The Complex Psychology of Buying a Home

Homes come with far more emotional weight than any other investment we make.

Our home is a refuge from the world, a place to raise your family, layered with memories and cherished belongings.  We fall in love with a home the way we never would with a stock portfolio.

It’s so easy to get caught up in the physical features of the houses you’re considering.  However, please stop to contemplate how the places you’re interested in would shape your families social relationships, both within and outside the family. One of the biggest tradeoffs is commuting.  People focus on a home that’s a certain size style, or town ignoring the fact they want to spend as much time as possible with family.  That “Perfect” house may require a longer commute, keeping them away from home for an extra hour or two each working day!

Additionally, when looking at affordability, please include the costs of any renovations or new furniture you may need / want.  When you’re thinking about a house, think about  furnishings and remodeling costs at the same time. More importantly, please keep in mind whether you’re buying in a higher or lower housing market.

I always advise my buyers not to extend themselves. “Never be house poor!”  You never know how some “event” will affect the economy or your family.  Also, if you have children sometimes they get quite expensive.  They could be the next Olympic gymnast requiring extensive training or possibly they may have special needs with costly medical expenses or necessary supports.

Home Sweet Home
Buyer’s Psychology: Home Sweet Home

 

Dr. Robert Shiller, a professor of economics at Yale wrote an analysis of housing prices and associated spending –

To quote his abstract:

“We re-examine the links between changes in housing wealth, financial wealth, and consumer spending…observing the thirty-seven year period, 1975 through 2012Q2. Using techniques reported previously, we impute the aggregate value of owner-occupied housing, the value of financial assets, and measures of aggregate consumption for each of the geographic units over time. We estimate regression models in levels, first differences and in error-correction form, relating per capita consumption to per capita income and wealth. We find a statistically significant and rather large effect of housing wealth upon household consumption. This effect is consistently larger than the effect of stock market wealth upon consumption.

The results presented here with the extended data now show that declines in house prices stimulate large and significant decreases in household spending.

The elasticities implied by this work are large. An increase in real housing wealth comparable to the rise between 2001 and 2005 would, over the four years, push up household spending by a total of about 4.3%. A decrease in real housing wealth comparable to the crash which took place between 2005 and 2009 would lead to a drop of about 3.5%.” Shiller – Wealth Effects Abstract – p. 2013

He wrote about recent home buyers around the country and their expectations on future values of their homes.  He also found most home buyers have very high long-term price expectations.  This could lead to someone buying a home not because it’s a good fit, but because a buyer deems it as a good investment. Some even plan on using the equity in their homes to fund their retirement.  Remember, you still need a place to live in retirement!

Stay conservative my friends!!

 

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