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February 09, 2006
Mistake #37--Are You Making It?
Imagine you're a renter moving from San Francisco to Pittsburgh. All of your rental options look marvelously cheap by San Francisco standards. So you pick out a nice apartment--much nicer than the one you would have chosen if you had just moved to Pittsburgh from a city that's cheaper than Pittsburgh such as Gadsden, Ala.
This is a mistake. To be specific, it's "Mistake #37," so named by Gary W. Eldred in his 2002 book, "The 106 Common Mistakes Homebuyers Make (and How to Avoid Them). Here's a pic of the author.
The reason it's a mistake is that you should choose your apartment strictly on the basis of what you want and what you can afford, paying zero attention to irrelevant information about rents in the place you used to live.
Now, two economists have given Gary Eldred's "Mistake #37" their ultimate tribute--a deep economic analysis that has just been published in the prominent British scholarly publication The Economic Journal.
The bottom line: They conclude that people really do make "Mistake #37." (Maybe they haven't read Eldred's book yet.)
The research is by Uri Simonsohn of the University of Pennsylvania's Wharton School and George Loewenstein of Carnegie Mellon University. It involved 928 participants in the Panel Study of Income Dynamics who moved during the sample period, 1983 through 1993.
One other interesting finding. After people have lived in the new place for awhile they seem to get used to the local rents and adjust their living habits accordingly.
I'm guessing that homeowners make the same mistakes as renters, and allow what they spent before to affect their judgment of how much to spend now. But it's harder to prove it, because homeowners moving from an expensive city probably have more money available to spend on a house, complicating the comparison.
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I am an avowed renter and don't see me changing my tune anytime soon. Some of my friends pay more in property taxes than I pay in rent. And as a bonus, I don't have to mow the lawn, paint ect.
Also, why doesn't the qudio work for the Feb 12 "Housing Trouble" video??
Posted by: Jim Allen at February 11, 2006 08:13 PM
I've read Eldred's book; his RE cheerleading has aged rather poorly since it was published. He's not quite at David Lereah levels, but then, who else is?
Eldred pays lip service to buying within your means, but advocates doing whatever it takes to buy (FHA, VA, first time buyer assistance, strech your budget, etc.). He doen't advocate toxic mortgages (Neg Am ARM), but he doesn't say not to, either. That is the obvious next step for readers. He also is emphatic that NOT buying is a mistake, when simple logic dictates that there must SOME level of price inflation that make renting a better strategy over a specific time horizon.
I'm glad I got it at Amazon price w/ free shipping, but wished I'd rented it from the library.
Posted by: Anon E. Moose at February 13, 2006 12:27 PM
This is a great article. I am new to your blog and i like what I see. I look forward to your future work.
I’ve taken a quick look at your postings, which are very interesting. Lots of material and ideas! Congrats on being so focused!
Posted by: Kevin JOnes at December 18, 2006 05:13 AM