Budget is Not a Four-Letter Word, especially when buying a house

Around 2004, our house hunt was going poorly. We were looking for a moderate, middle-class house with a larger garage - or room to add a larger garage. We found a candidate in our price range, just a few blocks from our current home. As we toured the house, we noticed cracks in the walls - the entire center of the house was sinking. That was pretty typical of what we were finding in our price range. So we raised our price range. Then we raised it again. Eventually, we had raised our price range so high that there was not a house in the county that seemed worth the money - but there WAS a house just a couple hundred thousand more that we really liked.


How do you decide how much to spend on a house? We weren't comfortable having a real estate agent make such a big decision for us. I asked our banker what we would qualify for - she ran the application and asked how much we wanted. We didn't know, and she said she had to enter something, so I pulled a ridiculously large number out of the sky, thinking the computer would reject it and spit out the actual maximum. We qualified for the ridiculously high mortgage on a 30-year fixed rate loan. Well, great, but what do we need with such an expensive house?

Eventually, we decided to write up a budget, showing how much we were already spending on everything. We used that budget to write up a projected budget, showing how much we could spend on everything if we bought a more expensive house. In order to make the numbers work, we had to cut back on lattes and hobbies. Okay. We also had to trim our grocery budget - no problem. We had to reduce our savings rate substantially. Ouch. We had to give up 401k contributions. No way.

Voila. We now had a way to decide how much house we could comfortably afford. We put the savings and retirement contributions back into the budget. debated how many vacations and lattes we would need to feel like we weren't slaves to the house, and adjusted the mortgage figure down to accommodate what we felt was a reasonable budget for us. We saw some tempting houses, but then we looked at the budget and decided that having adequate retirement savings was far more important than having a dream house. Besides, most of the potential dream homes needed a lot of remodeling to be dreamy.

The real estate industrial complex marketers encourage a lot of emotional decision-making in the home buying process. It's easy to get caught up in the hype. But our projected budget brought us back to earth, and helped us avoid buying more house than we could comfortably afford. Unfortunately, in the midst of the housing bubble, that meant not buying any house at all. That was good for our budget, but bad for morale. Now, however, we are reaping the benefits, as Sacramento County makes the news for its high foreclosure rate, we are not one of the statistics. Several homes we considered buying in the bubble, are back on the market at $100k less - some as much as $300k less than they cost at the peak.

I would like to take a moment to thank our budget for keeping us out of trouble. I would encourage any would-be home buyer to draw up an estimated budget - including any increased utilities, insurance, and/or maintenance costs. We figured out our moving costs - including any new furniture, drapes, or remodeling we'd want for the new house. Little expenses add up - a new lawnmower, towels that match the new bathroom, blinds for the gorgeous half-circle window in the living room and extension wands for vacuuming cobwebs off the high ceiling can quickly add up to $1,000 or more. If your budget in the new house requires big changes from your current budget, you might give it a dry run - see if you can really live, happily, with cutbacks in dining out, fewer vacations, less lattes. A mortgage can be a 30-year commitment - it's important to feel comfortable that you can live with it for 30 years.