One of the issues I’m tackling in Plenty is the usual calculators on how much house people can afford. By how much I mean how many dollars, not how much square footage (I’ve been reading Sarah Susanka’s Not So Big House series lately, and interviewed her thanks to my blog readers’ recommendations … something I will cover in the near future). I think many of these calculators are probably too aggressive. Not because people can’t handle the mortgage payments they suggest, but because in the context of overall happiness, there are solid reasons you might not want to.
With low interest rates and the existence of 30-year mortgages, the temptation is always going to be to borrow more. An additional $100,000 of house involving an extra $80,000 in loan (so, say, a $300k house to a $400k house, and going from $60k down to $80k down) is roughly an extra $500 a month. That probably sounds manageable for so much more house, especially if you have that extra down payment sitting around, a thought process that continues all the way up the line. The fact that mortgage interest is generally tax deductible also tips the scales toward borrowing more.
The problem is that research keeps finding that happiness is often sparked by small, repeated, but always changing pleasures. Perhaps a lovely home can do this for us, one that embraces us as it welcomes us home at the end of the day. But the hedonic treadmill means we adapt to most things that are constants in our lives. Like our homes and cars. Vacations, travel, dinners out, decadent foods purchased whether you have a coupon or not, gifts, massages, etc., on the other hand, are a little different every time. What the mortgage calculators don’t say is that the difference between spending 25% of your income on housing and 33% is 8% to spend on other things that have a good chance of boosting your well-being more, over time, than a more expensive house.
The counter-argument is that none of these other pleasures has the potential to go up in value. Because most home purchases involve leverage, even small amounts of appreciation have you living there for free. On the other hand, I just read an article pointing out that real estate prices have declined by 60-70% in some markets. Even more modest levels of depreciation can make you take a bath. If you put 10% down and housing prices decline 10% before you’ve paid much on the principle, you’ll lose about 100% of your money. So it’s unclear what’s a reasonable assumption at this point. At least no one can take that vacation to Paris away from you.