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How Much House Is Too Much House?

ESPlanner can be used to help make all kinds of lifestyle choices. Consider the following.

Chris and Alicia have just moved to Lawrence, Kansas, a university town where home prices are relatively sane. Chris and Alicia are both thirty, have two young children, and earn $50,000 each. They also contribute 3 percent of their earnings to a 401(k) and receive an employer match.

The couple has $60,000 set aside for a downpayment and wants to buy a home. Their mortgage broker assures them they can get a 30-year mortgage at 7 percent. Chris and Alicia are considering the following four houses costing $250,000 to $550,000.  

House Price $250K $350K $450K $550K
Property Taxes $900 $1330 $1710 $2090
Insurance $1000 $1200 $1400 $1600
Initial Mortgage $190K $290K $390K $490K

Chris and Alicia realize that what they can afford boils down to what they’ll have left for consumption. This is discretionary spending over and above meeting housing costs, paying taxes, making 401(k) contributions, and covering college and other special expenditures. The table shows how buying each house would affect Chris and Alicia’s living standard--consumption per person adjusted for economies in shared living.

Regardless of which house they buy, the couple is borrowing constrained; i.e., their living standard is lower when they are young and struggling with the mortgage. Which house Chris and Alicia buy makes a big difference. Buying the $550K home, for example, means a 32 percent lower living standard when young compared with buying the $250K house. After age 45, it means a 9 percent lower living standard.

Which house should Chris and Alicia buy? This depends on how much they’d love a big home versus eating out, taking vacations, buying clothes, piano lessons for the kids, etc.