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Having spent years selling and appraising real estate, I’m familiar with the usual measures for valuing a house. Price per square foot, comparisons to similar properties, and the guideline of keeping housing at or below 25 percent of what a household earns are all useful.
Less formally, many of us also measure our homes against those of our neighbors. We notice whether others have more space, a newly remodeled kitchen, professional landscaping, or other high-end features. Of course, we usually have no way of knowing their income, their debt, or whether they lie awake worrying about their mortgage payments.
Comparing your house to a market, a guideline, or someone else’s property does not always have much to do with your family’s life or needs.
Here’s a different way to think about it. Total all the costs related to housing in a year—the mortgage or rent plus taxes, insurance, and upkeep. Divide that number by a single day’s earnings after taxes. The answer is roughly how many days a year you work for the roof over your head.
Here is the arithmetic for a household with take-home pay of $60,000 a year and housing costs of $18,000 a year. Divide $60,000 by 260, the typical number of workdays in a year. The result is $230 per day. Divide the $18,000 housing cost by $230, and you get 78 days, a little more than one-third of your annual workdays. This number aligns with information from Harvard’s Joint Center for Housing Studies that half of all renters and a quarter of homeowners spend 30 percent or more of their income on housing.
What Your Home’s Cost Means to You
If your number comes back higher than you expected, that is not a verdict on your judgment or a reason to think you made a mistake. Housing costs not only vary widely in different areas, but they have outrun wages for the better part of two decades. Standard well-meaning advice for years, followed by many careful purchasers, was also to buy as much house as the bank would approve.
Whatever your number is, the next step is to ponder this question: Is your home worth the amount it costs you in both money and time? This value has little to do with real estate prices; it measures what the home is worth to you and your family. The amount of money you have to spend will hopefully increase as you advance in your career. The amount of time you have to spend will stay exactly the same.
For some people, the answer might be a clear yes. One-third of your annual workdays could be a fair exchange for what is not just shelter or an asset you expect to increase in value, but is a valued space that provides a cherished home for you and your family. Others might realize they are spending time and money for extra rooms they rarely use or space that fails to meet their needs. They may start considering options like downsizing, remodeling, or relocating.
Understanding the Value of Your Home
If you are looking to buy a house, you might find it useful to do this exercise before you make an offer. How many days a year would you have to spend for that ideal location, luxury bathroom, or expansive view?
If you already own a home, the purpose of this process is not to second-guess your home-buying choices or put pressure on yourself to sell a house you love. The point is to consider the value of your living space and the price you pay for it in a personalized, emotional way. Then you can make a more conscious decision about whether to keep paying that price.
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Rick Kahler, MS, CFP®, CFT™, CeFT®, is the founder of Kahler Financial Group, a Rapid City, SD-based fee-only Registered Investment Advisor.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
