A Free House Can Be Too Expensive

A recent post at PFAdvice on 10 Hidden Costs People Fail to Consider reminded me of the dangers of determining affordability of a home by just focusing on the mortgage payments which have been faciliated by easy credit, low interest rates, and "innovations" like interest-only mortgages. Even if a house is affordable--that is, the bank says it will lend you the money--doesn't mean that it's not too expensive for you. In addition to costs like maintenance, there's also the cost of furnishing, upkeep, etc. which tend to go up with the price of the home. Often overlooked, there's also the additional cost of ratcheting up our lifestyle.

An extreme example of this is a family who won a gigantic, well-equipped, house, plus $250,000 and a big SUV, in the HGTV Dream Home Sweepstakes. An article in Money magazine describes the 6,000 square foot house:

Each feature seemed more fantastic than the one before: the massive great room with its 30-foot ceilings and six-foot-wide fireplace; the master bedroom suite--in effect, a separate cottage connected to the main house by a breezeway, replete with a hot tub; the indoor elevator and the outdoor pool and fireplace; the guest house by the lake...The house is really three structures: a main building, a separate master bedroom suite and a lakefront guest cottage. Some 550 tons of limestone went into the construction of the main house, much of it used to build the 30-foot fireplace in the great room. Ten cedar trees were used to support the beamed ceiling, the trunks shaved down to square posts around the perimeter. Six sets of glass french doors let in sweeping views of the yard and lake.

You get the picture. The problem is that even though they were given the house and $250,000, they still can't afford it.

Upkeep is $2,900 a month. Homeowners insurance runs $7,000 annually. The insurance and gas bill on the Cruz fleet (they own seven vehicles, including the SUV they won in the contest) costs $1,000 a month...Then there are the incidentals. Fixing up the family boat, which got little use in Illinois, cost $11,000. A dog run for their three dogs was $6,000. Between family and friends eager to see the Dream Home, the Cruzes have company nearly every weekend. The tab: about $1,000 a pop. They've donated $40,000 to charity. And then there have been the splurges--$5,000 on Christmas presents; $2,000 for scuba lessons; an $1,800 go-kart.

So now, after a year in the big house, they're down to $36,000 and have put the home on the market. This example may be extreme, but it does remind us that we also have to factor in the associated costs (like upkeep, maintenance, etc.) AND the other costs that are rarely factored into the equation: lifestyle costs. Call it the "keeping up with the Jones'" factor.

We tend to judge our standard of living in comparison with our peers (such as our neighbors). If we move into a neighborhood that we can barely afford we're going to subconsciously feel the need to spend even more to have the same type of vacations as our neighbors or drive the same types of cars. The end result: we're either less happy or have less money, or both. If we don't factor in all of these costs, even a free house can be too expensive.