NEW YORK (CNN/Money) - I'm considering buying a home in the Phoenix area. I can afford to spend $300,000, but for that price I'll probably get a larger house than I actually need. Do you think I'd be better off buying a smaller, less expensive house or should I buy as much as I can afford?

-- Thomas Barth, Chandler, Arizona

Back in the inflationary 1970's, the mantra spouted by builders, developers, lenders and, yes, even personal finance journalists, was to buy as much house as you could afford.

After all, a house was a terrific hedge against inflation and it seemed to make sense to put as much of your money as possible into an asset that, at the time at least, was doing much better than financial assets. And many people prospered by following this strategy.

Indeed, during big real estate runups on both coasts in the late 1980s and during the real estate boom of the past few years people who bought more house than they need seem to have done pretty well -- so far at least.

Still, I don't recommend the "buy as much housing as you can afford" strategy. I'm more of a "buy as much housing as you need" kind of guy. Here's why.

A home can certainly be a terrific investment, especially with the home-mortgage deduction and the exclusion from taxes of up to $500,000 in home-sale profits for married couples and $250,000 for singles.

It's not without risk, however. Yes, home prices have a wonderful record of going up, up, up over the long run. But that appreciation is hardly a given, especially over shorter periods (say, 10 years or less) and especially if you buy in an area where prices have zoomed upward in recent years due to frenzied demand.

In the past, hot markets on both coasts have seen prices fall 10 percent or more after big runups, and it's sometimes taken seven to 10 years for prices to regain their former peaks.

These kinds of setbacks typically occur mostly in areas where prices soar into the stratosphere because some sort of limit on the supply side -- lack of developable land, zoning restrictions, etc. -- create a speculative fever of sorts. So buyers in areas where new homes can more easily become available generally don't have to worry about boom-bust cycles as much.

But there are other risks. While a house can diversify your net worth in the sense that house prices don't move in synch with stock prices, a house is inherently an undiversified asset. You own a house in one city in one neighborhood on one block.

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In the investment world, experts warn of investors taking on "specific stock risk" in that when you own a specific stock, you are subject to the risk that something will happen to that particular company. You can diversify away that risk by assembling a portfolio of different companies in different industries.

Well, when you own a home you're in effect taking on "specific house risk." Trouble is, you can't diversify away that risk as easily as you can with stocks, unless you plan on owning a group of homes in different locations around the country.

I say all this not because I'm predicting any kind of housing crash, or for that matter even stagnation in home prices. Rather, I think it's important that people buy a home with realistic expectations.

So how does this all relate to how much house you should buy? Well, a house is kind of a hybrid asset. You buy it because it's a home -- that is, a place to live, a place to retreat to, a place to raise your family. But you also buy it because it has an investment component. You expect its value to rise and to be able to sell it at a profit.

Sometimes these two aspects of home ownership dovetail nicely. We buy a house in a nice neighborhood with decent schools that's convenient to lots of services because that makes our lives more comfortable. It also happens that a house in such an area generally has greater appreciation potential.

We have to be careful, though. Sometimes we justify a home purchase in a way that blurs these two components. We may buy a smaller house than we actually need, for example, so we can buy into a fancier neighborhood where we expect price appreciation to be higher. Conversely, another person may buy a much grander house than he or she can comfortably afford, figuring that it's a good investment.

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Clearly, there's a large range of what kind of house is "large enough," "grand enough," "in a nice enough neighborhood," etc. But I think that as individuals we each have to come to some idea of how much house is appropriate for us, given our resources and our living needs.

And if you go too far beyond some reasonable notion of what's appropriate, then it seems to me that your hybrid home/investment is falling more into the investment category.

That may be okay if you've got plenty of other assets -- stocks, bonds, mutual funds, etc. -- and you're well on your way to meeting goals such as saving in your 401(k) and other accounts for retirement, funding your kids' education and whatever.

But if you don't have a decent size diversified portfolio aside from your house and if the payments you make on a home prevent you from accumulating assets for retirement and other goals, then I'd say you're making yourself too dependent on the performance of one asset -- your home. And I don't think that's a wise financial move.

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So my advice is try to buy enough house to meet your shelter and family needs -- that is, a house large size to accommodate you and in a neighborhood you feel comfortable living in.

But make sure that the amount you're paying for that house also allows you enough financial flexibility to accumulate sufficient financial assets so your financial future doesn't hinge solely on how much your house has appreciated over the years.

Walter Updegrave is a senior editor at MONEY Magazine and is the author of "We're Not in Kansas Anymore: Strategies for Retiring Rich in a Totally Changed World."