Because a home is thought to be a refuge and a place where you frequently raise your family, the value we place in the investment is far greater than what we could ever place on just about any other investment we will ever make. The feeling that is evoked often “blinds” us intellectually when we try to purchase or sell a home. As a result, poor financial decisions can be made.
For example, you might want to buy a certain style of house but ignore the fact that you also want to devote more time to your family. As a result, you may buy the house you want but the location causes you a longer commute. As a result, you spend less, not more, time with the ones you hold near and dear.
Selling can become complicated as well. Homeowners may feel that their home is worth more than the market value because they are emotionally bonded to the place. As a result, they may have a hard time selling their real estate. In some cases, they may not be able to sell the house at all. Therefore, if you are currently planning to buy or sell a house, you need to understand that your emotions may distort your objectivity.
For instance, according to an article in the Wall Street Journal, a homeowner often moves to a bigger house with the belief it will make them happier. However, the house is also farther from where they work, which adds to their daily stress. Therefore, location is an important consideration in how you will feel living in a new house. In fact, a 2008 study, published in the Scandinavian Journal of Economics, indicated that people were happier if they were closer to friends than if they lived farther away and lived in a nicer house.
In another study, conducted at Harvard, researchers found that a sense of community made people happier than specific physical features of their residence. No wonder real estate agents stress that location is an important feature in selling real estate. Where you live or the house you purchase also needs to be located in a place where you feel socially comfortable.
It’s no wonder then that people may place a higher value on their home when they sell it than what the market would indicate. Research supports this kind of emotional drive by defining it as loss aversion, or not wanting to sell real estate for less than its original purchase price.
Research published in the Quarterly Journal of Economics showed that homeowners often hold onto the purchase price as a bargaining chip when selling their house. They want to get more out of the house than what they paid for it. However, economic experts suggest that is not always a sound notion, especially if the house’s worth has depreciated. Current market prices have nothing to do with how much a person spent originally on his or her real estate.