From the LA Times:
Meet the flockers
By Diane Wedner
We haven’t seen this much peer pressure since high school. Buyers wait for others to jump in. And sellers
won’t budge on price till neighbors drop theirs.
…
TECHIE music buffs know that today’s must-have device is an iPod. So they buy them, en masse. Real estate aficionados know that we’re in a downturning market. So buyers wait and sellers hold out, en bloc. The group-think is the same, only the settings are different.Behavioral economists — experts who study what consumers do and follow the economic impact of group behavior — say that those involved in real estate are not immune to the same pressures and need for conformity as, say, high school students sporting pompadours in the ’50s, love beads in the ’60s and platform shoes in the ’70s.
“People suddenly start wearing wide ties or narrow ones, even though it’s not logical,” said Walter Reich, a professor of psychiatry at George Washington University in Washington, D.C. “In real estate, there are pressures and trends, too; people don’t want to feel out of step.”
…
But when the masses believe something is a good idea, it takes a sturdy soul to resist the trends.And when there’s a chance to get rich quick, everyone climbs onboard. Robert Shiller, the Yale University economist who predicted the 2000 stock market collapse in his book “Irrational Exuberance,” says the recent real estate boom replaced the ’90s stock market boom, with the same level of buyer and seller euphoria. Lessons learned from the tech-bubble bust were ignored. But real estate elation, too, inevitably faded, and fear now drives people’s actions instead.
…
.”In a changing real estate market, buyers and sellers freak out and come up with their own strategies, which actually affect the market,” said Christopher J. Mayer, a Columbia Business School economist. “Buyers waiting for prices to bottom out can cause prices to drop, and in the ’90s that led to a recession.”
…
The urge to follow the herd leads to spending beyond one’s means or failing to set realistic sales prices, behavioral economists say. Or forgetting that bison sometimes stampede off cliffs, buyers see “everyone” buying homes and gaining equity, and they want in too. There’s always safety in numbers, consumers assure themselves, and if they make a mistake, the misery can be shared.During the bull market, buyers feared being priced out of the market. This thinking may account for the fact that higher-risk negative-amortization loans made up 17.4% of all loans in California through July of this year, up from 14.8% in 2005, according to First American LoanPerformance, a data-tracking firm.
Once in, overextended buyers often become victims of “bubble thinking,” said Richard L. Peterson, a psychiatrist and managing partner of San Francisco-based Market Psychology Consulting. Buyers gamble that the value of their homes will increase, even if they’re losing money every month due to negative amortization loans and lack of equity actually accruing.
Now psychology is certainly outside my realm, but isn’t an article like this self-reinforcing?
I think this is an actual example of a media story that Realtors can rightly claim is one where the story helps people stay out of the market.
We’re obviously past a turning point in the market, but I think you can view article’s like this as a downward slope on the road it certainly doesn’t help the market.
“negative-amortization loans made up 17.4% of all loans in California” – that might be true for the poor sap paying the gobernatorial “sunshine tax”.
I’m down here visiting folks in Tucson AZ. Many of them were priced out by Kalifornia speculators who outbidded every first-time-buyer working on AZ wages.
I’d say the Kalifornia Greedy Grubbers grabbed at least 40-50% of the RE sold in Tucson betw. ’01-’05. This is organised pilfering IMHO.
They’re doing the same thing RIGHT NOW in San Antonio/Austin, TX.
GreenSCUM is gone but his stench will go on forever.
“During the bull market, buyers feared being priced out of the market.”
Greed/Fear
The same in any market mania. When everybody is doing it and making $, the herd has to follow. There is great FEAR that if they don’t follow, they will miss out on a no-brainer. After all, all the idiots are making big $, so can I. Consequently, they plow into a market, some with their eyes closed, do whatever to get in now at any cost. If I don’t buy now, it will cost 100k more next year. But I can’t afford this price, that’s OK, they have this new financing that allows me to buy the house of my dreams. But what happens when the rate adjusts and the principal kicks in?? No problem, if we can’t afford the payment we’ll just sell and make 100K , just get in now, it will be too late tomorrow!!! Oh s*it, 3 other people are interested, let’s get into a bidding war. I have a great idea,it’s so easy to make $, let’s buy multiple houses buyers and flip,GREED.
Now what?? The same GREED/FEAR exists. However, the great shift has occurred. Now it’s the potential buyers carrying this syndrome. BUY??? Are you kidding, this market is starting to drop, FEAR. Who wants to catch a falling knife?? What happens if the drop is only in its infancy?? Listen to the reports. You have to be a fool to pay these prices. I can buy at a later date for much less, GREED.
Yes, the great GREED/FEAR shift has taken place. It occurs on the way up and then the way down. When sentiment turns like this the corresponding drop/retracement is usually as much as the historic gain.
One of the top performing realtors in my area (“5 million dollar club” etc) recently published an advertisement for property listings which said on the bottom:
“The irrational exuberance we’ve seen in the market is gone, and now sellers must price realistically…”
Thought it was interesting those words were chosen.
BC Bob said:
“.. It occurs on the way up and then the way down…”
The problem on this way down is that the realtors are against selling low, and they feed the buyers whatever crap it takes :(
So this is going to be painfully long..
ks2nj.
I always said it would be a long, slow process. However, the realtors are not paying the monthly bills. The realtors will not be able to save this market. Although they will fight tooth and nail over this. What’s their other option?? The tidal wave that is brewing is too powerful. The market decides not the realtors. Remember, the market giveth, now the market taketh.
And remember that the late 90’s stock market boom and bust was unprecedented – with a unprecedented drop in many areas – so this RE cycle may be unprecendented too.
How many of us bought stocks only to have the company go belly-up losing the entire investment. We thought that at worst, we would lose some but not all.
This RE bust could progress in some veeerrry strange ways. We all think we’re really smart, and that in itself manipulates and guides markets in new unforeseen ways.
Can’t wait to see how it plays our and if the herd mentality produces some bargains at just the right time.
During the bull market, buyers feared being priced out of the market.”
Buyers already priced out of the market…
Now what?? The same GREED/FEAR exists. However, the great shift has occurred. Now it’s the potential buyers carrying this syndrome. BUY??? Are you kidding, this market is starting to drop, FEAR. Who wants to catch a falling knife?? What happens if the drop is only in its infancy?? Listen to the reports. You have to be a fool to pay these prices. I can buy at a later date for much less, GREED.
Wrong – first time buyers are simply priced out of the market, without first time buyers nobody could sell – unless they are buying second ho,e and going to rent their first one to would be First time home buyer for a big loss a month.
You have to realize that first time homebuyers have to appreciating asset(e.g. other home) to cover for astronomical raise in home prices… And despite what goverment tells you, average person not getting any significant raises in their salary – ir’s big’s shots who are getting huge raises – one big company CEO salary = 200 other people salaries, but for buying homes he is still only one person in 200 – 0.5% population….
P.S. If home prices would be at the 2000 level +3%/year appreciation (18% higher) – I might be looking right now – it would not be cheap for me but it would be at leats possible. right now it is impossible – 350K starter fixer-upper within 1 hour commute to work (and I do not work in NY – I work NNJ)
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