Inside a post about what economists think about buying vs. renting a house, Alex Tabarrok of Marginal Revolution ended with a nice sentence that I think applies to both buying and renting:
One final point: behavioral economics tells us that we quickly get used to big houses but we never get used to commuting. So when you have a choice, go for the smaller house closer to work.
In general, our current choice of house is aligned with this advice. We could get a bigger, newer, and/or cheaper house in exchange for a longer commute, but are happy with our size (2,000 square feet) and location (I work primarily from home and my wife’s distance to work is 3.5 miles). Our jobs are relatively stable, however, as jumping to a new job could easily change our commute.
Going for the shorter commute over the bigger house certainly feels like good advice. But what are the behavorial economics studies that support this statement?
First, let’s take the statement we get used to big houses. The overall concept of the hedonic treadmill has been found in a variety of circumstances. Brickman, Coates, and Janoff-Bulman (1978) found that lottery winners and paraplegics eventually returned to their baseline happiness levels over time. That is, both the joy of winning the lottery and the sadness from being paralyzed was not permanent. Per Wikipedia, Lucas, Clark, Georgellis, & Diener (2006) also “ultimately concluded that people completely adapt, return to their baseline level of well-being, after divorce, losing a spouse, birth of a child, and females losing their job.”
However, but I couldn’t find one that studied housing specifically. There’s probably one out there? Perhaps a bigger house can simply be lumped in with other consumer material goods.
Second, if we can get used to being paralyzed or losing a spouse, who says that we don’t get used to commuting? Perhaps this is taken from Stress That Doesn’t Pay: The Commuting Paradox (Stutzer and Frey, 2004). Abstract (emphasis mine):
People spend a lot of time commuting and often find it a burden. According to economics, the burden of commuting is chosen when compensated either on the labor or on the housing market so that individuals’ utility is equalized. However, in a direct test of this strong notion of equilibrium, we find that people with longer commuting time report systematically lower subjective well-being. Additional empirical analyses do not find institutional explanations of the empirical results that commuters systematically incur losses. We discuss several possibilities of an extended model of human behavior able to explain this ‘commuting paradox’.
If you know of more please let me know in the comments.
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With the factors you mentioned I would agree, however, my personal experience is a little different. My husband and I left a smallish row house in Washington, DC that was close to work for both of us 20 years ago for a larger farm house with 80 acres and a 40 minute commute, and we are much happier in the country. Although I think our happiness is mostly from the change in lifestyle, and less from the size of our home. Plus I have worked from home for the last 18 years and my husband has worked from home for the last 3 years.
I love reading your blog! Thank you!
I think I read somewhere that a 45 minute commute is the max you can endure before your happiness really takes a hit. But now that you work from home, all that space sounds great.
I should say that we could get even closer with a condo, but we also like the space of a single family home with a backyard and not having to worry about guest parking when friends come to visit.
As a millennial living in an urban area – 2,000 square feet sounds like a castle! I guess it depends on how many children you have.
I normally agree with living in a smaller place near an urban core – but winter can make this particularly unpleasant when everyone seems to stay at home and you’re essentially confined to your small space.
I think the key is for employers to be more flexible. Allow people to telework or let them come in at off-peak hours – this can greatly reduce traffic congestion and makes commutes more pleasant.
We could have the best of both worlds if there was less NIMBYism and developers were allowed to build tall buildings where people want to be. DC is a great example – the antiquated Height Act prevents housing from being built where people want to live (low-crime areas in DC where they work and play) and pushes them out into the suburbs – creating major commuting headaches.
Commute sucks. I hate it. I used to live 2 miles away from my office downtown a major city. I got married and we felt it was more important to live closer to my wife’s family for child support. We ended up moving 30 minutes away from my office and driving to work was terrible. HOWEVER, I simply changed my commute departure time from 9am to 4:30am and it is GREAT. Opened up a world of opportunities. This forced me to go to bed around 8:30am consistently every night (that’s ok– people waste time after 8pm anyways) and develop an exercise routine. Rise at 4:00am, gulp down a snack, commute to work (roads are empty — very stress-free driving), listen to a great podcast on the way, arrive at gym (office has gym) with the whole place to myself, shower, get to desk around 6am (no one arrives until 7am) and mentally prepare for the day, before I know it 2pm arrives and I’m heading home. Gas is really cheap and there is very little expense for commuting these days. Living 30 minutes away in the country where we are able to separate work from home is huge. Mix that in with some telework here and there and I think this is the ideal way to go. I can’t work from home 100% anymore…could not stay disciplined. Too much easy access to food and got lazy with the exercise. I honestly think I am a healthier and better person due to having a commute because it forces me into a routine. Arriving home at 2:30am gives me ample time with my family (wife is going to be a SHM).
P.S> We bought a small house (1300sqft) out in the country with a long commute. I guess I’m the opposite of what the above quote said??
That is 2:30pm, not 2:30am…
There is only so many hours in the day so living a central suburb of my metro area allows me to commute 30-45 minutes while owning a modest home. The other advantages to a small home are less property taxes, lower monthly bills and less to clean :). All of that adds up to more time to spend with my family and more money to throw towards my retirement.
My wife and I just sold our long time owned 5500 sqft house and are temporarily renting a 2000 sqft. Our circumstance is similar to yours. I work at home and wife is in corporate world. I miss dearly my former oversized three car garage, but that is all. My wife is much closer to work and the stress level seems to be less than half. We are saving way more money than ever before and house work is cut in half. We had a one acre yard that had to be mowed once a week and now an 8000 sqft lot. When we travel we literally pack our bags and go. Because of size of house before it was a hassle to find a house setter to live in home and take care of the multitude of mechanical items in larger home. I love this simpler living. It took several months to get rid of a lot of “stuff” but I’m not missing it
Interesting topic. At first, lumping large home in with other hedonic goods sounds reasonable, but you’re right, a large house isn’t necessarily just a shiny “consumption” object. There are functional features about it–playing ball in the backyard, family barbeques etc.
Personally, its the larger ongoing costs, larger lawn to maintain, increased heating bills, etc. that push me to live in smaller house moreso than the upfront cost or tradeoff between commute and size.
One thing this really doesn’t mention is the risk that comes with tying the location of your home to your job. How do you know that you’ll be working five years from now in the same location where you are today? The employer could shut down, the employer could move locations, the employer could let you go. You could also make the decision to leave. I think that as you look for locations for your home, your proximity to your job should definitely be one of many factors, but not the deciding factor.
I guess I would say that if you think your job has a chance of changing, then that’s another point towards renting over buying as well. The MR post links to a study that suggests that homeownership makes people stay in sub-optimal jobs because they don’t want to have to move.
I think there are a lot of variables involved here. Not just the size of the home, but the general community, and access to amenities such as medical care, schools, recreation, and other factors.
Another consideration is how frequently one might expect to change jobs, and where their prospective home is located in relation to where most of the jobs in their profession are located (tech industry, ship yards, federal buildings, etc). Most people don’t remain in the same job their entire career, so commute distance and duration can change over time.
In general, my sweet spot is about 30 minutes or less. That’s just enough time to switch gears between home life and work, and decompress at the end of the day. You can also use that amount of time productively by listening to podcasts, audio books, etc. More than 30 minutes starts to cut into family time too much for my tastes, and dealing with traffic can increase stress levels. But everything mentioned in this paragraph is personal, and will vary by the individual and the type of commute (heavy traffic, highway with little to no traffic, bus, train, subway, etc.).
My preference would be to avoid that 30 minute commute and buy a smaller home closer to work versus a larger home with a longer commuting time, or try to arrange my schedule so I can avoid the heavier traffic times to decrease commuting time.
Another thing to consider is resale value. I used to live in Silicon Valley years ago, and because housing is so expensive, many people moved into outlying areas that were an hour to two hours’ commute from work (Modesto, Los Banos, etc.). When the housing market and economy slump, those outlying areas suffer all the more and those houses are much harder to sell. Even in a good market/economy, the closer-in houses appreciate more. So my point to consider is this: while the closer-in house/condo may be smaller and/or more expensive, you will likely get that money back and see higher appreciation, whereas, you will never get your time and money back from all the hours and miles you spent commuting, wearing out yourself and your car.
I just recently heard this perspective from a friend of mine – that the “liquidity” of a house was a factor for where he wanted to buy. I have never owned, but I imagine it’s real stressful when one is trying to sell a house but can’t.
In my area schools are a very important factor for choosing where to live.
I have a commute that is less than 30 minutes in the summer and 35 minutes during the school year. For my area that is considered average to good and it works fine for me. We love where we live and have a nice home outside the city where I work.
Personally my view is that the commute is a tax paid by me alone and the home is a benefit to my entire family, so it’s a trade-off I’m willing to make. I also agree with everything said above about making the commute enjoyable by listening to (or reading if you take public transport) something you love. That way if you get caught in the inevitable traffic jam you get to listen to more content, which makes is a more positive experience.
I used to be against renting because I saw it as “throwing away money,” but I’ve realized that that’s not always true (especially after understanding how much of my mortgage payment in the early years went to interest). Now I’d say that it’s a question of your desires, job stability, and the ratio between housing prices and rental rates in your locale.
Where I live (Northern Virginia, outside of DC), a major reason for me to buy is as a hedge against future increases in housing costs. Of course, it’s possible that current trends will reverse, but right now rental rates seem to be headed higher every year.
This is a more than just a purely financial issue. Because of increasing rents, most renters I know move every year or two. The rental market is competitive, so it takes several weeks of looking to find a place. You give up evenings and cut out of work frequently to look at places before someone else snaps them up. Truthfully it’s not that different from buying a house, but you do it every year or two. It’s part of your life you can’t put on auto-pilot. That’s a huge cost to me. Not only are prices increasing, but you are regularly spending weeks or months thinking about what you will do next.