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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.
BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.