Wednesday, September 14, 2005

Buyer Psychology

I saw this article on another blogger's site and decided to also reference it here because it does a good job of describing buyer psychology in a flat to declining housing market.

Many of us here in Marin like to think that Marin is "special" in some way vis-à-vis its housing market -- "It's different this time", "Marin is special/unique", "Marin is God's country", etc. Yes, Marin is pretty. Yes, Marin is special. But it was just as pretty and special 5 or so years ago before housing prices went to astronomical levels. Are we to believe that today Marin is N times as special as it was before (where N is the factor by which housing prices have increased in the last few years)? No, that's silly. Are we to believe that the psychology of buyers in Marin is somehow different from the psychology of buyers in other parts of the country even after adjusting for socioeconomic status? I seriously doubt it. To think otherwise is arrogant. Buyers are buyers, which is why this article is being posted here.

Some choice quotes:
"It's not easy being a first-time home buyer, and the number entering the property market has dropped to a record low. Sometimes renting can save you money and leave you better placed to enter the housing market at a later date."

"In a recent survey, two out of three renters said that they could not afford to buy a house, while one in three said they were waiting for prices to fall. This is because they want to avoid negative equity, where the value of the house falls so far that it is worth less than the outstanding mortgage."

"A buyers' market sounds great, but what it really means is that there are lots of homes on the market that are not selling. This is because estate agents and sellers are reluctant to drop their prices and face the fact that in many parts of the country prices are past their peak. In other words, the properties in many areas are over-priced, and if you buy now you could be paying too much."

"At the simplest level, you could say that if house prices fall by more each month than you pay in rent, you will be out of pocket if you buy now. But you must also add on all the mortgage interest you would be paying on an asset that's falling in value."

"For example, with the average first-time buyer property of £157,000, a price fall of 1% in a month would wipe £1,570 off its value. This is more than most first-time buyers would spend on a month's rent. Add to this the £600 or so mortgage interest you would be paying each month, and it's hard to see any point in buying while prices continue to fall."
[Emphasis mine.]

"Over the past three months, regions that have seen price falls are: the South East, London, East Anglia, and the North. Halifax, the biggest mortgage lender in the UK, predicts that in the next six months annual house prices will fall 6% in East Anglia, 4% in the South East and London, 3% in the North and 2% in the South West."

"If these predictions prove correct, first-time buyers would save £2,900 in East Anglia if they stayed renting until January 2006, £500 in the South East, and £1,100 in London."

"If you want the flexibility of renting and are not sure when to get on the property ladder, then be patient and keep saving for that deposit."


Blogger marine_explorer said...

On the subject of psychology, here's a few select quotes I’ve heard first-hand in the last year:

A local RE investor, upon hearing a friend rented a waterfront Tiburon home for $2K/mo (heard today):

“Are you serious?…that makes no sense, that area’s very desireable (sounding perplexed). I bet they owned it for a long time…that’s why the rent is so low”

This guy has the best quotes. Again, talking to a friend (his office is next to mine):

“How are my RE investments going?–oh fantastic! No, I don’t think the bottom will drop out. (sounding defensive) RE in Marin is always a great deal–at any price. Marin RE has never gone down!”

Here’s a Grubb+Ellis VP: (yes, he lives in Marin too)
“No, there’s no “bubble” (rolls eyes)–especially in Marin. We might see some people defaulting on mortgages in a few years, but no housing deflation”

A family friend: (in Marin again)
“I’ve always made money on real estate–I don’t plan to lose anything this time”

To us on buying a new home:
“These house prices are normal for Marin; I just don’t see them dropping–ever. You better buy now before you’re priced out–forever

IMO, when people get this confident, so disconnected from a macro-perspective, they’re almost begging for a wallet smackdown. Reality will prevail--even here.

Sep 14, 2005, 7:44:00 PM  

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