Does the Dream of Home Ownership Rest on Biased Beliefs?

Homeownership increases life satisfaction less than buyers expect.

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A big yard, more space, or admiration from family and friends; the reasons for home ownership may vary, but the goal is the same: ultimately, it’s intended as an investment in happiness. Many people hold the ambition of acquiring a home. Home ownership is considered part of the American dream and over 90 percent of the US population between the ages of 18 and 44 aim to own a house at some point in the future. Even in Europe, where the average home ownership rate is lower, the majority of people would prefer to live in a privately-owned property.

In a recent study, we examined whether home-buyers’ anticipated increase in life satisfaction actually materialized following their move into their own four walls. We evaluated data on current and expected life satisfaction of over 800 future home owners in Germany. Results indicated that homeownership does, in fact, result in increased happiness, but not to the extent expected by the future homeowners themselves.

Status-consciousness inflates optimism

One important reason why new homeowners overestimate their future life satisfaction is that they tend to disregard adaptation. Accordingly, participants overestimated the medium-term added value of homeownership.

However, there are differences between participants: It turned out that status-oriented people in particular, for whom money and success were especially important, overestimated the increase in life satisfaction that purchasing a home would provide. Intrinsically-oriented people, on the other hand, for whom family and friends are comparatively more important, did not.

We don’t necessarily know what is good for us

The decision about whether to purchase a house or apartment is difficult. Apart from entailing major financial commitment, it involves many trade-offs with significant long-term consequences, such as foregoing leisure in order to be able to save more or longer commutes due to reduced mobility. If beliefs about the imagined benefits were biased, this may result in sub-optimal investment decisions.

In economics we generally assume consumer sovereignty. In other words, we know what’s good for us, and that we behave optimally. This study, however, shows that people may wrongly estimate the happiness factor of a decision, thereby not acting in their best interest.

This underscores the reality that people do not necessarily follow their own preferences when making decisions, but rather their – sometimes distorted – beliefs about their preferences. These beliefs, in turn, may be influenced by outside factors such as socialization, parents, or values conveyed in advertisements. Knowing more about how these kinds of influences affect one’s individual perceptions – and thereby one’s decisions – could be politically helpful – to combat manipulation from commercial interests, for instance.

So it’s worthwhile to examine one’s own values, especially before making major decisions. The research suggests that material values tend to be overestimated and might lead to incorrect expectations. Intrinsic values therefore seem to be a better compass on the search for happiness in life than extrinsic values.