Wednesday, Aug. 23, 2006 | 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.”
And, with as much media focus on the real estate market as ever, experts say psychology will continue to play a role going forward.
“It feels like a bigger thing than it really is,” said local real estate analyst Gary London. “Now the question is, ‘How long and how deep?’ We’re no longer asking ourselves, ‘Is the market down?’, we’re now asking ourselves, ‘How down, and for how long?’”
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.”
Most people love to hate the media. And while the housing market isn’t exactly a celebrity just trying to take a well-deserved break in Cabo San Lucas away from the watchful eye of paparazzi, there are many analysts who say the media have chased tidbits of housing market news so hard that the coverage has actually influenced market activity.
“Ten years ago, no one had ever heard of the housing bubble,” said Karl Case, professor of economics at Wellesley College in Massachusetts. “But when the covers of The New Yorker, The Economist and Barron’s are talking about the housing market, you know that’s affecting people.”
A recent cover of The Economist that showed a brick stamped with the phrase “House Prices” falling from the sky.
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.”
He attributes those psychological influences to a couple of different sources – the media and local chatter.
“The media’s ongoing assault on the residential real estate market ultimately creates a psychological effect,” he said.
London pointed specifically to the recent coverage of San Diego County’s first year-on-year drop in median home sale prices in 10 years. He admits that occurrence is important, but wishes more emphasis had been placed on the fact that the drop was only about 1 percent.
“The numbers are the numbers,” he said. “Last year, we didn’t have numbers, we had speculation. This year, we have numbers, but they’re very slight.”
London said that while everybody talks about real estate, only about 8 percent of properties are actually engaged in real estate activity at any time. That doesn’t stop people from talking, he said.
“People are swapping worst-case scenarios at cocktail parties,” London said. “That’s bound to add to the psychological cloud.”
If the grass is always greener on the other side of the fence, the adage is exponentially truer for home sellers in a cooling housing market.
“People saw what their neighbors sold their houses for last year,” Gin said. “The thought of selling for less than that may be enough to keep them there.”
Norm Bour has been in real estate for 25 years and hosts a real estate finance radio show that airs in Southern California. He said he hears from sellers all the time who can’t seem to sell their homes.
“I tell them, ‘It doesn’t matter how much you paid for it, you just need to take a loss, lick your wounds and move on with your life,’” he said.
He said it’s often hard for people to separate themselves from walls once decorated with a four year old’s purple crayon or from a tree that once held a tire swing.
“People have a skewed perception of their own home,” Bour said. “Their house is always the best in the street, best in the neighborhood because of all of the things they’ve done to fix it up,” he said. “They need to realize that their house is not going to sell for more than the most recent comparable sale.”
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.”
Case has researched how buyers behave in boom and post-boom markets in the last two decades. He said buyers and sellers both crave some sort of crystal ball.
“You’re buying in the future,” Case said. “Real estate exists in the future, not in the past.”
Hamilton agreed it’s all about forecasting.
“When you buy a home, a big factor is forecasting how much you expect to be able to sell it for,” he said. “You have to act on the basis of some kind of expectation of what it might be.”
London said people use the wealth of information available to help them avoid making a real estate mistake, especially as the market is hard to predict.
“Homo-sapiens are habitually risk-averse; it’s all about minimizing your risk,” he said. “There’s no hidden information, so you can find out how much your neighbor sold his house for.”
Many of these experts agree that buyers’ motivations are an important factor to consider.
They say homebuyers need to think differently about the current housing trends than they might think about stock market fluctuations.
“Ultimately, it is an asset, and if you’re living in it yourself, you’re getting out of the need to pay rent,” said James Hamilton, economics professor at the University of California, San Diego.
Case agrees. “To think of it not as an investment, that’s crazy,” he said. “But to think of it only as an investment, that’s crazy, too.”