The surprising change in buyer behavior caused by the housing bust

With the fear of being priced out gone, would-be home buyers see high prices as a deterrent, not as an incentive to recklessly jump into the market.

priced_out_foreverPrior to the housing bust, house prices on a national level had not fallen in over 80 years. Even in California where house prices had fallen on two previous occasions, the bottom of each trough was not as affordable as previous eras. When prices never go down or only decline a small amount for a brief period, people feel a sense of urgency to buy before prices rise even higher. This is a particular problem in California where house prices have risen faster than incomes for the better part of forty years.

Buy now or be priced out forever! That was the manipulative refrain realtors used to motivate their clients to act. It was a rational fear in California because waiting to buy often meant buying less or not buying at all. When the economy is strong and job growth outpaces construction, the shortage of supply relative to the demand pushes prices higher and higher.

Before the housing bust, the fear of being priced out was nearly universal. Everyone, everywhere felt they must buy a house at their earliest opportunity. The housing bust changed all that.

People learned a number of valuable lessons: distressed_borrowers

In short, the urgency is gone. There is no better evidence of this fact than the noticeable change in buyer psychology over the last decade.

Bubble-era home buyers jumped at rising prices; today, they’re turned off

By Andrea Riquier, Published: Mar 22, 2016

There’s a paradox in Monday’s existing-home-sales data.

Sales slid 7.1% to the lowest pace since November, the National Association of Realtors said. NAR has warned for many months that low levels of supply, which are pushing prices ever higher, will eventually cripple the market.

February’s decline may be a sign that the Realtors’ fears are coming true, …. as NAR Chief Economist Lawrence Yun said in a statement, “the main issue continues to be a supply and affordability problem. Finding the right property at an affordable price is burdening many potential buyers.”

(See: The hidden perils of lender policies that suppress housing supply)for_the_family

That may sound obvious: if you can’t afford the few limited options available on the market, you’d probably give up too. It also tracks with a survey NAR published last week, which found that the share of current renters who say now is a good time to buy fell in the most recent quarter.

But it’s worth remembering, as Yun pointed out in a press conference Monday morning, that it wasn’t too long ago that higher prices drew more buyers in, rather than shutting them out.

That phenomenon was documented by Robert Shiller, one of the creators of the S&P/Case-Shiller home price index and a Nobel Prize winner for his research on asset price psychology.

In a 2007 paper, Shiller described the bubble mentality as “a feedback mechanism operating through public observations of price increases and public expectations of future price increases. The feedback can also be described as a social epidemic, where certain public conceptions and ideas lead to emotional speculative interest in the markets and, therefore, to prices increase.”

A few paragraphs later, Shiller wrote, “That the recent speculative boom has generated high expectations for future home price increases is indisputable.”

No kidding.


That’s vastly different than the world we live in now. In the February Fannie Mae Home Purchase Sentiment Index, survey respondents said they expect home prices to rise 1.7%. One year ago, respondents forecast prices would rise 2.5%.

In the 12 months to February, the actual price gain was 4.4%, NAR said Monday, but in recent months the yearly increase has been as high as 8.2%.

Homeowners are also less confident about the value of the equity they have in their homes. That means they’re no longer cashing out to finance other spending, as they did in the bubble years.

Absolutely-Fabulous-HELOC_approvalGreat! The last thing we need is a return to the HELOC abuse lifestyle of the 00s.

But it also means they may not understand how much their homes could command on the market, making them less likely to list and worsening the supply problem.

When prices rise faster than their wages, people can obtain less real estate with their income, so there is a natural tendency for people to react with urgency because they don’t want to be forced to accept lower quality accommodations later on.

When people react to the fear of being priced out, they often act irrationally and buy whatever is available, and in their buying, they contribute to the problem of rapidly rising prices that prompts even more irrational buying. A frenzy results.

This is the psychology of a financial mania, and it’s something I’ve written extensively about over the last nine years. I find it very encouraging that this pernicious thought virus is no longer plaguing the housing market.

It sucks to be a realtor these days….


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