Seattle Bubble Psychology
I have a question for the board. Why would anyone in their right mind buy at the peak of the housing market?
Robert Shiller says there are three factors. First, it's like the optimistic gambler. People who luck out when the market goes up around them overestimate their abilities. Second, people overestimate profit and ignore inflation, repairs and the interest they paid on the mortgage. We've all seen the stories that if you do the math, housing is a terrible investment in the long run compared to the stock market.
Third, there's this - the anecdote factor:
"The human brain indexes facts in terms of stories about people, not in terms of numbers. Once prices start rising, everyone knows someone who made a killing selling their house. That becomes the story."
http://www.ft.com/cms/s/4c93a12a-f991-1 ... 10621.html
Robert Shiller says there are three factors. First, it's like the optimistic gambler. People who luck out when the market goes up around them overestimate their abilities. Second, people overestimate profit and ignore inflation, repairs and the interest they paid on the mortgage. We've all seen the stories that if you do the math, housing is a terrible investment in the long run compared to the stock market.
Third, there's this - the anecdote factor:
"The human brain indexes facts in terms of stories about people, not in terms of numbers. Once prices start rising, everyone knows someone who made a killing selling their house. That becomes the story."
http://www.ft.com/cms/s/4c93a12a-f991-1 ... 10621.html
Comments
good question! I think about 3 factors
1) emotional factor- people get caught up in seeing how they might live "if they just owned a place" - hollywood factor. Like people wanting to be married who aren't seeing only the glamour of it.
2) Americans are bad at math - can't really calculate the true investment potential (reference many threads on this board)
3) Short term thinking applied to a long term purchase. People look at recent performance of housing and extend it into the future. Plenty of examples of this from posters on this board as well. Post everything they see about how great current performance is, and ignore all evidence about what is going on with the broader economy, or performance vs. historical norms.
Interested to see what others think
I'd say emotion is the biggest thing. There's social pressure involved. I rent. We make good money, and it seems like there's a housewarming party around us every 15 minutes. Everyone I work with has bought a house within the last year, or already owned. I'm the only renter in my office.
People ask me 'When are you going to buy??' it's like a club or something.
They snicker if you suggest any uncertainty at the notion that values will continue to climb unabated.
One guy owns eight or ten houses up north, and cheerfully offers 'Always goes up!' and 'Always a great time to buy a house!'
That kind of thing can really stir up a person's emotions. Envy. Fear. Insecurity. I disagree with the idea of a house as a financial investment (until recently), but rather as an opportunity to get invested in a place. And being a renter, you can be left to feel rather rootless.
Couple that in with a general ignorance about how markets work (myself included) and not knowing what prices will do, and it becomes very easy to see how people make large financial decisions based primarily on fear and envy.
I'll admit that at this point I'm pretty much paralyzed by fear. I'm afraid that if I buy right now, I'm an idiot for buying at the peak. I'm equally afraid that if I don't, the prices will continue to shoot up. Look at redfin and see what some places sold for in 2002-2004. You'll be sick. I mean prices have nearly doubled in some cases.
That brings me to another aspect of emotion -- hope -- Someone who's missed out on the big profits might be more prone to gamble on the chance that it might continue. This is why every bust has suckers who are left holding the bag.
I don't want to be that sucker this time, but I don't know that it's a bust either. That's pretty much the root of being paralyzed by fear.
You can be happiest in life, in my experience, when you can control your greed. Most people think "If only I had twice as much, THEN I would be happy" (that's greed, pure and simple). If you think instead about everything you've already got and how lucky you are to have it compared with 99.9% of less fortunate people in the world, you'd realize that the real situation should be "If I only had half of what I've currently got I"d STILL BE HAPPY".
So, small_far_ugly - don't feel paralyzed or afraid. Feel empowered - empowered over your own sense of self control, something most other people don't have. Speaking of feeling paralyzed and afraid - typically that feeling you get when you are really beginning to feel sick to your stomach and you're beginning to doubt your sanity and think maybe you've got this whole thing wrong and everyone else might just have been right - that's a really good feeling to get in touch with and understand - because typically THAT'S THE TURNING POINT for the market, it's called capitulation. As an example, I felt there was a stock market bubble in 1999/2000 and the last time I felt that exact feeling was within one month of the stock market top. You are are in agony because the world seems just so screwed up - nothing makes sense - people are acting irrationally - and you just want the pain to go away. The impulse was great but I didnt' give in and I benefited financially as a result whereas many people I know who did give in were disembowled financially. So all I can suggest is have confidence in your own sense of reality and hang on a bit more - the world does return to rationality - it just takes longer than you would think it should.
I've had the exact same feeling for the past couple of years. I've been actively watching the eastside market for the past 3-4 years hoping that there will be a slowdown :-(.
Of all the people that I know, I've been the strongest believer in the bubble (and we are the only ones who haven't bought a home in our friends-circle; and all of them think that I'm still throwing away my rent money).
Now, I'm starting to wonder if I'll be "priced-out forever" :-(
Interest rates down, lax lending standards, and the mentality mentioned already in this thread create an environment where people have taken advantage of a unique economic situation to leverage their future earnings to an unprecedented degree. This dump of easy money therefore inflates prices, especially in the case of "always goes up" kool-aid drinkers, and whatever percentage of the populace it is that only cares about "what's the monthly payment?" (Ever seen how automobiles are advertised on TV? Advertise just the minimum monthly payment and it makes it seem like my unemployed sister could afford a Lexus...).
This too will pass.
And 20% down with solid earnings/credit history will still be able to access credit to buy property, long after any possible credit crunch comes to pass. Don't focus on the current blip, concentrate on getting your long term financial needs met and your short-term shelter needs met. Don't focus overly on trying to time markets. If you truly need a place and can afford it, then you don't have a lot of choice either way. Ignore your fearful/greedy/ignorant surroundings and enjoy life and financial freedom.
* Disclaimer: I am not a licensed Professional(R) Realtor(R) like some, and therefore not qualified to give "financial advice". There's Never Been A Better Time To Buy Or Sell And Pay A Commission(R). Always Goes Up. Seattle Is Special. Boeing. Vista. It's A Priority(R). etc etc.