I think the right question to ask about such matters as an emotional attachment to a house is whether you can afford it or not. We don't have any trouble criticizing someone's choice to buy something he can't afford, but "must" have for some emotional reason like gaining face. A "hold" decision on anything including a home should be subject to the same analysis. If the cost of succumbing to an emotion is affordable and well-understood, then who could argue with it? It is when emotions are allowed to dominate financial decisions without consideration of the costs that people find themselves somewhere they don't want to be. Here are two examples from real friends of mine.
Peter is in his mid-forties and has a large house in New Jersey. He is very successfull, highly compensated, and has nvested very well over the years. He views the prospect of a bursting housing bubble with indifference and this is rational because the investment value of his home has effectively no utility for him at all. He can afford to regard his house purely as a home.
My friend Liz on the other hand is an underpaid adjunct professor at a university in her early sixties. No tenure, probably few benefits. However, in 1999 she managed to buy her large condominium apartment from the sponsor for a song because of the peculiar negotiating position that holdover tenants have here in New York City. She figures now that she could walk away from a sale with $1 million net and plans to do just that in two years when she will retire to California, funded entirely by the proceeds from the sale of the apartment. My advice to her is to sell now. I expect the housing bubble to burst here, particularly if there is a recession next year, values could drop quickly. She has lived in the apartment for thirty years and can't face the disruption of moving to a rental.
Now, the previously unexpected investment value from her apartment has an extremely high utility for her because it enables a comfortable retirement which she could never have afforded otherwise. By comparison, the utility of the apartment as a "home" with all the warm emotional associations of thirty years of living seems very low to me because it has only two years to run in any case. I vividly remember the housing bust of the early nineties when apartments in NYC dropped 30% in about three years. My question to her is: are the remaining two years of warm fuzzies worth the possibility of losing, say, $200,000? To my mind there are only two ways to answer yes to that question: yes, because two years would be worth $200,000 to me or yes, because I have analyzed the housing market and decided that the risk is too low to bother with.
A home usually has both investment value, the prospect of capital gain in the future, and value as a consumable, that is, shelter. But the relative value of each differs depending on the owner's total financial picture and it also changes over time. When people fail to consider these aspects carefully they run the risk of misvaluing their biggest asset.
Peter is in his mid-forties and has a large house in New Jersey. He is very successfull, highly compensated, and has nvested very well over the years. He views the prospect of a bursting housing bubble with indifference and this is rational because the investment value of his home has effectively no utility for him at all. He can afford to regard his house purely as a home.
My friend Liz on the other hand is an underpaid adjunct professor at a university in her early sixties. No tenure, probably few benefits. However, in 1999 she managed to buy her large condominium apartment from the sponsor for a song because of the peculiar negotiating position that holdover tenants have here in New York City. She figures now that she could walk away from a sale with $1 million net and plans to do just that in two years when she will retire to California, funded entirely by the proceeds from the sale of the apartment. My advice to her is to sell now. I expect the housing bubble to burst here, particularly if there is a recession next year, values could drop quickly. She has lived in the apartment for thirty years and can't face the disruption of moving to a rental.
Now, the previously unexpected investment value from her apartment has an extremely high utility for her because it enables a comfortable retirement which she could never have afforded otherwise. By comparison, the utility of the apartment as a "home" with all the warm emotional associations of thirty years of living seems very low to me because it has only two years to run in any case. I vividly remember the housing bust of the early nineties when apartments in NYC dropped 30% in about three years. My question to her is: are the remaining two years of warm fuzzies worth the possibility of losing, say, $200,000? To my mind there are only two ways to answer yes to that question: yes, because two years would be worth $200,000 to me or yes, because I have analyzed the housing market and decided that the risk is too low to bother with.
A home usually has both investment value, the prospect of capital gain in the future, and value as a consumable, that is, shelter. But the relative value of each differs depending on the owner's total financial picture and it also changes over time. When people fail to consider these aspects carefully they run the risk of misvaluing their biggest asset.
