I'm about to refinance at a 5.25% interest rate (3.675% after tax), but Tyler Cowen and his commenters unnerve me. I figure a trackback will provoke Alex or Tyler or some other budding economist into responding.

Here's my very real dilemma. I bought a condo I love before the bubble. I now have substantial capital gains, and my after-tax housing cost is $1.50/sq.ft./month (vs. $2/sq.ft./mo. for not-quite-comparable rentals in comparable neighborhoods) plus the opportunity cost of having equity tied up in real estate instead of the stock market—though my equity in my real estate has returned a hell of a lot more than my equity in the stock market, where I'm down over 7% in four months. So do I cash out my capital gains to a greater fool and rent (with a likely decline in my standard of living plus the disutility of leaving a condo I really like, the disutility of dealing with a real estate sale, and the disutility of the aggravation of moving), or do I refi to lock in a ridiculously low interest rate that reduces my housing costs to $1.30/sq.ft./mo.—though again plus the opportunity cost in having equity tied up in something that may deflate somewhat? Does the answer change if I have a prime real estate location on top of a Metro station that will only become more valuable relative to more suburban locations as DC grows? (And perhaps even more relatively valuable as Tyler Cowen gains cadres of disciples who want to relocate to across the street from his offices?)

In the worst bubble to date, Los Angeles homes lost 21% of their value between 1989 and 1996. If that happened to me, I'd lose approximately 40% of my equity and a quarter of my net worth, but I'd still have a capital gain, though that reasoning seems to me suspiciously like the well-known gambler's fallacy of "playing with the house's money." No, if I've won $1000 in my first hour of playing blackjack, that's my money.