Finding a House That Won't Destroy You
Here in Washington, spring hasn't sprung. The birds aren't singing in the trees; the sky isn't an almost impossible shade of blue; young women aren't emerging, barelegged and be-sundressed, from their winter raiment. And if a young man's fancy lightly turns anywhere, it's to the dry cleaner, who promised, but did not deliver, overnight service on his one good winter coat.
There is, however, one sign of spring in the offing: the hopeful couples trudging through the snow with a sheaf of real estate listings clutched in their mittens. Spring fever may not be upon us yet, but house fever certainly is. So if you're one of those young hopefuls, it seems like a good time to discuss how you should buy a house.
In particular: how to figure out how much you can afford, and where you can afford to live. Given that my new book is on taking risks and being willing to fail, you might think that I'd advise you to splash out a bit. But in fact, the opposite is true.
To succeed, you need to be prepared to take risks -- which means being prepared for the inevitable fact that some of your attempts will end in failure. One of the most important ways you can prepare is to minimize your financial "nut": the amount of money that you absolutely have to pay every month if you don't want scary-looking men to start repossessing your possessions.
When people end up in financial trouble, you often hear tsk-tsking about premium cable and fancy vacations. But if you talk to bankruptcy lawyers and financial counselors, that isn't the normal story you hear. You're more likely to hear about car loans, mortgages, alimony. In other words, it's not the luxury splurges that do you in -- it's the fixed expenses. That's because discretionary luxury expenses can be cut in an emergency, while the fixed payments go on and on until they empty your bank account.
So if you want to be able to fail well, the first thing you need to do when you're buying a house is to make sure it won't destroy you in the event that you become downwardly mobile. That means coming up with what you can afford before you come up with a list of things you want in a house, because if you start looking at houses first, you're going to be tempted to fudge.
There are rough guidelines that work pretty well. For example, Dave Ramsey, the financial-counseling guru, says that you shouldn't buy a house where the payment is more than 25 percent of your take-home pay. "Payment" means what the real estate experts call PITI: payment, interest, taxes and insurance. That's a good rule of thumb, but I want you to think specifically about your situation.
As I outline in my book, before we bought a house, my husband and I asked ourselves what would happen if we both lost our jobs. Obviously, we'd have to get new ones. But what if the new ones didn't pay as much? What if they paid only half as much? How much mortgage would we be able to afford?
The answer worked out to about 20 percent of our take-home pay. Only after we analyzed our finances did we start talking about what sort of house we wanted. Because we wanted something with a yard and a basement, that meant we'd be buying something less renovated, and maybe not ideally located. Then, when we had cash, we'd put money into the house without raising our monthly nut.
Would I have preferred something with a finished basement, or more retail nearby? Sure. But I'd much rather have the easy sleep that comes from knowing that we can handle the mortgage payment even if we suffer a significant setback.
And in case this sounds unduly austere, let me point out that having cut back on our house means that we can do a lot of other things. Like taking career risks. Or taking a taxi over to any of the great restaurants that aren't next door to us. Or going on vacation -- a really sweet tropical getaway is still cheaper than tacking $1,000 more a month on the mortgage would have been.
But what about schools, I hear you cry? If school district is important to you, and there aren't any good local charters, you'll need to trade off something else, like space. Or accept a longer commute. Or put the extra money that you aren't spending on mortgage payments toward parochial-school tuition.
What you should not do, however, is convince yourself that it's rational to plunge into a 30-year mortgage that is right up at the edge of your income "for the children." For one thing, parents who are constantly stressed out about money aren't good for kids either. And buying a house in a school district that's more than you can comfortably afford is also apt to push you into "consumption cascades" that you really can't afford. I'm sure you can resist the temptation to buy a BMW just because the other families on the block have one. But many of the kids' activities will be geared toward an income you don't have, which means that you'll soon be sending personal-finance columnists frantic e-mails about how you can't make ends meet because band trips cost thousands every year, and you just can't bring yourself to pull your kids out of travel soccer where all their friends are.
Everyone needs a warm, safe place to lay their head. But the rest is all incidentals. And it's no good having a place to sleep if your bills keep you awake all night.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
(Megan McArdle writes about economics, business and public policy for Bloomberg View. Follow her on Twitter at @asymmetricinfo.)
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