Recent reports from the housing industry show that sales of homes priced at more than $750,000 are sinking, while the market for less expensive homes is getting better. This two-faced market is a lesson in the perils of buying too much home.
In fact, one can get richer faster by keeping the home purchase as modest as possible and investing the savings elsewhere. High-end homes are suffering because it’s harder and more expensive for borrowers to get “jumbo” loans, or those exceeding $417,000 to $729,750, depending on the location.
Wells Fargo (Stock Quote: WFC), for example, offers a conforming 30-year fixed loan for 5.25%, but charges 6.25% for a jumbo loan. Jumbo borrowers are often asked to make larger down payments as well. Use the shopping tool to find the best deal.
Sales of cheaper homes have been spurred by the $8,000 federal tax credit for first-time buyers. Also, the flood of foreclosures has hit the low end of the market harder, creating a lot of bargains that have spurred sales.Another likely factor: The low end of the market has more potential buyers, since wealthier buyers can cut their spending limits. At the high end there aren’t as many people to begin with, and there’s not a large pool of people who are even wealthier that can step down.
Finally, conspicuous consumption seems to be a bit passé, at least for now. People feel less need to own homes with multiple guest rooms or formal living and dining rooms that are rarely used.
Whatever the reason, choosing a more modest home generally makes sense over the long term. Home values typically rise at about 1 percentage point above the inflation rate, while stocks tend to return 6 or 7 percentage points more than inflation. By opting for a more modest home, you can build a nest egg faster, or have extra money to spend on other things.