With the recent extension of the homebuyers tax credit and expansion to include a current homeowner tax credit, there is probably going to be a lot of people in the market for a new house. These credits are yet another way people can benefit from economic weakness. If you are in the market for a new house you might want to question one piece of conventional wisdom.
It is not uncommon to hear real estate agents or other financial professionals advise that you avoid owning the most expensive home on your block. The theory is that people who are looking for a house that costs $200,000 won’t be looking in a neighborhood where the average house is $180,000. Therefore, you will not be able to sell the house for what it is worth – $200,000.
2 Reasons Why You Should Buy the Most Expensive House in Your Neighborhood
The Value of the Home Reflects the Purchase Price
Assuming you are not the first owner of the home (who theoretically paid what the home was worth) you should be able to buy the home for less than it is ‘worth’. Let’s assume that the real estate professionals are right and this particular home would sell for $200,000 if it was in a nicer neighborhood. Still, you can only sell it for $180,000 in this neighborhood. This means you have bought a more valuable home for less than is is ‘worth’. So it will not be a loss when you sell a more valuable home for less than it is ‘worth’. While you live in the home you can enjoy what is possibly a bigger house for less money than if you bought it elsewhere. Sounds good to me. But what about when you go to resell it? Yes, when you sell you might get less than ‘it is worth’, but just remember you didn’t pay for what it is ‘worth’ in the first place.
Peer Pressure: Staying Down With the Joneses
If you have ever lived in a community where the Joneses have less than you, you know it is much easier (and financially healthier) to keep down with the Joneses than to try and keep up with them.
A recent Dear Abby column bore the title “Not keeping up with Joneses has hardships.” A lady from Ohio wrote expressing her concern about trying to keep up with her more affluent neighbors. Abby wrote back and told the lady to suck it up (I think she used the phrase work on your self-esteem). A follow-up letter was written by a lady who signed her letter “Gets It”. She wrote:
I don’t think you fully understand what it’s like to live this way [in a community where you don’t have as much as your neighbors]. We’re the underdogs in a snooty community. Reevaluating priorities and working on self-esteem are important. But they do not negate how we feel when our kids ask, “Why don’t we have a yard like everyone else?” Or when the PTA moms snub us because of where we live.” Wyoming Tribune, Tuesday, July 21, 2009.
Living in a neighborhood you can’t afford (as determined by your budget category percentages) means you will plant more flowers than you can afford, pay a lawn service company more than you have, and buy extra big birthday gifts just to appear wealthy. For this reason, living in a more expensive home in a cheaper neighborhood could just save you money in the long run. There’s just not so much pressure from the Joneses.
It is much easier and financially healthier to keep down with the Joneses than to try and keep up with them.
If you are going to change how you live, shop, conduct yourself, care for your property, and spend money just because of your neighbors, then you should buy a home in a cheaper neighborhood. Envy is a very costly vice. Move to a place where you are at the top (economically) of your neighborhood, not the bottom. It removes all the pressure to keep up.
Need Proof? Remember the College Days
Remember back when you were a broke college student? Because I did an 84 hour Master’s Degree those school years lasted about seven years. In college, when my wife and I were first married we lived in a smoke infested apartment in what we called the “ghetto” (York, Nebraska does not have any official ghettos, but if it did, this would be one!). The apartment was dysfunctional in many ways. We were unable to control our own temperature and our oven was too small to hold our pans. But, being full time students it was what we could afford. Every Tuesday we would traipse down to Wendy’s for .99 cent all you can eat chili. The middle class got fries and the upper-class topped up with a coke and fries in addition to the chili. In that college community no one had money so no one suggested anything extravagant. That is the value of living in a community with a similar standard of living – the pressure from peers is removed. I would always rather be a better off person in the midst of the poor than to be the poor person in the midst of the wealthy.
How has your choice of neighborhood impacted your spending?