Sunday, April 02, 2006

Ignore Your 'Lizard Brain'

It's just so gratifying to read a magazine that used to be so "rah-rah, go housing; housing never goes down" now saying many of the things we bubble bloggers have been saying for so long now. The bubble really must be bursting. And the seller's amygdalas must really be working overtime now.

Anyway, here are some more "New Rules" care of Business Week (these are just so obvious but better late than never):
No matter how smart you are, it's easy to fall into certain mental traps that can cost big bucks. Instead of concentrating on the fundamentals, people tend to be ruled by their feelings and the compulsion to compare themselves with their neighbors. If your brother-in-law made a killing in real estate, you're determined to do the same. "So much of what drives the housing market is human interpersonal dynamics," says Yale University economist Robert J. Shiller.
1. Avoid the Herd
A first rule of thumb is to avoid herd behavior, which is what lured a lot of people into overpriced houses in the first place. The expectation of rising prices became a self-fulfilling prophecy as office mates and in-laws tried to leapfrog each other. The prevailing mindset: "You see people who aren't particularly talented, who aren't hard-working, who buy a house with nothing down, and they've been getting rich doing it. If they're getting richer, then you're falling behind," says Robert H. Frank, a Cornell University economist and author of Luxury Fever. Another attraction of herd behavior is safety in numbers. Millions of buyers can't all be wrong, can they? ...The rewards of thinking independently can be high.
2. A Small Loss Today is Much More Preferable to a Greater Loss Tomorrow
In a softening real estate market, one of the most dangerous mental mistakes is what behavioral economists call "loss aversion," which is the tendency to do dumb things to avoid, at all costs, recording a loss. Some sellers are so averse, they gamble the market will bounce back rather than cut their prices. Even owners who stand to make a big profit on a sale often set the price too high. In this case the mental error isn't loss aversion but outdated thinking.
3. Avoid Chasing the Market Down
The gravest danger of dragging your heels on price cuts in a sinking market is that you can "follow the market down," never managing to sell because your price is always just a little too high, says Christopher J. Mayer, a Columbia Business School economist. He and David Genesove of Hebrew University in Jerusalem found that when prices were falling in Boston in the early 1990s, two-thirds of the houses that came on the market were eventually withdrawn without a sale.
4. Don't Be Overconfident
In parts of the country where the market is still strong, a common sin continues to be overconfidence. Owners typically don't seriously consider a wide enough range of potential housing market outcomes, including the possibility of a steep decline. That leads people to take more risks than they should.
5. Don't Fall into the Trap of Thinking that Renting Makes You a 'Second-Class Citizen'
Rent-vs.-buy decisions are a perfect example of what the housing market can learn from behavioral economics. If financial efficiency were all that mattered, more people would be renting nice houses instead of buying them, even taking into account the home mortgage-interest deduction.

Especially in upscale communities, social pressure to buy is intense. Jonathan Miller, CEO of real estate appraiser Miller Samuel Inc., recalls that when he and his family moved to upper-crust Darien, Conn., 15 years ago and rented for a year, "we were absolutely second-class citizens. It was very unpleasant."

In many markets the total monthly costs of renting are far below the total monthly costs of owning the same property -- 62% cheaper in San Diego, for example, according to Boston-based Torto Wheaton Research, a unit of property manager CB Richard Ellis Group Inc. So you owe it to yourself to be aware that your castle thinking can be a costly predilection.
6. Don't Rely on Your Lizard Brain
Neuroscientists have even discovered the place in your brain that makes you spend too much on a house. Far from behaving perfectly rationally, real people are pushed and pulled by signals emanating from below the neocortex -- the primitive "lizard brain." That may be why there are so many homes with empty marble foyers, faux Roman columns, dust-collecting Jacuzzis, and exotic drooping conifers on the lawn.
7. Re-think the Whole Marin Wannabe Aristocracy Thing
What people can do is be aware of their human tendency toward status-seeking.
8. Avoid the Tangibles vs. Intangibles Fallacy
A foible that helps account for America's obsession with real estate is what you might call the tangibility fallacy. It's the all-too-human tendency to regard tangible things like houses as more stable and trustworthy than intangible ones like stocks and bonds. It's true that a house provides more comfort than a book entry in a stockbroking account. But that doesn't mean it's a better investment...To find your moorings, try to focus on the fundamental factors that determine value.

11 Comments:

Blogger randolfe said...

Great reference to Shiller. I would also recommend a read of Richard Thaler's Mental Accounting Matters, which also applies to how people rationalize (and often de-optimize) such decisions.

--Randy H

Apr 2, 2006, 10:56:00 PM  
Blogger Athena said...

GRRRR!!! I have to kvetch about this... and haven't decided whether or not to post it on my blog yet. So... this is the latest about a family member.

Have a family member... she is a retired grandmother living in a modest home in a retirement subdivision. She wants to have her elderly mother and mother in law come live with her but her current place doesn't have enough room for all of them.

So she went to visit one of the brand new subdivisions in Sonoma offering McMansions for just shy of a million dollars.

They had a "lottery" type event allowing her to "pick" the unfinished home she wanted and get pre-qualified for the house.

First of all I have every belief that this "lottery" was staged judging by the lack of sales in Sonoma I would want proof that these buyers were all legitimate before thinking that for some reason the bubble has passed over Sonoma like it belongs to the chosen people or something...

Secondly, she meets with the local broker to get pre-qualified and she TELLS him that she can't afford to do this...

He tells her YES you can and offers her 4 risky mortgage products.

She CANNOT qualify for this house using a traditional product and that is clear and he KNOWS that... so he offers her four different ARM products and the one that apparently made the most sense given her circumstances according to how this was told to me was what? You guessed it... a NEG AM ARM!!!!

WT?!?!?!? It is a 5 year so she would have to sell or refinance within 5 years and she KNOWS she will NOT be able to afford the payments when it adjusts.

I was told that the broker told her that over 80% of his loans are these products. Ummm.. YES honey!!!! That is precisely my point. If 80% of the people he is giving these loans to are JUST LIKE YOU and CAN'T AFFORD the dam house in the first place and they are ALL banking on selling or refinancing... WHO IN THE FORK IS GOING TO BUY YOUR OVERPRICED TRACT HOME BEHEMOTH FROM YOU WHEN YOU NEED TO SELL IT?!?!?

I don't know if I got through...

GRRRR!!! Why isn't this considered fraud?

He KNOWs he is giving a loan to someone who can't afford it- and is banking on a future market to be able to get out from under it.

Isn't there something REALLY wrong with this?

Apr 2, 2006, 10:58:00 PM  
Blogger Marinite said...

...the bubble has passed over Sonoma like it belongs to the chosen people or something...

First of all, you are too far north of the mark. Marin is the land of the Chosen People. Didn't you know that? We are immune. We are special. We have every right to be smug and arrogant about that fact too and aren't we just so proud.

Isn't there something REALLY wrong with this?

Yes, there is something really wrong with that. It is criminal, or should be. But as long as everyone feels like they are making money, no one is going to do anything about it or even care. So everyone gets these loans now because that is the only way they can "afford" to "buy". And then all these people get burned down the road, these loans fall from grace, then no one can buy anything at today's prices and guess what? Sellers either sell for a vast discount or not at all.

Sorry, but I am in one of my apathy moods this morning.

Apr 3, 2006, 9:53:00 AM  
Blogger Athena said...

you're in an apathetic mood... my energy today is sapped. You should have seen me all up on my soap box last night talking to these two little old ladies in my family and listening to other family members who have NO business dispensing financial advice feeling sorry for them being the receivers of my rant and telling them that it was meant to be or they wouldn't have won that lottery to pick their house. WTF?

They already put down a $30k deposit... and had only 5 days to change their minds. Is there really no way to get that money back?

I mean she SAID she cannot afford to buy the house and she really can't afford it and can't qualify for traditional financing... there ought to be some way these people can be persuaded to forget that they ignored that and recommended a high risk loan selling a future market and give that money back...


you better believe this is also one big smiling shister of a local broker... I hope to see him doing the perp walk when all this fecal matter hits the ventilator.

Apr 3, 2006, 11:46:00 AM  
Blogger moonvalley said...

Athena,
I have a sneaking suspicion as to who the Broker is just by stories I have heard around town. I am dying to tell the latest on what going on around here, but I'll not discuss it till we move into our new place in two weeks.
As to our being special up here, we live in Shangri-la dont'cha know??
Tell me your relative didn't buy in Bel Terrino whatever Flippper City?? or was it Montini Ranch. Who'd buy a million dollar place that's cheek by jowl with a dairy farm, unless one owned the cows?

Apr 3, 2006, 12:16:00 PM  
Blogger Athena said...

Oh honey! It was Montini Ranch. Then I told her... good grief I go by there EVERY weekend and for the past MONTH the only person I have seen lurking around there is YOU! She swears they truck out all sorts of interested people and show her waiting lists every time she is there. I think it is a whole lot of hooey!

can't wait to hear your news!!!

I think you very well know who this broker is...

my comment over the weekend is I don't care how NICE someone is, when they have the opportunity to make a quick pot of money off you- they will kiss you a bit before bending you over. The boogeyman doesn't ever really LOOK like the boogeyman except in hollywood slasher movies.

Apr 3, 2006, 12:49:00 PM  
Blogger peterbob said...

In a softening real estate market, one of the most dangerous mental mistakes is what behavioral economists call "loss aversion," which is the tendency to do dumb things to avoid, at all costs, recording a loss. Some sellers are so averse, they gamble the market will bounce back rather than cut their prices...

In addition to "loss aversion," they also suffer because they don't understand "inflation." If housing prices are flat for a decade, the inflation will erode the real value of your home. Either way, you can't avoid the drop in real value.

As an example, a 4% inflation rate for five years will cut 28% off the value of your house. Think about that. "Waiting" for five years to sell in a flat market is the same as droping the price today by 28%. But the problem with waiting five years is that the seller has to put all sorts of things "on hold" for a fairly long period of time.

Apr 3, 2006, 2:52:00 PM  
Blogger moonvalley said...


GRRRR!!! Why isn't this considered fraud?

He KNOWs he is giving a loan to someone who can't afford it- and is banking on a future market to be able to get out from under it.

Isn't there something REALLY wrong with this?

Athena, I was telling my husband this story of yours over lunch today, and he said..maybe it could fall under the heading of Elder Abuse..or Elder Fraud???? Ya think?

Apr 3, 2006, 6:12:00 PM  
Blogger Athena said...

I think so MV! I mean REALLY how LOW must a person go to take advantage of little old ladies LITERALLY! Come ON! I am appalled by the lack of chatter about this topic in our area.

Talk about a black out of news.

I mean REALLY look at all the other areas talking about their mortgage fraud and flipper fraud and appraisal fraud... but in the county with the lowest affordability practically in the state and one of the highest rates of uptakes of risky loans and all of OUR transactions here in the promised land are totally kosher? Must be because we are the chosen people.

;-D

Apr 3, 2006, 10:27:00 PM  
Blogger moonvalley said...

It would make an interesting story for the Sun or the Index Tribune, we know some of our local columnists, I think I'll suggest it and see what they say.

Apr 4, 2006, 12:58:00 AM  
Blogger Athena said...

MV... the Lynch's are bought and paid for by the real estate old dog's network in sonoma. Those guys have been buddying around with their in crowd since christ was a corporal. I doubt we will see anything except the sound of silence from them. Sonoma in that way has always been all about Hurry Up and Hush. catholic culture society. shhh... and offer it up and don't talk about it.

Apr 4, 2006, 12:28:00 PM  

Post a Comment

Links to this post:

Create a Link

<< Home

Terms of Use: The purpose of the Marin Real Estate Bubble weblog (located at URL http://marinrealestatebubble.blogspot.com/ and henceforth referred to as “MREB” or “this site”) is to present and discuss information relating to real estate and the real estate industry in general (locally, state-wide, nationally, and internationally) as it pertains to the thesis that recent real estate related activity is properly characterized as a “speculative mania” or a “bubble”. MREB is a non-profit, community site that depends on community participation and feedback. While MREB administrators do strive to confirm all information presented here and qualify all doubtful items, the information presented at MREB is neither definitive nor should it be construed as professional advice. All information published on MREB is provided “as is” without warranty of any kind and the administrators of this site shall not be liable for any direct or indirect damages arising out of use of this site. This site is moderated by MREB administrators and the MREB administrators reserve the right to edit, remove, or refuse postings that are off-topic, defamatory, libelous, offensive, or otherwise deemed inappropriate by MREB administrators. You should consult a finance professional before making any decisions based on information found on this site.

The contributors to this site may, from time to time, hold short (or long) positions in mentioned and related companies.