Living The Semi-Retired Life: Preventing A Self-Made Financial Disaster On Housing

Guest Post: How to Be Miserable and Broke in 1 Easy Step

Believe it or not, one of my favorite writers on housing IS a homeowner.

Ben Le Fort

, who publishes the

Making of a Millionaire

newsletter on Substack and a Medium publication of the same name, owns a home in one of Canada’s most expensive real estate markets. While things have worked out well for Ben, he often cautions against potential pitfalls of home ownership.

Today, we give you a taste of Ben’s Substack with one of my favorite posts where Ben talks about a move many homeowners make that can derail the road to financial freedom.

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How to Be Miserable and Broke in 1 Easy Step

Photo by Dillon Kydd on Unsplash

Here’s the worst real estate advice I have received:

“Now that you’re making more money, you should buy your dream house.”

In a previous post, I debunked the silly notion that a house is not an asset.

Homeownership might be the most complicated decision in personal finance because a home is both an asset and an expense—and in many cases, it’s our largest asset and expense.

Choosing where to live is the fork in the road separating financial hell from financial flexibility and, eventually, freedom.

In addition to being our biggest expense, housing is a fixed expense, and due to our emotional attachments to our homes, it’s hard to make a change if you experience buyer’s remorse.

This is particularly true when it comes to “downsizing.” Most of us would rather face financial ruin than lose the status of our big houses or luxury apartments.

In this edition of Calling Financial Bull$hit, I explain why our need for bigger and bigger homes is driven by envy and how it’s keeping millions of people from achieving financial freedom or even financial security.

We have bigger homes and fewer people living in them

When I drive by the older neighborhoods in my city, I see many tiny bungalows built after World War 2. When I drive by the new subdivisions, I see nothing but a sea of McMansions.

This anecdotal evidence is backed up by the reality of the housing market in North America. We continue to build bigger houses even though fewer people live in them.

Here is a fact that might blow your mind. Adjusting for inflation, the average housing cost per square foot has only increased by 4.6% in the U.S. between 1973–2015.

It turns out we want to live in bigger houses.

• In 1973 the average house size was 1,660 square feet

• In 2015, the average house size was 2,687 square feet

The average home was 62% bigger in 2015 than it was in 1973. This becomes laughable when we consider that we have fewer people occupying these ever-growing houses.

• In 1971 three people occupied each house

• In 2015 only 2.5 people occupied each house

We have an increasing population, demand for bigger houses, and fewer people occupying each house.

And for some reason, we remain mystified that the price of housing has exploded.

One of the biggest problems with the housing market is our demand for such big houses. We don’t have enough usable land to accommodate a 3,000-square-foot detached house for every family.

If we accept that reality, the logical question is, what is causing the demand for increasingly large houses?

One reason is our envious nature and our need to flex our economic status.

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The McMansion effect

A 2019 paper by Clement Bellet titled “The McMansion Effect: Top House Size and Positional Externalities in U.S. Suburbs” offers an explanation as to why we have been stuck in this endless loop of building bigger and bigger houses.

Bellet combined data from the American Housing Survey and geolocalized data from more than three million suburban houses. When someone builds a big house, it sets off a chain reaction of the other homeowners in the neighborhood wanting a bigger house too, which they referred to as “the McMansion effect.”

The McMansion effect was strongest in homeowners who (previously) had the biggest houses in the neighborhood. Then, someone builds a new McMansion, and their house becomes the biggest one on the block. Suddenly, the existing homeowners don’t feel so great about their house, which now feels small in comparison.

So, what do the existing homeowners do?

You guessed it; they upscale their houses.

They either bought a new, bigger house or built an addition to their current home.

“I see your McMansion and raise you a new floor onto my house.”

A bigger house can strip all flexibility out of our life

I’ve written in detail why upsizing your house is one of the worst financial decisions you can make.

A bigger home means:

• A bigger mortgage

• Higher property taxes

• Higher utility bills

• Increased maintenance costs.

• More money spent on furniture

In short, upscaling your house takes your biggest fixed cost and makes it even bigger.

A bigger house is a financial anchor tied around your feet for two reasons.

First, it increases the floor on the minimum amount of money you need to make to survive, which greatly reduces financial flexibility.

Maybe you are feeling burnout, and you want to switch from your current high-stress job to a slower pace job that makes less money but is a better fit for you right now.

Good luck making that math work if you just decided to double the money you spend on housing.

Second, it leaves less (if any) money to invest and build future financial freedom.

Money is a zero-sum game unless you get a promotion or pick up a side hustle.

Every extra dollar you spend on your new big house is a dollar that is not invested. The opportunity cost of spending more on housing is less wealth and, as a result, a long road to financial freedom.

The saddest part of the McMansion effect

Clearly, you give up a lot to move into a big house, so owning a McMansion must make people pretty happy, right?

Wrong.

Bellet found that the neighbors who upscaled their homes after the McMansion was built reported only a temporary increase in happiness.

Eventually, you get used to living in a bigger house, which doesn’t make you much happier than before.

No more happiness and less financial flexibility. If that sounds like a terrible trade-off, trust your instincts.

The most important thing to remember about money and happiness is that money buys happiness, but it does so indirectly.

Having more money buys us more control over our lives. It’s this feeling of control and freedom that makes us happy.

The opposite is also true. The more we increase our fixed expenses, the less control, and freedom we have. This makes us feel like we are “stuck,” which is a very unpleasant feeling.

One of the best financial decisions you can make is to learn to be happy in the home you live in right now.

Next time someone builds a McMansion down the street from you, understand that you will probably feel envious, and that is a perfectly human response.

Try and reframe the situation in your mind. Instead of feeling bad that you have a smaller house, feel good that you have lower fixed costs, which means you have an easier road to financial freedom and control over your life.

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This post originally appeared in Ben Le Fort’s Making of a Millionaire Substack.

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