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Hoarding, the Scarcity Mindset, and an Unnecessary Attachment to Your House

Parked next to a hoarder.
I’ve parked next to this type of person before. It’s sad.

“I steal cracker packets. I hoard them. Once my collection is large enough, I’ll take them to the flea market and try to sell them to discerning lovers.”
–Jarod Kintz

My parents like to watch the show American Pickers, so when we go home for the holidays, we usually wind up watching an episode (or 20) of the show.

For those of you who don’t watch much TV (like me), the basis of the show is that the stars are experts at reselling valuables – kind of like high end pawn shop people – and they go around the country sifting through junkyards, homes, estate sales, whatever to find the valuables in the piles of crap that people have accumulated.

Invariably, they arrive at a house or barn and there’s someone there to tell stories about good ol’ Aunt Clare (not her real name) who loved collecting cat sweaters or some such “collectible.” However, somewhere in the process of collecting high end cat sweaters, Aunt Clare got on a roll. As a result, every room in the house is filled with useless crap and a couple of worthwhile cat sweaters.

It’s the job of the American pickers to sift through the crap and buy the worthwhile cat sweaters so they can take those cat sweaters home and resell them for a hefty profit.

What they never show is how the poor yutz who is left behind has to deal with all of the other useless garbage that Aunt Clare collected over the past 75 years before becoming buried in it one day and suffocating because she was unable to escape.

Side train of thought: how do these people make enough money to afford to buy all of this stuff? It doesn’t just magically appear in your spare bedroom, like how coat hangers reproduce. Am I the only one who watches these shows and wonders what the household budget of a typical hoarder looks like (assuming one exists)?

  • Food: $300
  • Mortgage: $800
  • Car: $200
  • Cat sweaters: $5,850

But what happened to poor Aunt Clare in the first place? She had a nice little collection of a few worthwhile, potentially valuable cat sweaters, and somewhere along the way, she rockets herself off the cliff and winds up with a house full of rubbish.

According to Psychology Today’s Matthew Shanahan, at some point along the way, with a typical hoarder, the ability to estimate how much pleasure a given object will give that person gets out of whack. A rational person (which, to be fair, nobody is truly homo economicus) would make a rough guess at how much pleasure a given item or experience would provide and then come up with a price scale for it. All the pleasures have relative values, so we spend varying amounts for them.

By the way, we tend to overestimate the pleasure that we get from material goods (unless there is an associated memory or sentiment attached to that item) and underestimate the pleasure that we get from experiences, leading us to spend way too much money on stuff vis a vis experiences.

A hoarder, on the other hand, skews the expected pleasure from an item way off the scale while keeping the price scale relatively constant. Thus, a $10 cat sweater suddenly will provide, to the hoarder, way more entertainment and pleasure than it would to the average cat sweater aficionado.

To further complicate the hoarder’s situation, he or she then runs into Prospect Theory. As we saw in “Will Annuities Make You Happier,” Prospect Theory makes you expect more pain from losing something than joy you would get at receiving something of the same value.

So, the hoarder buys a cat sweater (or something else), finds it’s not as fun as expected, but thinks that getting rid of the cat sweater will cause more pain, and she or he might one day regret getting rid of that cat sweater. Thus, up into the attic/spare bedroom/closet/kitchen/car it goes along with all of its friends.

Additionally, the hoarder thinks in terms of a scarcity mindset (much like a politician, as we saw in “The Scarcity Mindset, The Abundance Mindset, and the Impact on Public Policy”). That line of thinking leads the hoarder to believe that there are only so many cat sweaters in the world, so he or she needs to scarf up (haha! get it?) as many cat sweaters as possible before they run out.

OK, you may be thinking. That’s all well and good. We’ve done a thorough psychological evaluation of the people that we see on some of those “reality” shows.

So what?

Does Your House Cause You to Become a Hoarder?

If we step back and think about the issues that cause hoarders to become hoarders in the first place—inability to appropriately value the utility/pleasure from a given item, fear of loss, and scarcity mindset—then perhaps we can see a situation where it’s not just a mental misfiring that causes issues, but something in our own lives.

That area is in housing.

Think of it. You hear the story line that the National Association of Realtors loves to feed the public: home ownership is the American Dream (no, the American Dream is Dusty Rhodes). They show you images of houses with white picket fences, husband and wife, and 2.5 children. They then have to sew the half child back together, which is a real pain.

To further the story, they tell you that a house is an investment, conveniently bypassing the fact that residential real estate doesn’t even beat inflation.

You buy into the story (which we did). You tell yourself that you’re handy and that you love home maintenance. You enjoy cutting the lawn because it gives you a chance to relax and meditate. Were that the case, you’d mow the lawn a whole lot more than you do.

You also only think about the mortgage payment on the house because that’s what the Realtor wants to do so that you’ll buy way more house and make the Realtor way more in commissions. You blithely ignore the other costs associated with owning a home, like replacing the roof every once in a while. You forget about property taxes and insurance, because those will get rolled into your PITI so you don’t have to think about them as a separate line item.

You also discount how much of a pain in the butt that commute is going to be.

But, once you bite the bullet, you become committed. You start to think of it, not as a house, but as a home, and it’s YOUR home. The nesting instinct kicks in, and you go raid Aunt Clare’s house for some knick knacks to put all over the place to make that house feel more like a home.

As you get older and have kids, you start to add other characteristics to the house. It was where Junior and Juniorette grew up. You want to leave a legacy, leave the house to the kids.

All of these thoughts contribute to the same psychological misfiring that happens with hoarders.

Misestimating utility: you pay for a house, expect it to return money for you, and provide you with happiness. The reality is that if you have a mortgage, then you’re losing money, on an inflation-adjusted basis, if you’re the average houseowner. Furthermore, the house provides shelter. That’s its primary purpose. The other pleasures you derive from a house are things that you do, which can be accomplished anywhere.

Prospect theory: you start to feel an attachment to the house. It’s your house. Because you think of it as your house, Monkey Brain pipes up and causes you to mentally jack the value of the house up, probably above what the market will actually support. We saw why this happens in “The Endowment Effect: Why You Should Buy a Foreclosure and Never Sell to an Investor.” As a result, you value your house more than you would a carbon copy next door.

Scarcity mindset: you imagine that there could be no other house just like the one that you have and that nothing could replace where you are now, even though there are probably plenty of places that you could move to or build that would provide just as much, if not more happiness.

Some of you may truly get the utility out of a house that you expect to, and the amount you’re paying all-in is a good deal.

However, I am willing to wager (and based on my experience with my clients, I’ve seen this enough to know that I’m good money on this bet) that for many of you, owning a house hasn’t been all that the Realtors cracked it up to be.

What’s the solution? There’s not a given one-size-fits-all solution to this problem. Downsizing is usually a good start. So is renting, which is what we did.

Do you own your house? Are you happy with it? Or, do you, deep down, wonder if you’re facing the “in for a penny, in for a pound” scenario?

Let’s talk about it in the comments below!

By

Jason Hull, CFP®, was the co-founder of Broadtree Partners, a firm that acquires $1-5MM EBITDA companies. He also was the co-founder of open source search consultancy OpenSource Connections, a premier Solr and ElasticSearch firm. He and his wife FIREd (financial independence retire early) at 46 and 45, respectively. He has a BS from the United States Military Academy at West Point and a MBA from the University of Virginia Darden Graduate School of Business.

You can read more about him in the About Page.

10 replies on “Hoarding, the Scarcity Mindset, and an Unnecessary Attachment to Your House”

The longer I’m a homeowner, the more I miss renting. We’ve suffered huge opportunity costs from paying the mortgage off early. (Though my gut says we would not have been as aggressive putting money in the market from 2010-2013 as we were with paying down debt. The latter really motivated us, and the former scared us.)

But I kind of dislike home maintenance. We’ll also likely leave the state in the next 12-24 months, and I really don’t like the idea of the home sale process. Seems like a big pain and 6% commissions to people who didn’t do a whole lot of work.

Ironically, we’re now considering a cash out refi, putting that money in the market, and (by borrowing only a certain amount) turning the house into a cash-flow positive rental when we leave.

1. I’m a fan of paying off all your debt. The psychological benefits outweigh the barely -EV of paying it off early.

2. If you were so motivated to pay off your debt, why go back? You just contradicted yourself. Why add a liability/expense to the personal balance sheet?

3. Is your current house the best possible investment you could make in real estate? If you sold your house today, would you take that money and buy that exact house to make it a rental? If not, then don’t turn it into a rental unless you absolutely cannot sell it.

4. If you’re moving in 12-24 months, why in the world would you want to pay origination fees, etc. for a cash out refi?

Can you guess where I’m going with your plans?

Do you see how the attachment is affecting your thinking? You’re thinking of the current house as a sunk cost as opposed to a fungible asset.

Oh, trust me, I want to sell. My wife, not so much. It’s our first house and she wants it to ‘stay in the family’, like the hypothetical people in your post.

The cash out refi/rental plan is a compromise to at least get some of the benefit (capital) of a sale.

Go to 10 estate sales and talk to whomever inherited the house and see how happy they are (not). That might convince your wife. I do have an article about it in my (shameless plug) 52 week Financial Game Plan.

Then take lots of pictures. The pictures will be representational and will offer the same hedonic benefits as the house itself. I can also assure you that in 10 years, you won’t think of that first house in the same way you do now. We bought our first house 11 1/2 years ago, and we tell stories about it that usually end with “so glad that we’re not in that house anymore” even though we really enjoyed it when we had it.

OK, here\’s one for you. What about New York City? I\’m always told it\’s \”different than the rest of the US.\” I rent an apartment larger than I could afford to buy, for a very reasonable rent (wonderful landlords who want a good tenant and have never raised my rent). But it\’s becoming very worn and I\’m tired of the tiny kitchen and bathroom. I\’m at the point I really would like my own place–just don\’t want to put any money into a rental– and the rent vs buy calculator is starting to nudge a little more into the \”buy\” column. Added to this, everyone tells me–and it seems to be true, from watching my friends\’ deals–that the way to make money in NYC is to buy, because prices \”always rise\” here. Of course I know that\’s not true–I saw what happened during the recession–but on the other hand, the prices on apartments I like have risen 100k+ in the last year. (for the record, I\’m 54, no debt).

Could you see if the landlords have other deals on places that might have larger kitchens/bathrooms?

Alternatively, any family who are handy who could manage properties in other locations – buy rental properties where the cash flow makes sense and use the rental stream to pay for a bigger apartment?

Other boroughs?

Also, AWESOME on the no debt! clapclapclapclap!!!!!

I’m not saying I’m against home ownership for everyone. It has its own pros and cons. If the math (all in) works out for a house, particularly if you can pay cash, go for it. Just make sure that you’re not falling prey to the psychological biases that create an incorrect perception of value of home ownership. If you can go in eyes wide open and the numbers make sense, go for it.

I will tell you that I never buy real estate with the expectation of appreciation. That said, I do everything I can to buy real estate on sale. Fortunately, since it’s an illiquid market populated with irrational people, it’s possible to get a steal of a deal if you’re patient enough.

And thanks for commenting!

I know the feeling.

We\’ve been in our place a while now but will be moving in a few years. It\’s tempting to turn it into a rental property and have an excuse for periodic business trips back to the area to check on it, but it\’s not worth the hassle. Better to take or equity, and the capital gains exemption, and reinvest in our new location.

Hey, Jack–

We actually kept our old condo when we moved, but not for the 28% discount on travel back to Charlottesville, but, rather, because we couldn’t sell it at an acceptable price. I figure 28% off of a $1,000 trip (the effective tax discount) isn’t a good tradeoff if I have other alternatives, but is a good ancillary benefit all other things being equal. Again, it comes down to a question of if you had the $ in your hand, would you buy that exact, same house as a rental property. I agree with your decision – use that reinvestment to generate a little extra cash flow to help pay for the trips!

Oh, one thing – the CG gains exemption holds even if you rent the property out for 3 years. You have to have lived in the property as a primary residence for 2 out of the past 5 years for it to be eligible for the capital gains tax exemption.

Thanks for commenting! Have a great weekend!

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