Wednesday, August 23, 2006

"If I don't board the housing train now, I'm going to be left behind."

From the Voice of San Diego:

Real Estate Psych Spike

There are neat charts of data. There are colorful 3-D trend graphs. There are historic accounts and industry predictions. And then there's emotion.

That psychology is what many real estate analysts consider the "x-factor" -- the part of the market that can't be logically graphed and analyzed. It's hard to predict what people will do -- buyers and sellers alike -- especially in a market that finds itself in unparalleled uncertainty.

James Hughes, dean of the Edward J. Bloustein School of Planning and Public Policy at Rutgers University, said the psychological and emotional factors involved in real estate have gone in cycles, depending on whether the market was up or down. But the psychology is always there -- for richer, for poorer.

"We used to call recessions 'panics,'" he said. "We didn't have a fancy word to describe them. The switch goes from greed to fear to greed to fear."
...
But it takes more than one person getting greedy or scared to turn the entire market. Herd mentality, even when rooted in economic reality, forms the foundation for most dramatic market shifts.

Hughes said the near-20-percent annual appreciation in home values in some places at the beginning of the decade was a huge motivator in getting people in the market. "There was the thought, 'If I don't board the housing train now, I'm going to be left behind,'" he said.

And now, homebuyers are a lot more cautious about getting on the train, said Alan Gin, professor of economics at the University of San Diego.

"It could conceivably work in the other direction," he said. "Buyers keep hearing this talk about a bubble, about housing prices slowing. Buyers might just decide that they're going to wait, possibly make lowball offers."
...
That media coverage isn't entirely to blame for the frenzy surrounding housing prices, said Hughes of Rutgers University.

"There's a tendency right now to blame the messenger," Hughes said. "The media by itself is not the instigator."
...
But London said with the absence of external shocks like widespread unemployment, a weak economy or a terrorist attack, the market's current ups-and-downs are due almost entirely -- 90 percent, he estimates -- to psychology.

"There's not as much real, substantive factors to stand on, so it's mostly about psychology right now," he said. "But that could change."
...
Hughes, from Rutgers, said sellers need to get past their greed. He gave an example of a common temptation: If someone bought a condo unit 15 years ago for $200,000 and saw it peak at $600,000, that person is often reluctant to sell in a cooling market, even for $500,000.

"It depends on when they bought," he said. "The seller's got to realize after a while, 'I still made $300,000.' They'll gradually accept it."

13 Comments:

Anonymous Anonymous said...

The Gravy Train has derailed..

Booowhooo

8/23/2006 07:06:00 AM  
Anonymous Anonymous said...

Grim,

This is a part of a past post from me. I read today's topic (psychology of the market) and thought this was appropriate. You can delete if you feel that it is redundant.

Let's talk about something that you don't hear from the industry. Two words, GREED and FEAR. I believe the last 30-40% of the up move were based on this and this only. When markets are moving up like this one, invariably greed constitutes a good part of the move. Buying one property was not enough, they had to flip 20. Everybody is making $. This is where FEAR sets in. Those on the sidelines have to get in because they FEAR if they don't, they never will. Prices will be up another 100k next year. They have a major FEAR that if they don't act now, they'll be left out in the cold. The herd stampedes in, bidding wars occur. Hurry get in!!!!!!

Now the market does not have to come down based on any economic factors, it will and is imploding on its own GREED and FEAR. That's right, what brought this up to ridiculous, exaggerated levels will bring it down.The corresponding drop will be equally pronounced, GREED and FEAR.

Now buyers are on strike. Why??? GREED and FEAR. Educated buyers will in no manner participate after just a 10% drop. They will get GREEDY (this is good GREED). They want to be assured they are not buying into a market that is still going down. There is a great FEAR on the part of buyers now that they are not buying value. Yes, GREED and FEAR will lead this market down. Usually the corresponding drop is greater than the upmove. It's the inevitable laws that govern prices. Nobody wants to buy when prices are falling. This will take time. Who knows what the fed will do when the $2 trillion in adj comes due in 2007. It is possible that you can have a little spike up sometine during this down move. Don't be fooled by this dead cat bounce.

BC Bob

8/23/2006 07:43:00 AM  
Blogger Metroplexual said...

"There's a tendency right now to blame the messenger," Hughes said. "The media by itself is not the instigator."

Is this aimed at the blogs?

8/23/2006 07:43:00 AM  
Anonymous Anonymous said...

"If I don't buy now, I'll get left behind" can in very short order turn into, "If I don't sell now, I'll get left holding the bag."

But mostly, I fear greed--or is it the other way around...

-Jamey

8/23/2006 07:59:00 AM  
Blogger Mr. Oliver said...

This is so on point.

For the past year, all I had heard was all of the now classic cliches...

"Real Estate never goes down."

"NY/NJ is different"

"You can afford more house than you think you can."

and, my favorite...

"No one puts down 20% anymore!"

Funny thing though, is whenever I would ask for some logical basis for these opinions, there were none.

I would relate the story of my parents having to sell their home on Lawn Guyland in '91. Sure, they bought in '73, so they made a nice profit in 18 years. However, I remember how brutal the market was, how the market fell.

Of course, as we all know, "things are different now."

8/23/2006 08:44:00 AM  
Blogger jayb said...

I don't know what the chances of a recession are, but let's say one hits soon. The Fed drops rates again to 1% or so. How many of you think this whole cycle could repeat itself? Buyers with easy access to money and prices going up, so sellers motivated to sell.

Or do you think there is some ultimate limit where buyers would realize that they can only afford so much and prices can go so high, no matter what the rates are or the buzz about the market or how ignorant they are about financing and affordability?

8/23/2006 09:06:00 AM  
Anonymous Anonymous said...

Tricks of the Trade :

My agent threw a nice explanation for RE never going down.

"The price of the property can go down but not its appraisal value, so its never a bad time to buy".

-KBR

8/23/2006 09:12:00 AM  
Anonymous Anonymous said...

To jayb - Thats what bank of japan did after their bubble burst in the 90's. They bought the interest rate to 0% and left it there, but it took nearly 15 years for the country to re-emerge. Its called Debt exhaustion.

8/23/2006 10:12:00 AM  
Blogger chicagofinance said...

jayb said...
I don't know what the chances of a recession are, but let's say one hits soon. The Fed drops rates again to 1% or so. How many of you think this whole cycle could repeat itself? Buyers with easy access to money and prices going up, so sellers motivated to sell.

Or do you think there is some ultimate limit where buyers would realize that they can only afford so much and prices can go so high, no matter what the rates are or the buzz about the market or how ignorant they are about financing and affordability?
8/23/2006 10:06:28 AM

Although I fear a recession may be inevitable, when a recession hits, things will be really ugly.

In 2001, we were primed to withstand a little downturn. This time around, we've pigged out and are weighing over 300 lbs., but we are going to have to run a marathon to get out of it. We are in no condition to handle anything other than rosy skies.

Best way I can describe it.

8/23/2006 10:41:00 AM  
Blogger jayb said...

Anonymous said...
To jayb - Thats what bank of japan did after their bubble burst in the 90's. They bought the interest rate to 0% and left it there, but it took nearly 15 years for the country to re-emerge. Its called Debt exhaustion.

8/23/2006 11:12:46 AM

I'm somewhat familiar. It was their economy that burst, not housing right? They experienced deflation for a while didn't they? Lived there for 2.5 years and they work and save like animals. Did the average Japanese take on too much debt to cause that exhaustion? Why did that happen to their economy?

We don't save like they do. So you're telling me, if a bad recession hits, even at 0% our economy will take a while to recover? Just trying to draw out some more information.

8/23/2006 11:36:00 AM  
Blogger Metroplexual said...

CF,

Very well put, I agree. Imo consumers will just be paying down debt and not buying a thing that is not absolutely necessary.

8/23/2006 11:43:00 AM  
Blogger yo me said...

Abode attitude
How Americans feel about their homes.
By Les Christie, CNNMoney.com staff writer
August 21 2006: 3:31 PM EDT


NEW YORK (CNNMoney.com) -- There's a lot of money riding on just how Americans feel about their homes. The value of residential real estate in the United States is worth upwards of $20 trillion, according to the Federal Reserve.

The National Association of Realtors (NAR) reports that close to seven million single family homes are expected to change hands this year alone, at a median price of about $227,000.

Despite the big money to be made - or lost - in real estate, only 5 percent of Americans regard their houses primarily as investments, according to a recent report on the attitudes of Americans toward their homes.

Coldwell Banker surveyed more than 2,500 U.S. homeowners over 25 years old with household income of at least $75,000. The responses from this moderately well-off group revealed that the vast majority, 67 percent, think of the house they live in primarily as a home, not a financial vehicle.

That loyalty to their existing home was further demonstrated by their answers to a question about whether or not they would trade up from it to a better one if they could do so without affecting the rest of their lifestyle. Most (53 percent) said no or probably not.

This demographic seems to be well satisfied with the lives they lead and the reports of Americans draining equity out of their homes to finance lavish lifestyles may be exaggerated. The survey found that 63 percent of respondents said they had taken no cash out of their homes for at least three years and 77 percent had no intention of doing so in coming years.

"The majority don't look at their homes as piggy banks," says Coldwell Banker CEO Jim Gillespie.

All that seems to indicate a high level of attachment, one that may seem surprising in people as mobile as Americans, who move an average of every seven years, according to NAR.

When they do move
The survey found that most of the Americans moving relocate to either equally crowded or even more densely populated areas; two-thirds moved either from one city to another, from one suburb to another or from suburb to city.

Most of us leave our hometowns; 81 percent live someplace other than where they were raised and 52 percent live at least 200 miles from there.

And although almost everyone has more than one reason for moving, the ones they cite most often include their careers (48 percent) or to improve their lifestyles (45 percent). More than 27 percent relocate to pursue a relationship.

Other reasons for moving include finding a more affordable location (15 percent) or a more affordable house (13 percent), a need for more space to serve a growing family (15 percent) and to be closer to extended family (16 percent). Divorce plays a role in 11 percent of these moves and displeasure with their current homes is cited by 12 percent of respondents.

Many people (13 percent) just want to leave winters behind by going to a warmer climate.

What Americans don't want
What these Americans are not doing is moving into "handy-man specials." Sixty-eight percent said they bought spanking new homes or ones requiring very little updating.

Gillespie sounds a bit rueful over that. He says, "Homebuyers may be missing opportunities to get more house for their dollar. . . . Sweat equity can transform a home from a fixer upper into a beautiful living space worth much more than its purchase price."

Perhaps lower-income Americans than the ones covered in this survey are buying the fixer-uppers. Or maybe these folks just don't have the time, skills or inclination to spend their all-too-short vacations scraping, spackling and painting.

Gillespie says, "People in [the higher] income range are looking for lifestyle, in a home that's already completed. Only 9 percent of them bought a fixer-upper and many of them were in high priced markets such as California," where even moderately high income people face affordability problems.

8/23/2006 06:25:00 PM  
Blogger yo me said...

let's start enjoying this homes.it does not matter if you have one ,two or three.market goes down ride on it.capital is the answer on any bussines.

8/23/2006 06:31:00 PM  

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