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It’s All Psychological

July 20, 2007

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.

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2 comments

  1. I think you’ve lost touch with reality (chuckle). Seriously, it’s a stretch to imply that labor and materials have no impact on the pricing of homes, or any tangible product. These glorious fields of urban sprawl didn’t just appear overnight like crop circles. I don’t know much about the house-building business but I do know that builders have expenses and those expenses are indeed factored into the cost of the home. I also believe you are correct in that builders and home sellers perform a psychological dance when it comes to selling and buying homes. But there is one very important factor that you hit on in a round-about way—Median home incomes. This region simply could not continue to support the rising home prices because incomes were not keeping up. And I see no indication that this will change in the near future, especially with the shift to a global economy. In other words, jobs are being outsourced and insourced (a clever term I thought of myself). Insourcing is what happens when the government caves into the business and Chamber of Commerce lobby and quietly opens the immigration doors to allow workers to come and do the “good paying jobs” for less. We also know about companies that simply move out of state or out of the country to lower their operating cost. Can you say, “Welcome to Wal-Mar?” I hope so because that might be one of your few job options in the future.

    Some of my friends have attempted to find security in government work with the state. But even the state is going broke because it spends more than it takes in. One doesn’t have to be a genius to know beyond any doubt that eventually this state will tumble into a painful financial crisis unless every adult citizen gets off their butt and demands financial accountability. We spend money like drunken sailors, and borrow, borrow, borrow to keep us pacified into thinking everything is okay.

    Why did I carry on this rant? Because of that dangerous psychological condition called denial. We are indeed looking truth in the eye and denying it.
    Ultimately I guess my question is: should we a Christians even be concerned about such ambitious financial matters? Speaking from the heart I will admit there are times when I resent (from a financial perspective) the influx of people from around the country and around the world because I do not see it as a good thing any more. I suppose that might be jealousy, or a reaction to reality. But there’s another reason that has nothing to do with home prices or incomes or immigration or deficits: people are so busy and they come and go so frequently here that it’s almost impossible to find kindred spirits with whom you can establish life-long relationships. I feel homeless and disconnected in my own home. I feel like I’m just camping here for a while but I don’t know where I will go when I’m finished camping. What is that? Where does it come from? Am I wrong for feeling this way?
    Explain that psychological factor:)


  2. Hello, is anybody home?

    Better get something posted about the need for all of us to live lives of integrity, at least to the best of our ability. It’s much easier to be convicted in our hearts about sin (so we can start making things right) than it is to get caught in sin.



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