Looking for a smart way to save money on a home purchase? You might be surprised to learn that buying a more expensive house could be the answer. Sounds strange, right? Let me break it down for you.
Back in late 2023, my family and I bought a pricier home, and it’s been a bit of a financial squeeze. But instead of dwelling on the downsides, I’ve started to see the benefits of owning an expensive home, thanks to some enlightening chats with real estate agents.
Fast forward to 2024, and we’re seeing a resurgence of bidding wars for homes, driven by a strong job market, a booming economy, pent-up demand, low mortgage rates, and skyrocketing stock prices. The downside? It’s getting harder to snag a good deal on a house. As people’s wealth grows, they’re splashing out on big-ticket items like cars and houses.
The Trick: Avoid Median-Priced Homes
If you’re looking to save money, you might want to avoid buying a home that’s priced around the median for your city. Instead, aim for what I call the "frenzy zone" – homes priced up to 150% of the median. Once you start looking at homes priced 50% higher than the median, demand drops off, and you can find better deals. On the flip side, the closer you get to the median price or below, the harder it is to get a good deal because there are more people who can afford homes in this range.
To give you an idea, let’s look at the US average. You’d need a household income of $106,536 to buy a median-priced home of around $420,000. To escape the frenzy zone and save money, you’d need to look at homes priced above $620,000, which would require an income of $160,000 or more, or a larger down payment.
The San Francisco Example
While I can’t give you a nationwide picture, I can share some insights from the west side of San Francisco. Homes priced at or below the median (under $1.7 million) are in high demand, thanks in part to the strength of the tech and AI sectors. Many homes are attracting multiple offers and selling well above the asking price.
Why Median-Priced Homes Cost More Per Square Foot
While median-priced homes are cheaper in absolute terms compared to luxury properties, they often cost more on a price-per-square-foot basis. For example, in San Francisco, the price per square foot for median-priced homes is 20% to 32% higher than the city’s median price per square foot.
The reason? People are willing to pay more for necessities and less for luxuries. The first bathroom in a home is more valuable than the eighth one, and the same goes for bedrooms. Also, the most expensive parts of a house per square foot are kitchens and bathrooms. If the house is smaller, these areas make up a larger proportion of the total square footage, pushing up the price per square foot.
Higher Rental Returns with Smaller Homes
While smaller homes cost more per square foot to buy, they often yield higher rental returns. Plus, there’s usually more investor demand for smaller properties, which helps to keep their prices high.
The Benefits of Buying More Expensive Homes
By focusing on homes priced 50% or more above the median, you’re likely to face less competition and a lower risk of getting into a bidding war. Plus, these higher-priced homes often sell for a lower price per square foot, potentially saving you money in the long run. Just make sure you don’t stretch your finances too thin.
A Strong Middle Class
You might think that higher mortgage rates would hit median income earners the hardest, as they typically need to borrow the most and therefore pay the highest mortgage interest expenses. However, the strong demand for median-priced homes in San Francisco, and likely in other cities too, suggests otherwise.
This demand indicates that the median household may be more financially healthy than we realize. It also suggests that there’s increasing upward pricing pressure on homes in the next price bracket up.
The Right Price Per Square Foot Is Subjective
The price per square foot of a house depends on factors like location, finishes, age, architectural style, view, and lot size. The better these factors are, the more you’d be willing to pay per square foot.
Finding Better Value in an Expensive House
Despite paying a lot for my new home, I feel like I got a great deal compared to the market. I didn’t get into a bidding war to buy my home. Instead, I waited for two previous offers to fall through, then waited another year before making my own offer, which was 14% below the asking price.
Your Turn
Have you ever felt that buying a more expensive home made your life more affordable? Why don’t more people aim for higher-priced homes to find better deals? I’d love to hear about how median-priced homes are selling in your city. And if you’re interested in passive real estate investment, you might want to check out Fundrise, which manages over $3.3 billion and focuses mainly on residential and industrial real estate investments in the Sunbelt region.
