I've seen a lot of articles in the news about how higher priced homes are a great bargain. This article in Yahoo Finance discusses this trend and points out how higher end homes have fallen in price-per-square-foot more than any other segment of the market during the crash.
A good friend is beginning to think about getting in the housing market, and are considering higher priced property. The properties that they are looking would have been unaffordable even a couple of years ago, but have now fallen to where they are considering a move to a higher priced property.
They have their finances in order so I'm confident that they would be able to afford the down payment and monthly payments, but it's still worth considering that even though you can afford a higher priced property, should you?
Here are a few things that I think come to mind that should be considered when you look at the type of property you might buy:
- Down payment and monthly payment – Make sure that you can afford both the down payment and monthly payment
- Taxes – Even if your dream home is way lower in price, chances are the taxes to support that house may not have dropped. Make sure to factor the tax payments in your budget
- Cash flow – Even if you can afford your dream home, make sure it's not going to put you in a cash poor position. There is good, free budgeting software available that can help you make sure things are on track, especially when that time comes to e-file your tax returns. If you find yourself funneling every dollar into the payments, you might not end up enjoying your dream home as much as you anticipated.
- Flexibility – Make sure that your payments leave flexibility both for things in your control and out of your control. If you'd be in trouble if you or your spouse lost your job, you might want to re-consider. If you might consider going to a single-income household, make sure you're prepared for this up front.
- Utilities – A bigger house is going to use more energy. There are more cubic yards to heat, more lights to keep on, perhaps more yard to water and keep up.
- Upkeep – Any house is going to require upkeep. Things will wear down or break. When it comes time to put on that new roof and replace that carpeting, realize that those things (and many others) will cost a lot more than a more modest house.
- Opportunity cost – Any extra dollar you spend on your home is money that you can't use elsewhere. Make sure you understand and are prepared for that. You might be standing on the sidelines while people you know are investing in something paying a big return, unable to do so because you don't have the cash.
Each person and situation is different. I'm not saying that taking advantage of the real estate market to buy a nice home is right or wrong. That decision varies with each person and there's a lot of gray area. All I'm recommending is to think about things other than price when making your decision.