in the outer suburbs (>30km out).

The average house price in this city is about 7-8x the median income.

Regional areas are cheaper, but that means far fewer employment opportunities or long commutes to the city.

louloulou

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Re: How much is too much for a house?
« Reply #31 on: April 21, 2015, 09:56:17 PM »
where I live 3x cost of living would not buy you anything.

median house price = 7x median annual income

Kris

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Re: How much is too much for a house?
« Reply #32 on: April 22, 2015, 06:07:57 AM »
where I live 3x cost of living would not buy you anything.

median house price = 7x median annual income

Then, no house.

nereo

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Re: How much is too much for a house?
« Reply #33 on: April 22, 2015, 06:28:31 AM »

My past experience of house investment beats the stock market. It gave us 500% tax free return in 4 years (total mortgage payment in 4 years + down payment vs money got back after selling). It's true that not always this case, like history data suggests. But still, house can be an investment. It's more like picking an individual stock, not a total market though.

No, it didn't. At least, I am 99% certain this was not the case. I was shocked when I read that you got a "500% tax free return in 4 years" because that's in the realm of house-flippers' best dream scenario.  But then I realized how you were calculating returns (total money spent vs. money back after sale).
What are you measuring here is total return on money spent.  And that's fine - you did very well, congratulations!  pat yourself on the back.
However these 'returns' that you quoted were highly leveraged.  You were on the hook for the total value of the home, and while you didn't state the specifics after 4 years I'm guessing you owned somewhere around 20-30% of the total home (i.e. you had paid off 20-30% of the original sale price of the home).  Let's assume 25% - that means your returns were leveraged 4-1 when you sold (and had been going down each mortgage payment).  To make a fair comparison to the stock market, you would need to compare returns with the same degree of leverage.

But wait, it gets more complicated.  For a fair comparison you need to include buying and selling costs, insurance and associated taxes.  Also, any money you spent on home maintenance needs to be included, as well as any upgrades or repairs that you made over 4 years.  Then all prices need to be real-adjusted for inflation (appoximately -8% of the sale price in your case). Finally, for a truly fair comparison the total number of hours spent on home maintenance needs to be factored in.

I'm not trying to pooh-pooh your gains here.  I do think it's great that you made such a tidy profit on your home over a relatively short time period.  But I see this fallacy of fantastic home-ownership gains perpetuated over and over.  Someone purchases a home for $300k with a small down payment and sell it a few years later at $400k and conclude that they've had gains which have far exceeded anything the stock market has ever returned.  It's just incorrect and can become dangerous when gullible individuals start thinking home ownership is their ticket to riches.

If I'm grossly wrong about some of my assumptions I apologize.  If you bought a home with cash for $100k and sold it 4 years later for $500k without every doing any maintenance  - well done!   I'm just trying to educate a bit here...

GetItRight

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Re: How much is too much for a house?
« Reply #34 on: April 22, 2015, 07:23:26 AM »
In absolute terms even in a HCOL area I'd say 150k-200k, with the upper end pushing past my comfort level. To accommodate for higher cost of living areas 2x income would be my max and even that is pretty extravagant. If you are working in an area where 2x income doesn't cut it then the presumably higher income in that area does not justify the higher cost as there are plenty of places where 2x income will get you a very nice house.

If it's your last house after FIRE and you've budgeted for it then I could see spending more for a desirable location that accommodates your lifestyle and retirement goals (i.e. proximity to beach, waterfront, etc) but even those types of places can be had for much less than the average consumer type pays if you don't demand all the luxury features unrelated to your goals. For a basic house serving the purpose of being in reasonable proximity to work while you're still building the stash... 2x income at most. Live like you're poor now so you can live like you're rich later.

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Re: How much is too much for a house?
« Reply #35 on: April 22, 2015, 08:49:57 AM »
 
where I live 3x cost of living would not buy you anything.

median house price = 7x median annual income

Then, no house.

What is the alternative then? Rents in the Bay have been going up somewhere in the 6-10% range every year. The salary multiple, absolute cost is irrelevant IMO. If the alternative is renting, punch your numbers in the NYTimes buy vs rent calculator and see what you get.

Bob W

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Re: How much is too much for a house?
« Reply #36 on: April 22, 2015, 08:53:28 AM »
My rule on houses is the same for anything else  "If you can't pay cash for it you can't afford it."    That said I'm not opposed to you having the cash (or tax deferred accounts)   that are greater than the value of the house but take out a 3.25% loan while keeping your investments working.

Houses are the ultimate consumer marketed item.   Realtors are taught to say things like "Buy the biggest house you can afford and it will be a great investment!,"   and "Your mortgage should be about 1/3rd of your income."   Using that logic a couple earning 150K should have a 50K annual housing cost and buy a $750K house.   

I'm always amazed when people won't spend a penny on restaurants but will pay 400K for a house.  When MMM bought his luxury pad I did a little research on his town and found nice homes for rent for $1,000 a month.   He is paying about 4K per month.  So all his savings ideas don't come close to equaling the 3K per month difference.    (he is very well off financially so I don't begrudge him living wherever he wants.  But I doubt that he is anymore hedonistically happy in the 4K house vs the 1K house)

Areas differ,  but I assume there is always a less expensive housing option.

If you don't have the cash to buy a house outright then rent an inexpensive place.  Yes!  Rent until you've saved the money -- shocking!

300 sq ft per person is more than enough space.

And lastly ---- You don't own a house -- It owns you. 


*(former home builder/marketer,  current owner of a way too big house that we paid very little for)

RetiredAt63

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Re: How much is too much for a house?
« Reply #37 on: April 22, 2015, 09:58:41 AM »
Really, I don't think actual dollar figures are very informative - if I quote house prices in Canadian dollars, not only are they massively dependent on location, but look at the Canadian dollar fluctuation versus other currencies over the past few years.  Plus since we pay our mortgages, and save for our down payments, out of after tax dollars, what % of income we have in our hands after tax is also going to vary enormously.  We are an international community, please let's remember that in these discussions.

So maybe the discussion would be more useful if we looked at after-tax and % income, not numbers?

And location is so important - if you want a "nice" house on the Ottawa River in/near Ottawa, you will be paying about a million.  If you are willing to commute, you can get a similar house in the L'Orignal/Hawkesbury area for roughly half that.  In Toronto - more. Or way more.

Avidconsumer

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Re: How much is too much for a house?
« Reply #38 on: April 22, 2015, 10:06:13 AM »
A friend of mine advised me, before our first purchase, "always buy the most home you can afford in the best location you can find".   This has served us well as all the properties we have owned were enjoyable to live in and easy to sell for profits when we moved.

I'm surprised to see the advice of "always buy the most home [that] you can afford".  To me, that seems like a path to financial ruin (or at least employment servitude).  Regardless of whether I was renting or purchasing-to-own, I've always started with a location that has made the most sense, and then found a place that met the minimum amount for what would make me comfortable.  I could certainly 'afford' a much larger place, but those require more energy to heat, more furniture to fill, and more money to insure. I don't see any positive benefit of buying a place larger than you need.
I do like cynthia1848's approach of buying a home in need or repairs in a desirable location, and then systematically renovating it while you are living there. However, a 50% return over the last 7 years isn't quite as good a run as the SP500 has had over the same time period.

It's not a 50% return as it's leveraged. If you deposited 20% of the value, then a 50% increase in the value of the home is significantly more than a 50% return. Buying property in the right area, can easily give you 100% return in a year. Some people can even flip houses for that much.
« Last Edit: April 22, 2015, 10:12:18 AM by Avidconsumer »

mm1970

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Re: How much is too much for a house?
« Reply #39 on: April 22, 2015, 10:19:09 AM »
where I live 3x cost of living would not buy you anything.

median house price = 7x median annual income

Then, no house.
Or, you could buy one anyway.  Just wait, and maybe put more down.

We waited until we were in our mid 30s.  Put 20% down, the market went into the toilet (at the bottom of the market, our house was worth $300k less than we paid for it).

We have been paying it off aggressively and refinancing.  So we were never actually underwater (at the bottom of the market, the house was worth about $20k over our mortgage).

Now we owe 1.5x our gross income on the mortgage and 2.5x our highest individual income. (Had we timed it better, we'd be better off).

I regret not timing it better, but hindsight is 20/20.  If we were renting right now, we'd be paying the same amount a month (mortgage+prop tax).  Of course, even if we waited to buy until RIGHT NOW we'd probably have been better off, because our particular house is worth a tiny bit less than we paid for it, and interest rates are low.

Very interesting article in the local paper about it all, about how we have two different groups of professionals locally - those who bought houses 15 years ago and the rest of us.

nereo

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Re: How much is too much for a house?
« Reply #40 on: April 22, 2015, 10:24:54 AM »
A friend of mine advised me, before our first purchase, "always buy the most home you can afford in the best location you can find".   This has served us well as all the properties we have owned were enjoyable to live in and easy to sell for profits when we moved.

I'm surprised to see the advice of "always buy the most home [that] you can afford".  To me, that seems like a path to financial ruin (or at least employment servitude).  Regardless of whether I was renting or purchasing-to-own, I've always started with a location that has made the most sense, and then found a place that met the minimum amount for what would make me comfortable.  I could certainly 'afford' a much larger place, but those require more energy to heat, more furniture to fill, and more money to insure. I don't see any positive benefit of buying a place larger than you need.
I do like cynthia1848's approach of buying a home in need or repairs in a desirable location, and then systematically renovating it while you are living there. However, a 50% return over the last 7 years isn't quite as good a run as the SP500 has had over the same time period.

It's not a 50% return as it's leveraged. If you deposited 20% of the value, then a 50% increase in the value of the home is significantly more than a 50% return. Buying property in the right area, can easily give you 100% return in a year. Some people can even flip houses for that much.
yes, but the leveraging aspect is exactly what gets many into trouble, and why people (erroneously) think that their home has been such a great investment compared to the broader market.  If you are going to make a fair comparison you have to also 'leverage' the market to a similar degree.  See my previous post for a bit more detail, but the danger here is that you are leveraged in both directions.  If the house drops 10% your  'loses' are compounded and you are suddenly in the dreaded "underwater" debt-trap.  Plus there's the unavoidable fees and taxes both in the purchase and the sale, not to mention any maintenance and labor required on the property over the duration that you own it.

Avidconsumer

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Re: How much is too much for a house?
« Reply #41 on: April 22, 2015, 10:35:45 AM »
A friend of mine advised me, before our first purchase, "always buy the most home you can afford in the best location you can find".   This has served us well as all the properties we have owned were enjoyable to live in and easy to sell for profits when we moved.

I'm surprised to see the advice of "always buy the most home [that] you can afford".  To me, that seems like a path to financial ruin (or at least employment servitude).  Regardless of whether I was renting or purchasing-to-own, I've always started with a location that has made the most sense, and then found a place that met the minimum amount for what would make me comfortable.  I could certainly 'afford' a much larger place, but those require more energy to heat, more furniture to fill, and more money to insure. I don't see any positive benefit of buying a place larger than you need.
I do like cynthia1848's approach of buying a home in need or repairs in a desirable location, and then systematically renovating it while you are living there. However, a 50% return over the last 7 years isn't quite as good a run as the SP500 has had over the same time period.

It's not a 50% return as it's leveraged. If you deposited 20% of the value, then a 50% increase in the value of the home is significantly more than a 50% return. Buying property in the right area, can easily give you 100% return in a year. Some people can even flip houses for that much.
yes, but the leveraging aspect is exactly what gets many into trouble, and why people (erroneously) think that their home has been such a great investment compared to the broader market.  If you are going to make a fair comparison you have to also 'leverage' the market to a similar degree.  See my previous post for a bit more detail, but the danger here is that you are leveraged in both directions.  If the house drops 10% your  'loses' are compounded and you are suddenly in the dreaded "underwater" debt-trap.  Plus there's the unavoidable fees and taxes both in the purchase and the sale, not to mention any maintenance and labor required on the property over the duration that you own it.

You are right, however it's still more than a 50% return.

Avidconsumer

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Re: How much is too much for a house?
« Reply #42 on: April 22, 2015, 10:39:02 AM »
A friend of mine advised me, before our first purchase, "always buy the most home you can afford in the best location you can find".   This has served us well as all the properties we have owned were enjoyable to live in and easy to sell for profits when we moved.

I'm surprised to see the advice of "always buy the most home [that] you can afford".  To me, that seems like a path to financial ruin (or at least employment servitude).  Regardless of whether I was renting or purchasing-to-own, I've always started with a location that has made the most sense, and then found a place that met the minimum amount for what would make me comfortable.  I could certainly 'afford' a much larger place, but those require more energy to heat, more furniture to fill, and more money to insure. I don't see any positive benefit of buying a place larger than you need.
I do like cynthia1848's approach of buying a home in need or repairs in a desirable location, and then systematically renovating it while you are living there. However, a 50% return over the last 7 years isn't quite as good a run as the SP500 has had over the same time period.

It's not a 50% return as it's leveraged. If you deposited 20% of the value, then a 50% increase in the value of the home is significantly more than a 50% return. Buying property in the right area, can easily give you 100% return in a year. Some people can even flip houses for that much.
yes, but the leveraging aspect is exactly what gets many into trouble, and why people (erroneously) think that their home has been such a great investment compared to the broader market.  If you are going to make a fair comparison you have to also 'leverage' the market to a similar degree.  See my previous post for a bit more detail, but the danger here is that you are leveraged in both directions.  If the house drops 10% your  'loses' are compounded and you are suddenly in the dreaded "underwater" debt-trap.  Plus there's the unavoidable fees and taxes both in the purchase and the sale, not to mention any maintenance and labor required on the property over the duration that you own it.

You are right, however it's still more than a 50% return. Property investment creates more millionaires than the stock market...

nereo

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Re: How much is too much for a house?
« Reply #43 on: April 22, 2015, 10:53:15 AM »
You are right, however it's still more than a 50% return. Property investment creates more millionaires than the stock market...
I think you are completely missing it here.  The 50% number came from Cynthia1848's post about buying a home in need of lots of repairs, working extensively on it and after 7 years having the home's value increase by 50%.
You are correct that her gains relative to her initial outlay of cash + mortgage payments would have been much greater than 50%, but you are ignoring two key things.  First, that return on investment required substantially more than just the initial down payment + monthly mortgage payments.  There was clearly a lot of 'sweat-equity', plus extensive renovations, transaction fees and taxes.  Second, if you are going to compare leveraged returns to the market, you have to compare them to leveraged returns on the market.

Quote
Property investment creates more millionaires than the stock market...
[citation needed]
what about the millions of homeowners who went underwater when the value of their homes went down and they were effectively stuck because the bank owned 90% of the home?  What about lost opportunity costs because they could not move. 

The idea that, broadly speaking and across all markets people can make more money with their homes than in the market seems unlikely to me.

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yandz

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Re: How much is too much for a house?
« Reply #46 on: April 22, 2015, 11:30:50 AM »
I can't remember which interview, but MMM referred to himself as "a bit of a house slut" in that it is worth it to him to have a nice home.  I had a good long chuckle about that.  The reality is I feel the same way.  We spend a lot of time at home. We entertain family and friends. We cook nearly every meal there. We stay home one weekends. We are serious home bodies. Since our home captures so much of our time, we bought at a higher (but still reasonable) price point than we could have (2.2x ONE of our incomes or 1x our joint incomes) and are putting some remodeling time and $$ in.  The short commutes, close walking trails, what will be a lovely kitchen, and "just right" size and layout for us.....it makes it so worth it.  We don't know if we plan to sell later, but am much as I agonized the added cost (2x the previous home value), it really does contribute to our happiness over our previous home/location.

ETA: we are still at a 70+% savings rate, so yay.  But we could be saving even more had we decided on something that was just "sufficient" vs. as awesome as we feel about our current home.
« Last Edit: April 22, 2015, 11:37:04 AM by yandz »

cynthia1848

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Re: How much is too much for a house?
« Reply #47 on: April 22, 2015, 11:59:20 AM »
So you have to live somewhere.  If you rent, your rent + utilities etc. is the COL.  If you own, PITI is the COL.  If your home is increasing in value as you own it, then you get part of the PITI back in appreciation and equity.

In our case, if we were to have rented, our rent payment for a similar home would have equaled PITI, but at the end of the 7 years, (1) we wouldn't have built any equity in the house,  (2) we wouldn't have been able to take the mortgage interest deduction, and (3) we wouldn't have been able to invest that money in the market anyway.  So it's kind of a false dichotomy to compare it to market returns.  If you have free cash flow to invest somewhere, then you can compare real estate to other investments, but the calculation is different when it is your primary residence.

thd7t

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Re: How much is too much for a house?
« Reply #48 on: April 22, 2015, 12:01:34 PM »
So you have to live somewhere.  If you rent, your rent + utilities etc. is the COL.  If you own, PITI is the COL.  If your home is increasing in value as you own it, then you get part of the PITI back in appreciation and equity.

In our case, if we were to have rented, our rent payment for a similar home would have equaled PITI, but at the end of the 7 years, (1) we wouldn't have built any equity in the house,  (2) we wouldn't have been able to take the mortgage interest deduction, and (3) we wouldn't have been able to invest that money in the market anyway.  So it's kind of a false dichotomy to compare it to market returns.  If you have free cash flow to invest somewhere, then you can compare real estate to other investments, but the calculation is different when it is your primary residence.
I think the other advantage is that a fixed mortgage is a pretty nice inflation hedge.

Kris

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Re: How much is too much for a house?
« Reply #49 on: April 22, 2015, 12:11:13 PM »
where I live 3x cost of living would not buy you anything.

median house price = 7x median annual income

Then, no house.

What is the alternative then? Rents in the Bay have been going up somewhere in the 6-10% range every year. The salary multiple, absolute cost is irrelevant IMO. If the alternative is renting, punch your numbers in the NYTimes buy vs rent calculator and see what you get.


Smaller house.  Move to LCOL.  Get a better job.  Apartment or townhouse. 

My point being, this forum is about living within your means so you can achieve financial independence.  Part of that is taking a good look at your lifestyle and realizing what things you think you need to spend money on, and think critically about it.  Many or most reasons, if examined critically, start to look less reasonable, or important, or justifiable... Or set in stone.  If you feel you need to spend 7x your annual income to get the house you want, that is a financially bad decision.  Write down the various factors involved (area, size of abode and cost per sq foot, salary,  etc.) and figure out a way to live that is financially sensible.
« Last Edit: April 22, 2015, 12:13:15 PM by Kris »