Buying a Large House can be a Big Mistake

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Published by Debra Taylor, CPA/PFS, CDFA, JD | July 5, 2016

Over the last week, my family moved from Franklin Lakes, NJ where we have lived for thirteen years, to Ramsey, NJ. The reason for this move had a lot to do with a desire for more community, and Ramsey’s thriving golf course (which our new home is located on), town center, and constant social events seemed perfect.

In fact, we have been in Ramsey for just about a week, yet we have already met many neighbors, attended an awesome block party, and visited a local farmer’s market. Quite honestly, we left a lovely home with a large yard because we desired the social experience in our new town – hanging out with our neighbors is more fun for us than simply living in a large house. All of this and more is the exact point of a recent Wall Street Journal article entitled, “The Psychology of Buying and Selling a Home,” where the authors explain that the most important thing to look for in buying a home is community and social connection over bricks and mortar.

While, yes, this does mean that we have to make sacrifices (like operating in more cramped living conditions), our family decided that the positives outweigh the negatives if we get to live in a place nicknamed (by us) “College for Adults” (that name is so much truer than you could ever imagine)!

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This then brings me to the main point of this article, which is to focus on the “intangible,” like community and the people around you, rather than the material. One of the biggest financial mistakes I see so many people make is letting their emotions get the better of them when buying a house.

They will buy a larger or more expensive house (often outside of their price range) because they are so focused on the material aspects, like a two story foyer or two-acre property. This mentality hurts buyers because not only are these types of houses often bad financial investments, but they also often come with unexpected extra costs. Hence, when buying a house, people should be aware of the following three main points.

Fact #1: Houses Are Not Always Good Financial Investments

Although clients often believe that homes can qualify as good long term investments (and use that reasoning to justify a huge spend), that is simply not true. While researchers have found that homeowners often hope that they can earn money on their “investment,” studies suggest that is not exactly the case.

Christopher Mayer, a co-author of one such study and a Professor of Real Estate and Economics at Columbia Business School, cautions that houses often depreciate in value over time, so in reality the price you originally paid for the house will likely have very little to do with what the current market price is or will be.

Fact #2: Two Story Foyers Won’t Make You Happy, But People Do

While homeowners love those extra features in houses – like long driveways, two-story foyers, or larger plots of land – the truth is that such features may not make them happier with life in general. In fact, according to Shige Oishi, a co-author of a 2010 study on the subject in Social Indicators Research, once buyers actually move, “their overall happiness does not often change because there are many trade-offs in moving.” One tradeoff people do not often expect in a bigger house – but always receive – are higher maintenance costs.  The bigger a house is, the more time, energy, and money it takes to maintain.

Additionally, because many people try to move to bigger, nicer houses, many times they do so at the expense of being farther away from work, which results in more commuting time. The result is a decrease in quality time spent at home with family members or friends. In fact, a 2008 study in the Scandinavian Journal of Economics found that people who had longer commutes reported “lower subjective well-being” than people with shorter commutes. Elizabeth Dunn, a psychology professor at the University of British Columbia sums up these findings perfectly by explaining that, “If you’re moving to a place far away from your friends, but it has nicer stuff, it’s not a great deal for your happiness.”

Fact #3: Move for the Social Connections, Not the Stuff

The final and most powerful point is the admonition to choose your home based on social factors and community, not bricks and mortar. One prime example of the importance of this is a study of Harvard undergraduates who were randomly assigned to different dormitories. While these first-year students initially believed that they would be happiest in dorms with bigger rooms and better dining hall facilities, these Harvard geniuses were completely wrong!

In fact, when the researchers checked back with the students after six months, the only aspect that truly appeared to count for their happiness was the quality of the social life in the dorms, like living within close proximity to friends. Long story short, friends and social connections make people happier than material items ever can.

Remember not to prioritize material items before social connections, and make sure to buy a house inside your price range! While everyone loves granite counter tops, that will not be a great memory of yours in twenty years – but spending time with family and friends will be. So when buying a house, be sure to think of the social aspects of your decision, and not just the material ones.

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