In fact, I would posit, the truth lies in a combination of the two theories. I think that people try to make real estate a rational investment, but those who view it purely that way often don’t live where they want to live, or buy when they want to move. In the end, those who are happiest are frequently those who fall in love with a particular piece of property, and rationalize its logic as a good choice for where to put their money. People who turn out to make the best choices, from a financial perspective, are to some extent those who are lucky in their timing. Very few of us choose exactly the right time to buy, if that is our aim. More likely, we get a job, start a family, or retire at a time that lends itself to a home purchase when prices are low, and end up selling when prices are high, for the same reasons. In addition, there is one other factor: it’s best not to be too greedy, because aiming to get the very most out of your real estate investment can lead to waiting too long to buy or sell; in a way, that argues that overthinking a purchase or sale can be a mistake. Many good decisions turn out to be good in hindsight, even for those of us in the business.
So why does it matter what national fiscal policy is? Since I believe in the power of the free
market, I believe that having the government tell us to buy real estate doesn’t
work, most of the time. In fact, it
triggers something in our brains that makes us suspect that, as with some other
good reduced too far on sale, there must be some reason NOT to buy then. What does work, conversely, is for prices to
begin to rise, or for rates to begin to climb.
Once buyers see that their purchase will cost more, they acquire a sense
of urgency that does far more for the real estate market than really low rates
and prices could do. And, of course, as
soon as some people start rushing to buy, prices get bid up, and the sellers’
market conditions begin to feed on themselves.
Soon rates and home values begin to price some buyers out of the market,
and lead others to overpay or stretch too far for something too expensive for
their incomes. We all know what happens
then….
If people always did the rational thing, they would know
that interest rates are almost always lowest near Election Day, and, yet,
that’s not a busy time of year for real estate.
Springtime, when rates traditionally rise, is the season that tells the
story as to how the market will fare for the rest of the calendar year. Every year, then, we see the theory that the
behavior of others affects our behavior more than logic does. Other factors certainly matter, but some of
them are also emotional. The single
biggest effect on sales, in my opinion, is the consumer confidence index. One could buy when one believes it is
peaking; however, I believe that most people act without knowing the exact
number of that index, but because the climate that goes into setting the index
affects their behavior. That certainly
happened around the country beginning at the end of August, when sales
everywhere seemed to slow down at once, even though the economic indicators
didn’t predict a dip.
Professor Robert
Shiller of Yale, winner of this year’s Nobel Prize in Economics, has written
extensively on emotions and economic behavior, and we in the industry live it
every day. If the Fed eases up on
stimulus, that should make people start to feel as though the economy is
heating up, which should send them out to buy real estate. Maybe not today, but certainly this
spring. So that would argue for a good
market in 2014, caused by a combination of irrationality—seeing others buy—and
rationality—seeing numbers that point to recovery and growth. Together, that points to a good year this
year, and probably, barring extreme weather, an early start to the spring
selling season. So here’s to a robust
2014, and may the buying begin!