Um, third option: "it depends".
I use both, depending on what I´m about to do. When I build a whole new house, I mainly sort by room, except for lighting for example, that I sort by function. Also, for some of the harder to find objects, I only know one way to find them, either by going for the room or function route.
That´s one thing I have to praise Sims 4 for: there´s a search function. Really, really wish we had this in Sims 3.