A local reporter writing for the Sacramento Bee was commenting on the changing real estate market in Northern California. Currently, parts of the Sacramento region are seeing some of the largest price drops in the state. At the same time, other parts of the region are seeing little lowering of the price. What I caught was the comment of the reporter who concluded, “Part of this current real estate market is psychological and not based in reality”.
I have several observations on that comment. First, almost every aspect of the real estate market is psychological. Someone might say that the part that isn’t involves the cost of materials and labor. But that isn’t even close to being true. I remember visiting a friend in Evanston, Wyoming in the early 90s, when the oil industry was tanking. That entire town survived on higher gas prices and prices were staying very low. 2,000 square foot houses were selling for less than $30,000. I guarantee you that this cost is well below the materials, labor and land value. But as soon as everyone got a whiff of the price plummeting, they all wanted to sell no matter what they got. Now, you can pick up that same 2,000 sq. ft. home for over $200,000.
Every aspect of real estate is psychological. If people sense that they won’t be able to buy a house, they will pay more. Conversely, when the same people years later fear they won’t be able to sell their house, they take less. The common soulish reactions to anything are all involved in real estate: jealousy, pride, fear, risk, greed, prejudice, tiredness and anger.
Second, what does the reporter mean by “reality”? Is she referring to the price people feel they ought to get, the price the Country assessor would like to see or the neighbor next door who has a fetish with the grass growing to heights of 18 inches or more? What reality? Every macro-market in the history of our country has been based upon how all people perceive their lives are doing. Post World War 2, people were tired of being poor, depressed and afraid. So they sunk all their fortunes into a house. Thus were suburbs born. After the sky-high interest rates of the 8os, people resolved never to get caught up in untenable mortgages again, and more people put at least 20% down on homes. At the turn of the Millennium, as the next generation grew up who hadn’t experienced the pain of 15% mortgages, we went through the cycle of rising prices fueled by a group that thought they could survive forever on Adjustable Rate Mortgages and no down payments. All that is called Greed.
I remember telling a close friend to ignore the trend and go with a 25 year fixed mortgage. I said that low mortgage rates wouldn’t last forever. He quoted three other friends (all coincidentally in the real estate or financing business) who assured him that he would be safe for at least ten years before the ARMs went up again.
Last year, he had to sell everything and move into an apartment. For some reason, he blames the economy, the government, the mortgage company and his parents. I haven’t heard him blame himself yet, and I don’t expect to. I guess blame is another one of those components from psychology that applies to real estate.