It’s a fact of life: homes come with far more emotional weight than any other investment we make…Ever wonder how our emotions influence the homes we choose and the prices we pay? A home is a refuge from the world, a place to raise a family and, for some people, an investment they hope will go up in value down the road. We fall in love with houses in a way that we never fall in love with a portfolio of stocks and bonds.
All too often, though, we don’t realize that how we feel about homes blinds us when it comes time to buy or sell. We let our emotions blind us to cold facts about the market or the realities of ownership. Or we prioritize one set of emotional needs over others that are just strong but may not be evident at first. And ignoring them can lead us to make bad financial decisions that can affect us for decades to come.
The home-selling side of the equation brings its own set of thorny issues. Homeowners often have an overly rosy view of their home and expect it to increase in value far beyond reasonable expectations. And when they put it on the market, they often stubbornly cling to their asking price—even if it means leaving it up for sale far longer than they planned and risking the possibility of not selling it at all. Here’s a closer look at some psychological missteps that buyers and sellers often make as they wade into the housing market.
Ignoring the big picture
Home buyers are always on the lookout for features—like a longer driveway or bigger backyard—that will make them happier with their home. But people don’t realize that those changes may not make them happier with their life as a whole.
“When people move to better housing, they think they will be a lot happier overall,” says Shige Oishi.“When they actually move, however, their overall happiness does not often change because there are many trade-offs in moving.”
One of the biggest trade-offs is commuting. Many move to live in a bigger house, but that bigger house is often farther away from work—so that means more commuting, which tends to add stress and detract from overall happiness.
Overlooking big expenses: People who are buying homes tend to compartmentalize their expenses and not add up the total cost of everything needed to fix up and furnish the house. That can lead them to make poor choices about how much to pay for a home. For instance, they may overspend on a down payment for the house itself and leave themselves without enough
Weighing buying vs. renting: The biggest budgeting concern is, of course, whether you should buy a house at all. Research shows there are psychological benefits to taking the plunge—but also to opting out.
Buying a house can give people a psychological boost by making them feel like they’ve “arrived” and are part of the American ideal. Homeowners also may feel as though they have more control over their lives since they’re not dependent on the whims of a fickle landlord.
But while those factors may lead people into buying a house, there are other negative elements that homeowners don’t discover until after they’ve taken the plunge. Research, for instance, has shown that home ownership can cause undue stress. The amount of work necessary to maintain a home—such as decorating, or mowing the lawn every weekend—may be too much for some people. Others may be overwhelmed by the financial aspect of ownership, such as being tied to a big monthly mortgage or keeping up with repairs and other unforeseen costs.
Expecting a big return? When it comes to selling a home, most people aren’t in for a huge payday. Yet many are overly optimistic in their home-price expectations, according to Robert J. Shiller.
Using questionnaire surveys, Mr. Shiller found, among other things, that home buyers have extremely high long-term price expectations. That can lead people to buy homes that aren’t a good fit in terms of location or social scene just because they seem like good investments. Or they may stake their plans—such as retirement—on a certain return and find themselves scrambling when they come up short. On a larger scale, this over-optimism can lead to speculative booms that warp the market. While it isn’t entirely clear why homeowners are usually so cheerful about the future, the researchers postulate it may result from the “money illusion”—a failure to take inflation into account.
People have many reasons for selling their homes, and for setting the prices they do. However, research has found that the most powerful emotional drive at work in a sale is loss aversion—not wanting to sell a home for less than what you paid for it.
Homeowners latch on to the price they paid for their home with the hope that they can get more when they put it on the market. But that may not be a sound idea especially if your house has depreciated in value. It’s a fallacy to assume that you’ll be able to recoup losses you’ve already incurred. The current market price has nothing to do with how much a person paid for it.
Matthew Kassel from the Real Estate Beat Blog
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