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?
We live in a neighborhood where we make more than the average. And no one knows how much we make :) It’s a nice arrangement that allows us to live the lifestyle we want without feeling like it’s necessary to keep up. And we try to be low-key, because we don’t want to be the people that others feel they have to keep up with.
I live in a small-town, and most of us here are in the lower class/middle class bracket. Sure, there are those folks who live in the “rich section” of town, but since their property taxes are sky high, I sure don’t envy them. We can barely afford to upkeep our small 1200 sq. foot house and pay the yearly taxes on it. My hubs has a full time job, but everything keeps going up and up.
Some of those in the fancy houses can hardly come up with the tax payments. Most of them have two incomes, and can barely make it. In a small town, you pretty much know what everyone else is doing and how they are doing. They bit off way more than they can chew, in my opinion.
As someone who is contemplating a move of my own now that the housing market seems to be slightly on the rebound, this is a concept that I never really considered. Although I never tend to be driven by envy, “Keeping down with the Joneses” seems to be a more appealing concept than the other way around.
This is some great food for thought
Jason @ MyMoneyMinute says
Interesting points to bring up! This was brought up in a similar way in “The Millionaire Next Door” – those on professional occupations like doctors & lawyers had a higher standard to live to (luxury car, business clothes, upper class neighborhoods, socialite functions), while the guy who owns a plumbing business doesn’t have to participate in this; rather he is almost forced the other way – to not appear too rich to his blue-collar employees. Plumbers don’t wanna see their boss in a suit driving a BMW, they want to see a pickup truck. Customers get agitated too, because they would feel overcharged for the service if their plumber was big-timing them.
I never thought of these advantages in this way, but will surely keep them in mind when we buy again, which will be soon!
Jason @ MyMoneyMinute´s last post ..Your Financial Goals: Review & Renew!
Steve @ MyWifeQuitHerJob says
That is an interesting way of thinking about it. My wife and I just purchased a house and ended up with an average house in a somewhat pricier neighborhood. Most of the nice houses that were in the lesser neighborhood were way overpriced and just sitting on the market.
Steve @ MyWifeQuitHerJob´s last post ..Breaking Down The 100K A Year Barrier With Your Small Business
This is the first Christian PF blog where buying the Mcmansion for the Mcchristian is condoned, of all things. I am all for getting the best school and safest neighborhood your finances can afford, but the house itself becoming the loved family home should be the goal–not the King of the Hill on the block. I am sick of Christianity trying to be “better than” .
Financial Samurai says
Hmmmm, thought provoking Craig. I would rather be the perceived poor one in the neighborhood, but secretly have a lot of money in the bank.
I am 100% for always being the underdog, and flying stealth.
Financial Samurai´s last post ..What Would You Do With $8.5 Million If You Won The WSOP?
Joe Plemon says
This is a thought provoking post, but because keeping up with the Joneses has never been an issue for my wife or me, I am not motivated to buy the best house in the neighborhood. i would prefer simply buying the best house I can afford, whether it is the best in the neighborhood or the worst in the neighborhood.
Joe Plemon´s last post ..Four Reasons Why Wealth Should NOT Be Your Financial Goal
Peter Anderson says
I like the idea of not keeping up with the Joneses, but to be honest, like Joe it hasn’t ever been much of an issue for me. I think i still prefer to buy a nice house that is in the low to mid-range of the neighborhood, and in a decent neighborhood that has good schools, etc.
Craig Ford says
I’m glad this post provided some good food for thought. Obviously, I had to overstate my case to make a point.
@carmen. I noticed that you have some very serious concerns about this post. First, let me remind you that I am a guest writer and so what I write does not mean that this blog – Bible Money Matters – endorses all my writings. In fact, in the comments Peter shares his thoughts regarding this post.
If I could clarify a few things I think that you might be more at peace with this post.
1. This post is not about buying a mansion. This post is not even about spending a lot of money on a house. Instead it refers to the most expensive house in the neighborhood. As A.Marie points out there are a lot of different types of neighborhoods. A person can spend $100,000 and have the most expensive or least expensive home depending on their neighborhood.
I am not advocating spending more that your budgeted for a house, but I am suggesting there are financial advantages to buying a house in a ‘lesser’ neighborhood instead of a ‘greater’. Beyond, the financial considerations each of us need to think about the type of neighborhood we want to live in.
2. The goal is not to be the king of the hill. The goal is to remove yourself from the pressure of spending more than you can afford. This allows you to focus your spending on things that really matters instead of just spending money to keep up.
3. I do live in the most expensive house in my neighborhood. My house cost me about $65,000. I don’t think any of you would call my residence a mansion.
I hope this clarifies things for you. And no, I don’t think I am better than you. Sorry if you got that impression.
@Joe and Peter. You guys are hot on the trail of the point of this post. It really is not about the house, but the neighborhood. And yes, buy the house you can afford, but I would suggest we should not be at the low economic end of your neighboorhood because you will always be spending more for community events (i.e. birthdays) because of your neighbors. As the Dear Abby quote points out, some peole really do struggle with trying to keep up with their neighbors. These are the ones who really MUST take the advice in this post.
Peter Anderson says
Point well taken. I really do enjoy the discussion that the post has provoked – great post Craig!
In my comments I guess i was speaking more to someone like myself who lives in a good neighborhood, which also happens to be affordable -and not upper class. We bought in the mid-range of the neighbhorhood home values, but at the same time the neighborhood doesn’t have a lot of the “keeping up with the joneses” spending mentality. The neighborhood is actually kind of a cookie cutter newer neighborhood where most of the homes look alike and are maintained by an association. I wonder if that discourages the gratuitous displays of wealth and spending to a degree? We also bought much less house than we could afford, so that might be part of it as well.
Joe Plemon says
I have to admit that I had never thought of “keeping down with the Jonses” before reading this post.
Our house was about the middle of the neighborhood when we bought it years ago. However, because we have improved our house more than the others around, it is probably at the top of the neighborhood now. Now I sometimes find myself wishing that our neighbors would work on keeping up with the Plemons.
Becky Rivera says
This post has me confused. I thought the goal was to buy a house that I could afford in a good neighborhood, so I could resell if necessary?
But I think the ultimate goal is to only buy a house if you can afford it with as much down payment as possible (like 100%-I can dream) in a neighborhood you feel safe in.
I just bought my first house in the town I grew up in. It is a lower middleclass neighborhood, but still with a small town safe feeling. Crime rate is very low here (town is one square mile.) I feel safe walking around town, even at night. Plus my older son rides his bike around town and to the bay (we leave very close to it) with his friends.
I feel like I paid alot for my house ($150,000) but you can not get a house in my area for less. My house is 8oo and some square feet. It will work as it is just me and my two sons (ages 11 & 6,) but still it is small.
In my town people make more than me and less, but for the most part there is not too much keeping up with the neighbors. At least if there is I don’t participate. I am just grateful to have my home (after 30 years of payments I will- we just closed last week), my health, and the ability to pay my bills (which is all because of God.)
Thanks for the blog post.
Becky Rivera´s last post ..Not even a dent
Becky Rivera says
p.s. house is in central NJ. I know in like Nebraska I can get a huge house or lots of land or something for $150,000, but I feel God wants me in NJ and He has made a way for that to be.
Becky Rivera´s last post ..Not even a dent
Credit Card Chaser says
I love the way that you flipped around the issue of the price with your first reason. I have always had somewhat of an issue with the methodology of using comparables to value real estate but great thoughts.
i still live in the university community and my spending is still so low. Makes me feel very good each time that i see that my spending is very much under control and living frugally at a young age. needless to say i normally have much more money to invest in my business. I live like this so that in the future when my networth is in the sky, i can live and go wherever i feel like without being pressured by anybody to do so
Where did my idea of a mansion come from? Oh yes, the picture right at the top of the page. The dollar amount of $65,000 for your house has nothing to do with the mentality of this article. If you lived in a tent, it would have to be the biggest and the best in your neighborhood. AKA “better than”.
Peter Anderson says
Carmen, Craig wrote the post, but since I approve articles and sometimes add photos – I added the image to the post – so I take responsibility for that. I actually took the photo recently while on vacation, and did a search of my image archive for “house” and that one came up. (It is of former President Bush’s home in Kennebunkport, Maine by the way). If that photo gave the wrong impression to the rest of the post, I apologize as I was the one who added it, not Craig.
Craig Ford says
I hoped my response would have clairified my position, but it seems as though you simply did not like this article and its content.
I would encourage you to read more of my articles as I believe that this article has left you with the wrong perception regarding my view of money. Anyone who had read even a handful of my article knows that I do not promote using money to become better than anyone.
Craig Ford´s last post ..Are Some Money Topics Unrelated to the Bible?
Very good, Peter. I love former President Bush’s mansion. In fact, if I could afford a mansion I would buy one without hesitation; once again, if I loved the house, my family loved it, the schools nearby, all the thing that make a mansion! a home. Not the biggest, baddest, most awesome mansion in the neighborhood. and that is all I have to say about this. I am sorry that this had to become so overblown. There were just certain words and phrases in this post that really rankled me and I apologize for letting it get to me. I really love the mansions-I have seen the Kennedy compound and love that too!
Craig Ford says
@Becky – I think you are asking the right question – what is the goal? Obviously the goal will differ from person to person. My goal is to make my house into a home. My goal is not to be burdened or pressured by financial decisions. I don’t want to compromize my finanical plan because someone else has certain expectations on what I do with my home or what I have in my home. Our family has made our decisions according to that goal. Everyone, however, has different goals.
There are some neighborhoods that are downright expensive. If the Homeowners association requires you to water your yard 3 times a week and you are upside down in debt you will pay the cost to water your lawn while you dig deeper and deeper in debt. I think that was a poor financial decision for that person.
I think it is dangerous when people eek into being able to afford a ‘good/better/best’ neighborhood. Then when these neighbors all decide they want to have the worlds largest Christmas light display, what are you going to do? Probably you’ll go out and drop half a grand to put lights on your house. That kind of stuff is crazy.
Personally I’d rather be in a simpler neighborhood without the contant pressure by the (apparently) wealth people around me.
Craig Ford´s last post ..Are Some Money Topics Unrelated to the Bible?
I live in a military community where the houses change owners every three years or so. I’m most worried about selling my house, and it is not easy to do so if I have the best house in the neighborhood. I live in a cookie cutter neighborhood where all the homes are the same, and the builder is still selling brand new homes. Buying a home at the top end of the spectrum or upgrading it with granite countertops, etc. is not worth it for me. I’ll never sell a house at the top end when buyers can buy a brand new home in the middle.
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We actually are in the process of buying a home (closing 12-7) and we chose to buy the smallest, least expensive home in a really nice neighborhood. Not to make any financial statement one way or the other, but to get in a good neighborhood with great schools for my kids.
I think we tend to overthink the process and worry too much about what others think. Take care of your own house and don’t overextend yourself financially and you’ll be fine.
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My husband and I have always had one of the smallest homes on the “street”. And we’ve always lived on very nice streets – we do so purposefully. We get to enjoy a very nice environment with good location and good stores – usually the neighbors are very nice and are people we have a lot in common with. We’ve never had a problem keeping up with the Jones’ cause we realize, we’re not as rich as the Jones’ (actually we probably are as rich as they are because we spend wisely). But we don’t get distracted by the things they have. This has paid dividends since we’ve had to move and have been able to sell these homes rapidly. Most recently we moved last December – our old home didn’t sell til May, but it sold, which is more than many people can say. It sold because it was a cute house in a desirable location and neighborhood (and we actually made money). If you have the biggest home on the street you may not be able to unload it as quickly and the price of the other homes will likely drive yours down, especially if anyone nearby is being foreclosed. Of course if you plan to stay put for a generation then you should be fine, but sometimes the unexpected happens and you have to unload your home quicker than you think. But the most important aspect is to buy a home you can afford – whether its the largest or the smallest on the street.
This was an interesting idea, keeping down with the joneses, but here are two thoughts.
Someone in my neighborhood bought a house about 2 months after I did. This house probably is nicer than mine, he paid $30,000 more for it. There might be a little more square footage, but the layout is basically the same. Probably an extra $120 in P&I, maybe more in taxes and insurance, and other carrying costs. That’s a consideration.
Thought #2, just because you’re in a cheap neighborhood doesn’t mean your neighbors aren’t materialistic in other ways. You’ll still see their cars and their trash and the delivery men. You could feel some pressure from their consumerism in other areas besides curb appeal.
Please, please, please–someone give me a silver lining!
Right before the housing bubble burst, we fell so madly in love with a house we blindly rushed into it. Every day since then, we’ve driven through our neighborhood and are weighed down with remorse. We own the most expensive house in the subdivision. We had it on the market all last year without a single bite. Now living in our dream house is overcast w/ a constant feeling of doom.
Has anyone else gone through this…and survived? Any advice? Any relief?!