Emotional Decision-Making Common in Real Estate Transactions

WASHINGTON – In November, house prices were up an average of 3.7% from 2022, but home sales continues to drop 7.4% every year since 2021.

The United States real estate sector is still recovering from the effects of the pandemic housing boom, soaring interest rates and a critical shortage of housing inventory, presenting challenges and opportunities for seasoned investors and new homeowners.

A standoff between buyers and sellers is causing deal counts to drop. Many aspiring homeowners are holding off buying, hoping that prices will decrease, while many would-be sellers are delaying upgrading their property to hold on to their enviably low pre-Covid mortgage rates.

However, one underappreciated factor in homeowner behavior could be less about supply and demand and more about something intangible: emotions. The distinction between a house and a home tends to get lost in discussing the property market, yet statistics suggest that “emotional equity” is a significant contributor.

In a survey by Peerage Realty Partners, more than three-quarters of respondents felt their connection to their home was even stronger in the aftermath of the recent pandemic. The comfort a home provides and the sense of security in a community were listed as particularly important.

This deepening appreciation for housing is also shown in the fact that the length of residence in a home now averages more than 13 years compared with five to seven years between the mid-1980s and the mid-2000s, according to data from Redfin. More people are hanging around longer in their homes.

Sentimentality, an often-overlooked factor in property investing, can exert a strong influence. Buyers and sellers are not always rational economic actors — their moods and memories also guide them through the market. A better understanding of emotional equity in property can give first-home buyers and seasoned investors a more holistic view of their real estate portfolio.

Heading down

The U.S. housing market is in a downturn as interest rates rise, supply chains remain disrupted and consumer confidence is fragile.

The annual rate of home sales in October was down almost 15% compared to the same period in 2022, according to data from the National Association of Realtors®. Some regions have been particularly slammed by the slowdowns. The Northeast, covering Pennsylvania to Maine, was hardest hit by the steepest fall, with sales plummeting almost 17% in October.

Rising house prices and interest rates, as well as the shrinking supply of houses, impact buyers. Data from Realtor.com shows active listings have almost halved since 2019.

Unsurprisingly, this reduced home-buying market is undermining confidence. According to Fannie Mae's latest Home Purchase Sentiment Index, 85% of consumers believe it's a bad time to buy a house.

“Prospective home buyers experienced another difficult month due to the persistent lack of housing inventory and the highest mortgage rates in a generation,” Lawrence Yun, chief economist at the National Association of Realtors, said in a prepared statement.

Still, buyers won't sit on the sidelines forever. Deep down, their desire for homeownership still burns. Almost 85% of non-homeowners across the nation still aspire to own one.

While some opportunistic property buyers may be tempted to try to '”buy the dip” in the property market, it's essential to recognize the inherent risks associated with this strategy. Timing the market can be a precarious endeavor, influenced by many unpredictable factors. The complexities involved in accurately pinpointing the lowest point in a market downturn make this approach a high-stakes gamble.

“If a buyer finds a property they would like to call home, they should not delay,” Stacey Froelich, a real estate broker with Compass in New York City, told Bankrate last month. “You cannot time the market, and a home should be a long-term investment.”

Acknowledging the inherent difficulty in timing the market should put investors in a mindset geared toward long-term capital appreciation over chasing short-term savings. By embracing a strategic focus on the long game, investors position themselves to weather the inevitable ebbs and flows of the market.

First impressions last

It doesn't take long for people to feel an attachment to their property, particularly if they have only ever rented and can now feel a sense of ownership. This is especially true if the space is a nesting ground for a young family and maybe where young children are raised.

The stereotype of elderly grandparents who can't seem to part from their old home may need updating. Younger Americans are living longer and longer in their homes. According to data from the National Association of Realtors, about 40% of Americans aged between 25 and 44 who purchased a home in 2022 plan to live in it for 16 years or more. For homebuyers between the ages of 18 and 24, the ratio is almost 50%.

Historically, the common practice involved purchasing a “starter home” — usually a smaller residence — to build some equity for a few years and get their portfolio started before upgrading to a “forever home.”

Today, as more American homeowners stay in their first homes for longer, emotional attachment will likely have more influence in future housing decisions.

Homeowners attached to their property may decide to keep living in their original residence even though they would like to move to another neighborhood or city.

Similarly, homeowners’ personal connections with their first homes will shape their decisions if and when they can afford to purchase a second property. While some want to upgrade their living status and leave behind their former dwelling to tenants, those comforted by the familiarity of their long-time residence may prefer to make their second house an investment property and continue to reside in their first.

Second time lucky

One might think sentimentality mainly affects those in multi-generational homes or who have lived in their primary residences for decades, but it can even impact those buying an investment property.

“In all levels of real estate, emotion is always a factor, whether you like it or not. For the vast majority of buyers, purchasing a home is by far the biggest investment they will ever make, so it has to ‘feel just right,’” writes Tim Elmes, a Fort Lauderdale-based luxury real estate agent.

Even individuals earning six-figure earners within the high-income tax bracket are not immune to sentimental attachment to their properties.

“Sometimes, the more disposable income you have, the easier it is to justify overpaying for an 'emotional' spend,” Elmes adds, cautioning that it is hard for these wealthy buyers not to see an investment property as a potential future residence for themselves.

Elmes urges affluent investors to take the focus off their feelings and instead focus on what other luxury property buyers might want, while keeping tax considerations and maintenance costs in mind.

It's hard to get sentimental about a ticker in your exchange-traded fund portfolio, but a physical structure that shelters you for seasons is a different story. After all, home is where the heart is.

Too often, the media depicts property as merely an investment tool, ignoring the emotional dimensions that play a critical role in decision-making. Feelings can catch people by surprise and leave them feeling conflicted, potentially jeopardizing their lifestyle and investment strategies.

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