Author Topic: How much is too much for a house?  (Read 21503 times)

nereo

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Re: How much is too much for a house?
« Reply #50 on: April 22, 2015, 01:57:12 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 agree with (almost) everything you just said.  Most of my postings in this thread have been in response to a few individuals who are spouting the idea that investing in 'the largest home you can afford' is a better wealth-building strategy than investing in the market under most circumstances. It sounds like you have made a lot of smart financial decisions with your home, buying an undervalued home, renovating it yourself and staying in it for several years.  This is a similar strategy to what we are doing.

My issue is that many people delude themselves into thinking their homes have appreciated much more than they actually have, and then make misinformed statements like "my return was much better than the market's".  It's a kind of willful amnesia that homeowners make so that they feel better about their purchase.  Common mistakes include not factoring inflation (often substantial given how long people own their homes), ignoring buying and selling fees (especially substantial when a home is owned for a very short period of time) and ignoring the energy and time spent on maintaining their own home.

My only concern with your situation is that you mentioned a rent payment would have been about equal to your PITI. To address your specific responses:
1) True, you would have no equity if you rented.  But for the same price you would have spent no time or money renovating your home.  Those are very real costs that should be factored in.
2) Mortgage deduction works for some but not for everyone. It's less useful when the interest rate is low (like now), the principle balance is low (e.g. towards the latter half of the loan).  Many find they only save a few hundred over the standardize deduction.  Hopefully you benefit more
3) agreed - if you couldn't have otherwise invested the money this is all just a thought exercise.  The aim of which is to answer the question "how good of an investment has my home been."  To that end comparing it to other metrics (SP500, bonds, savings account) can still be a useful yardstick.  It doesn't change anything but it gives a frame of reference.

louloulou

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Re: How much is too much for a house?
« Reply #51 on: April 22, 2015, 04:06:35 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.

Not everywhere is like America though. In my country, this is just the reality. Even in lowest LCOL areas, medican house cost= 3x median income. But people living there for the most part would earn less as there are just not the jobs.  To get a higher income, you would need to move to the big cities where median house price = 12x median income. It is a real issue here. The reality for many is that they will rent for life.


Mrkineticz

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Re: How much is too much for a house?
« Reply #52 on: April 22, 2015, 04:43:40 PM »
im in the same predicament as the OP. One thing I did was use my fiances credit by herself and was approved for a 300k house by herself. Knowing if i put my name on the house with her we would be approved for 500k easily. so by using only one persons credit we are in a way stopped at 300k to buy a house! try that if u can

Ricky

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Re: How much is too much for a house?
« Reply #53 on: April 22, 2015, 09:01:15 PM »
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.

This is what I don't understand. A lot of people on these forums seem to be able to buy within the 0.5-2x income range. With the median American income at ~$55k and probably the average salary here of $100k, that is anywhere from a ~$25k-$200k house. where are you finding these cheap quality homes!?

Of course, in your particular case, you may make well above six figures, but I remember another thread where so many were saying they had homes no more than 2x their income.

nereo

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Re: How much is too much for a house?
« Reply #54 on: April 23, 2015, 05:13:54 AM »

This is what I don't understand. A lot of people on these forums seem to be able to buy within the 0.5-2x income range. With the median American income at ~$55k and probably the average salary here of $100k, that is anywhere from a ~$25k-$200k house. where are you finding these cheap quality homes!?

I've had a similar question.  We make well below the $55k threshold yet we decided to purchase a home that's about 4x our annual income.  We were aided by having a large down payment and extensive savings but the bottom line for us was we couldn't find anything to rent that was even close to what our current mortgage payment are.  Our housing portion of our budget is a larger percentage than I'd like it to be, but it would be the same (actually worse) if we were renting in this area.  Shrug.
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badger1988

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Re: How much is too much for a house?
« Reply #55 on: April 23, 2015, 05:58:40 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.

This is what I don't understand. A lot of people on these forums seem to be able to buy within the 0.5-2x income range. With the median American income at ~$55k and probably the average salary here of $100k, that is anywhere from a ~$25k-$200k house. where are you finding these cheap quality homes!?

Of course, in your particular case, you may make well above six figures, but I remember another thread where so many were saying they had homes no more than 2x their income.

Zillow http://www.zillow.com/home-values/ says that the median sale price for all of the United States is currently at 207k (up from 152K in 2012). So roughly half of all the houses sold in the U.S. are less expensive than the 200K upper end of the range you gave.

ShoulderThingThatGoesUp

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Re: How much is too much for a house?
« Reply #56 on: April 23, 2015, 06:19:55 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.

This is what I don't understand. A lot of people on these forums seem to be able to buy within the 0.5-2x income range. With the median American income at ~$55k and probably the average salary here of $100k, that is anywhere from a ~$25k-$200k house. where are you finding these cheap quality homes!?

Of course, in your particular case, you may make well above six figures, but I remember another thread where so many were saying they had homes no more than 2x their income.

There are lots of these. Random example for my county. Built in 1992, no HOA, right around $100/sf. One of the best school districts in the state.

Lots of value in small metro areas if you can find a job.

nereo

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Re: How much is too much for a house?
« Reply #57 on: April 23, 2015, 06:26:00 AM »

Zillow http://www.zillow.com/home-values/ says that the median sale price for all of the United States is currently at 207k (up from 152K in 2012). So roughly half of all the houses sold in the U.S. are less expensive than the 200K upper end of the range you gave.

Sure, but ignoring Zillow's flaws, what matters isn't the median price of a home across all of the US (which includes lots and lots of very cheap rural houses), but what the price is for the area where you live and work.  If you make the median salary in a more urban/suburban area with higher home prices, it doesn't matter that you could buy a home 200 miles away.  Likewise, if renting is considerably more expensive than mortgage payments, it may make sense to buy even if you are above that 2x threshold, especially if you plan on living there for several years.
EDIT:  To put it more succinctly, there's a correlation between median home prices in an area and median salaries.
« Last Edit: April 23, 2015, 07:03:13 AM by nereo »

cynthia1848

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Re: How much is too much for a house?
« Reply #58 on: April 23, 2015, 07:14:56 AM »

1) True, you would have no equity if you rented.  But for the same price you would have spent no time or money renovating your home.  Those are very real costs that should be factored in.
2) Mortgage deduction works for some but not for everyone. It's less useful when the interest rate is low (like now), the principle balance is low (e.g. towards the latter half of the loan).  Many find they only save a few hundred over the standardize deduction.  Hopefully you benefit more

#1.  Very true - I think for those of us (MMM included) who like working on homes the time spent feels more like leisure than work.

#2.  When you get into the high dollar values for income and deductions, the deduction available is much higher.  Off the top of my head, I think the first few years we were deducting around $35-$40K in mortgage interest.

zurich78

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Re: How much is too much for a house?
« Reply #59 on: April 23, 2015, 08:44:22 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.

I think that is a good secondary metric.  For me, it still boils down to the price/value.  If you can get lucky and score a good deal on a bigger home at a small home price in the same neighborhood, I think one should do it if the upside has a higher ceiling and the worst case scenario is essentially the same.

xenon5

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Re: How much is too much for a house?
« Reply #60 on: April 23, 2015, 07:32:32 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.

But there are other factors that affect the rent vs mortgage payment ratio.

1)The absolute cost of property tax goes up over time, and the % can also go up if your city runs into budget troubles
2)If you live in a condo/co-op, HOA costs also go up over time and the association can also run into trouble.  So that's 1-3 budgets (city, state, HOA) that you have little control over directly influencing your costs.
3)All maintenance costs and utilities are your responsibility (in my area, heat and water is usually included in rent).  Maintenance costs also go up over time.
4)Transaction costs are high on buying and selling, so if you need to leave sooner than expected, you can end up with 0 or negative total return
5)A mortgage is a bigger commitment than a rental agreement.  Selling can take months and renting out takes work.  If you didn't buy with renting out in mind, it could be a lousy rental.
6)You take on the risk of the house losing value over time.  If the house loses 50% of its value, you lose out significantly.   See Detroit.
7)Some areas have rent control that indexes the max annual rent increases to inflation.  Such guarantees for homeowner taxes/maintenance are pretty rare.

There are plenty of factors influencing the buy/rent decision.  My point is that $1000/month of mortgage isn't automatically better than $1000/month rent for an equivalent home.  If anything the mortgage needs to be less than the rent to fairly compensate you for the extra risk you're taking on and pay for maintenance.
« Last Edit: April 23, 2015, 07:49:39 PM by xenon5 »

Abe

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Re: How much is too much for a house?
« Reply #61 on: April 26, 2015, 09:26:04 AM »
For people living in the US who are in northern California or NYC, is your decision to live there mostly because that's where the jobs in your field are, or quality of life? It seems they are one of the few areas in the country where the cost of housing has far exceeded the earnings potential. The cost of housing is just so much, regardless of income level, that I would be reluctant to live there unless my job was incredibly secure. It may seem reasonable to spend $800k on a house when you are earning well, but just paying the taxes on that would take a big, non-recoverable chunk out of a paycheck of a median wage earner. It seems that anywhere else in the US you can find an affordable house for a median wage earner near a large city, depending on your tolerance for a commute.

nereo

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Re: How much is too much for a house?
« Reply #62 on: April 26, 2015, 11:25:54 AM »
For people living in the US who are in northern California or NYC, is your decision to live there mostly because that's where the jobs in your field are, or quality of life? It seems they are one of the few areas in the country where the cost of housing has far exceeded the earnings potential....
I won't pretend to answer for all 35 million Californians, but I lived there for a decade.  Home ownership was never in the realm of possibilities, but I still loved living there.  I have family there, a lot of friends and a job I loved.  I enjoyed the culture, the food and the physical location.  Even though my current location makes much more financial sense (for example, my mortgage is about half what a one-bedroom apartment cost me in California), I still miss living there.

Sometimes it's about more than where the most financially optimal place to live is.

Bob W

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Re: How much is too much for a house?
« Reply #63 on: April 26, 2015, 12:10:31 PM »
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.
. Like your thinking.  Our home was 1 times our annual as well.   I think that is a reasonable number for someone leveraging with a mortgage.   I think most people won't like buying a 100k house on 100k income in most areas but it can be done.   Or just save more.  Leveraging at 80% is not a good idea if you don't have the cash to back it up.

Rein1987

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Re: How much is too much for a house?
« Reply #64 on: April 27, 2015, 12:13:08 PM »
For people living in the US who are in northern California or NYC, is your decision to live there mostly because that's where the jobs in your field are, or quality of life? It seems they are one of the few areas in the country where the cost of housing has far exceeded the earnings potential. The cost of housing is just so much, regardless of income level, that I would be reluctant to live there unless my job was incredibly secure. It may seem reasonable to spend $800k on a house when you are earning well, but just paying the taxes on that would take a big, non-recoverable chunk out of a paycheck of a median wage earner. It seems that anywhere else in the US you can find an affordable house for a median wage earner near a large city, depending on your tolerance for a commute.

I'd like to mention two things as a bay area resident. First, it's not like cost of housing far exceed earning potentials..In fact, there's too much earning potential recent years. New grad in high tech company can easily get $100k or more salary. If you are willing to take some risk, a startup can be bought by large company or go IPO in a few years, making you multi-millionaire by 30 (more than 10% of my classmates get to a million net worth now, by 30.). Because a lot of people have too much money to spend, which makes other professions easier to get rich too. For example, in other areas, piano teacher might be $40 a hour in other area but in the bay area I know a few charge more than $100 a hour, with more than 50 students. By simple math, I guess she can make 20k a month gross, or at least 10k. In other words, bay area is a heaven for people who are willing to take adventure and seek wealth.

Also, home owner in the bay area can be those who lived here for a long time. Because of prop 13, their expense on the house is really low. New home owners are not likely to be medium wage earners. New home owners I know either makes top 5% or got more than 200k or even 1 million support from parents.

The reason I choose to live here is: 1. too much earning potentials which might make me FIRE earlier. 2. My home country's housing price is way more expensive than here (1.5 million USD for a 1500sqft condo, much less income level). At least here houses here are more "affordable" in my mind.

nereo

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Re: How much is too much for a house?
« Reply #65 on: April 27, 2015, 12:30:53 PM »
For people living in the US who are in northern California or NYC, is your decision to live there mostly because that's where the jobs in your field are, or quality of life? It seems they are one of the few areas in the country where the cost of housing has far exceeded the earnings potential. The cost of housing is just so much, regardless of income level, that I would be reluctant to live there unless my job was incredibly secure. It may seem reasonable to spend $800k on a house when you are earning well, but just paying the taxes on that would take a big, non-recoverable chunk out of a paycheck of a median wage earner. It seems that anywhere else in the US you can find an affordable house for a median wage earner near a large city, depending on your tolerance for a commute.

I'd like to mention two things as a bay area resident. First, it's not like cost of housing far exceed earning potentials..In fact, there's too much earning potential recent years. New grad in high tech company can easily get $100k or more salary. 
I'll just chime in with an example - my niece's kindergarden teacher has a salary of $68k and spends her summer teaching surfing (hey, it's California) to have a gross-income around $100k.  This is in the SF Bay Area.  Not bad for someone in her late 20s without an advanced degree.

Quote
Also, home owner in the bay area can be those who lived here for a long time. Because of prop 13, their expense on the house is really low.
Ah Prop 13... has there ever been a better-intentioned piece of legislation with such unintended consequences?

Quote

2. My home country's housing price is way more expensive than here (1.5 million USD for a 1500sqft condo, much less income level). At least here houses here are more "affordable" in my mind.
Just curious here - what is your home country?  Taking a stab in the dark here... Iceland?

myrax

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Re: How much is too much for a house?
« Reply #66 on: April 27, 2015, 12:47:10 PM »
The NY Times Rent vs. Buy calculator can help you calculate whether renting or buying is a better option, though it doesn't take into account time spent on repairs: http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html


slugline

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Re: How much is too much for a house?
« Reply #67 on: April 27, 2015, 01:26:27 PM »
My point is that $1000/month of mortgage isn't automatically better than $1000/month rent for an equivalent home.  If anything the mortgage needs to be less than the rent to fairly compensate you for the extra risk you're taking on and pay for maintenance.

+1 I view ownership as insourcing the tasks of landlord and property manager. So I think it has to cost less than renting to be financially advantageous, really, so you can "pay yourself."

mm1970

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Re: How much is too much for a house?
« Reply #68 on: April 27, 2015, 01:34:41 PM »
For people living in the US who are in northern California or NYC, is your decision to live there mostly because that's where the jobs in your field are, or quality of life? It seems they are one of the few areas in the country where the cost of housing has far exceeded the earnings potential. The cost of housing is just so much, regardless of income level, that I would be reluctant to live there unless my job was incredibly secure. It may seem reasonable to spend $800k on a house when you are earning well, but just paying the taxes on that would take a big, non-recoverable chunk out of a paycheck of a median wage earner. It seems that anywhere else in the US you can find an affordable house for a median wage earner near a large city, depending on your tolerance for a commute.
I live in Santa Barbara, so...similar to NorCal in many ways.

In the Bay Area, what I've seen is booms and busts.  For example, there have been times in the last decade or so where the typical Bay Area house was actually cheaper than the Santa Barbara equivalent.  The difference is that now, that same house is $500k more than it was a decade ago, because of the boom cycle.

Santa Barbara is a really nice place to live. My kids were born here, we both have jobs here, our friends are here - we came and just never left.  The traffic isn't bad like the Bay Area.

But the Bay Area has more jobs, more competition.  During the booms, people in my industry could go across the street and get a big raise. So if you were already living there and had a house or condo, you could save a ton of money.  That gives you more stability if there are more jobs.  (Santa Barbara doesn't have quite the job market.)

At this point, I think it would be difficult for us to find jobs in our areas of expertise in the same location, unless it was the Bay Area (I don't want to go there).  So, there aren't a huge number of places that have semiconductors, and those who do might not have jobs for my husband.  Regardless, he makes more money.  If we were to move, it would be for his job.  Well the easiest place to go would be the DC area (his company has an office there), but that's hardly a huge step up.  And I could get *a job* there, probably, but it would be more of a struggle, and I'd likely have to have an awful commute, so - just no.

What else is there?  I'd hate to move "somewhere else" and leave my friends and my kids' friends, unless it meant we were going to be near family. No jobs for either of us near my family.  There *are* jobs near his family - a house "our size and age" in his home town is $110k a year, vs. the $750k+ it is where we are now.  No brainer, right?  Well, it's effing cold there and they've had awful winters.  And he doesn't want to move back home.

Anyway, the whole "retire to a nice beach location" - I just figure that our overpriced "starter home" in SB is going to also be our "retirement home", assuming we don't run out of water between now and then.

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Re: How much is too much for a house?
« Reply #69 on: April 27, 2015, 01:44:20 PM »
My house cost 2x our annual salary.  It is way too much house for us- right now it has 3 unused rooms.  But it was impossible to find our desired feature (room for my husband's workshop) in a smaller house

However, I'm a complete homebody.  I don't regret getting a bigger house, even if it costs more than our last smaller one because I am happier at home, which means I have no desire to go out anymore. I don't need to go out to eat because it is fun to cook in the beautiful kitchen rather than just being a utilitarian place to get it done. I don't feel the need to go out and wander the mall, because just lazing around the house is fulfilling to me because it is a beautiful space.

And I am happier with the neighbors. It is difficult to put a price on great neighbors.  This is a million times improvement of our old house.

And it is single family. In our area zero lots are so common. From starter homes to 500k homes- people share walls.  My house costs significantly less than 500k. I have no understanding of why people buy those. (There is no condo association that takes care of the yard/pool/snow removal etc- if there was that would make more sense.)

If we have kids, our house will make more sense. But even without them, I feel silly with the wasted space, but not financially.