OP overlooks the real reason people have leaned toward the bigger house for the past 50 years (and it has nothing to do with bathrooms or Grandma). It was because it was generally accepted financial advice and because it worked.
The general rule was "Buy the biggest house you can afford, and then, when the time is right (5 years or so), take your equity or flip, and do it again. By retirement time, you should be sitting on a tidy next egg."
A lot of older baby boomers have earned more in their lifetime from this strategy that from all their jobs combined!
Then people forgot about the phrase "you can afford" and starting breaking the guidelines in a boom market. They also forgot about the busts, when this strategy goes on hold.
When you blindly follow "rules" you don't understand, you're just an accident waiting to happen.
It's always seemed like that general rule was a not so subtle way of saying, "you cannot possibly be trusted to manage your assets responsibly, so you should tie them up in a house, so you can't do anything stupid with your money". Certainly real estate is historically a reasonable investment, but almost never the best one. And the additional upkeep costs: new roof every 7-10 years, lawn care, time spent cleaning 1000 extraneous sq feet of rooms, the opportunity cost of all that extra crap to fill up your McMansion, plumbing, electrical, etc.
It's also worth thinking about the fact that if you followed the trend of the past ~20 years, and moved further out of the city with each new "upgrade", the reasonably sized house you left first is probably more valuable than the McMansion you live in now, because people are returning to cities and paying more for that convenience. And the suburban mega houses are steadily dropping in price.
But, I agree. It all really went pair-shaped when people imagined themselves getting rich by flipping houses, and so spent more than they could afford--imagining that they'd flip it before the mortgage payments caught up with them, and make huge profits. Calling it "gambling", and treating it the same way, would probably not be incorrect. I think it's the same mindset that gets people in trouble.
> The additional bathroom is a completely superfluous asset for at least 362 or 363 days each year, whereas a long commute does become a burden after a while.
Not to mention that a 45 minute commute for 200 working days a year would cost you about $1800 in gas a year. You can get a damn fine hotel room for Grandma and Grandpa when Christmas rolls around for $1800.
The primary reason given by the small sample of empty-nesters I know who have moved into the city was not: for the restaurants, for the food, for the culture, or for the night life. The reason they decided to move into the city was because their children were living there and they could walk over and see their grandkids.
The tradeoff I have seen is more extreme - it's more like tiny one-bedroom or studio with no outside space (balcony or deck) in the city vs. McMansion with an hour commute. I think that sellers/landlords,etc completely understand the "weighting" and have largely arbitraged away any advantage that city centers offer.
Right, the author neglects to mention that most people would be willing to spend a lot more of their income on a mortgage payment then they would on apartment rent. Where mortgage counts partially toward savings rent is just flushing money down the craper 100%. If you spent the same amount on rent as you did on a house payment you could probably get a pretty nice place.
Unconvincing. The article doesn't really explain why people make bad decisions, it just describes the sort of decision which people might make and then asserts it's wrong.
Anyone who did decide to commute for an hour just so they could have a spare bedroom that their parents can stay in once a year, of course, is making a stupid decision, but living in a house instead of an apartment has plenty of other advantages.
The article is based on a small section in the linked PDF, which is based on a conclusion the researcher made by reading a newspaper article about the Dutch housing market. So, yeah - unconvincing. In the heavily McMansioned areas of the USA, people are commuting to a suburban office park, not a city center. Thus, the housing choice is going to be between different suburban developments, not between a gated community and an apartment downtown.
'According to Dijksterhuis, these people are making themselves miserable because they failed to properly "weigh" the relevant variables when they were choosing where to live.'
Just because this person has a particular set of priorities, doesn't mean I have the same ones. I don't mind commuting, but I do dislike cramped living space.
Also, this has nothing much to do with the mortgage crisis. That was caused by people who probably shouldn't have been borrowing any money, borrowing a shed-load and then defaulting. I bet most of them would still have been out of their depth if they'd only borrowed half as much.
I think the author of this article doesn't realize how the decision making process happens.
Husband: I'd like to be close to work, perhaps 30 minutes away.
Stay at home Wife: I want a big house so I can play Martha Stewart and show off to my female friends. If I don't get what I want, it's a sign you don't love me.
Incidentally, some long commutes aren't bad. If your commute has exercise, sun, a river view and lots of beautiful women, you don't mind an extra 20-30 minutes:
They never mentioned the issue of kids, either. For most of the folks I know who chose to live in the suburbs (including my parents), the decision factors were:
1.) They want their kids to be safe.
2.) They want their kids to go to a good school system, so they can get into a good college and make lots of money later in life.
3.) They want their kids to have a lawn to play in and grow up surrounded by greenery.
4.) They want their kids to make friends with other people like themselves.
I grew up in the suburbs, and am really glad I did. I wouldn't want to trade treehouses for sidewalks, touch football games on the lawn for skateboarding in the park, or my small exurban charter school with a graduating class of 32 for a large public high school with a graduating class of 2000. The good school system has paid off too - both my sister and I started at salaries that were roughly what my mom retired at.
I moved from city (Chicago) to suburbs 2 years ago, here was the breakdown:
1) safe - there's plenty of safety in the city if you can afford it. It's usually the tradeoff with space.
2) good schools - ditto
3) this was a downside of the suburbs - I'd much prefer a nearby park that I don't have to own, mow, etc. I ended up buying a new house with a very small (2800sf) lot, most of which is covered by our house
4) My kids are still small, but we've got the same variety of people here as in the city (basically traded white & black for white & hispanic)
The biggest issue that forced us to move was $/sqft. We could afford a one bedroom in a city neighborhood we were comfortable with but not a 2br. We moved and although my salary is much higher, we have another kid and we'd need a 3br soon.
Space, Commute, Safety, Schools. Pick 2 (or 3 if you're lucky). We traded Commute+Safe for Space+Safe (schools aren't spectacular where we moved but our kids aren't school age yet).
Living on the UWS and commuting to midtown via riverside park/west side highway doesn't count as a long commute. The only reason it's long is that you choose to bike it rather than take the subway.
Living in central Jersey (or hudson valley or greenwich) and commuting 2 hrs to midtown via car and NJT-- that's more the tradeoff the OP is talking about.
:-P
That said, another choice (may not be valid in some cities) is to split the difference-- live on the edge of cities where housing is more affordable, but commutes are still reasonable (e.g. South Brooklyn, Washington Heights).
People drive too much and sleep too little. Studies show this time and time again and yet people rarely weigh the cost of commuting and alarm clocks correctly.
Here are some of my personal opinions on the topic...
I completely agree shorter commutes create happier workers. I also think employees are less likely to leave a job if they live close, happy or not... And of course, for most people, commutes are a waste of time, and thus to be avoided whenever possible. But, when it comes down to it sometimes there is no way to avoid commuting (family, a great job opportunity, $$$$, inbetween homes, etc).
I prefer living in the city. I don't understand why most people prefer a "McMansion" as it's been referred to. To me it makes more sense to live in the city and have a cabin/condo to get away on the weekends and holidays. Then again I don't have any kids (yet). And it seems that the McMansion neighborhoods seem to have better school districts, family oriented communities and are safer. So I understand living in a McMansion for those reasons. What I don't understand are the single or kid-less couples who still insist on the commute and the McMansion. Maybe it is partially a societal difference. I don't see my residence as an especially good investment, and that may differ from most people.
> Behavioral economics of this sort only seems interesting when it offers productive tips to rectify the mistake. So how do you get people to weight the commute time appropriately?
Maybe more like a feature... I've noticed that realtor.com beta lets you search for houses within an X-mile radius of a given address (e.g. your work). Trulia.com, on the other hand, lets you see the housing trends for a given city/zipcode. If I could do a search on Trulia (and save it) within X miles of an address, and see housing trends and houses for sale for that circle (while I'm dreaming, let me have a custom RSS feed for a given search instead of an email), that would be ideal.
I've been running a real estate startup for two and a half years and wouldn't necessarily recommend it to anyone in this market. Tough business to make inroads into and find profit in, despite the tremendous opportunity to improve the user experience. Not saying you can't do it, but it's not the kind of low-lying fruit you should look for as a small startup.
we sacrificed an extra bedroom in order to live closer to work and in a better city. we have no regrets at all, we love our area and having a quick 30 minute bus ride to and from work without having to drive at all is a blessing. eventually we'd like another bedroom but that may not happen for a long time!!
The general rule was "Buy the biggest house you can afford, and then, when the time is right (5 years or so), take your equity or flip, and do it again. By retirement time, you should be sitting on a tidy next egg."
A lot of older baby boomers have earned more in their lifetime from this strategy that from all their jobs combined!
Then people forgot about the phrase "you can afford" and starting breaking the guidelines in a boom market. They also forgot about the busts, when this strategy goes on hold.
When you blindly follow "rules" you don't understand, you're just an accident waiting to happen.