Following the Herd

 

In his book, Markets,Mobs and Mayhem, Robert Menschel writes about how our world suffers from herd mentality. He notes that bubbles and busts have shaped history and that today with the scope of the media and technology allowing so much access to information we’re more at risk than ever. Whenever we find ourselves caught up in the herd and the panic of the moment we can make poor decisions that often have long term consequences.

A couple of weeks ago I was chatting with a friend who was relating the number of people she knows who are on the fence about buying a home and she said that it was “obviously a bad time to buy”. It made me really think, if now is “obviously” a bad time to buy when was a good time to buy? Was it in 2004 when every property got 10 offers and went $100,000 over asking? Was it when you competed for a house with serious structural damage that didn’t really fit your needs and you didn’t like that much anyway? Was it when you wrote offers that were completely “As Is” and had no contingencies of any kind and you just hoped and prayed that no glitches appeared during escrow and you lost your deposit? I wrote an offer in 2005 that was $210,000 over asking, “As Is”, no contingencies of any kind, all cash with a 2 week closing and offering the seller a free rent back for 30 days…and we finished 3rd! Now that was herd mentality!

Now we have a different, yet very real, kind of herd mentality. Now we have buyers who found it perfectly acceptable to write fat offers, well over asking, who won’t write an offer under the asking price. I say this to people alot so I figure I might as well put it on the blog. I don’t believe losing money in a declining market is really a central issue to buyers. I believe it’s far more important for buyers to have the emotional support that comes with competition to motivate them to take the plunge. It makes no sense to be OK with writing an offer $100,000 over the asking price, but not be OK writing an offer under the asking price. It also makes no sense to smoke cigarettes…but people do it.

This all played out in Foster City in the last week.  Just as I was about to write a post about us entering a real buyers market because no single family house had sold for almost 2 weeks, the SF Chronicle runs a front page story about positive April sales numbers and actually tiptoes around the concept of the market nearing bottom. Within 48 hours of that story being published offers started to come in and since then 6 houses have sold and I know of at least 2 others who are reviewing offers right now too. I have to say that my batting average is .750 as 3 of the 4 houses I touted in my post on May 3 have sold. The Chronicle’s done negative pieces since then so maybe the herd will ebb again. Here’s a interesting fact about this current market…it’s not like everywhere else. Every open house I’ve been to recently has been crowded. There’s lots of people looking around out there! One of these days some emotional green light will come on for people and multiple offers will ensue. Why not write an offer now, when you can get a good buy?

Comments

  1. 2 more sold yesterday…bringing us to 8 sales since last Wednesday

  2. The future will tell us if those who make up today’s herd, those who prefer to wait and see are crazy or not. With the information available today, they certainly don’t look crazy to me. There are quite a few people who have been looking at the real estate market only since the end of the 90s, maybe especially in the Bay Area (and I am one of them!). These people may think that real estate brings returns of 10-20% of year (see this NY Times chart showing year-to-year growth during the last 20 years). But it hasn’t been always like that, and what we have seen during the last 10 years has been a boom to a level we have never seen before. See this chart showing inflation adjusted values of homes for the last 120 years. It is pretty telling.

    With all this, it is no surprise that “many economists warn that the pain in the housing market may last for several years” (NY Times 5/28/08) and that “house prices have already fallen by more over the past 12 months than in any year during the Great Depression” (The Economist 5/29/08).

    I for one can’t blame the herd :).

    Alex

  3. Great comments Alex…good job with the homework! I guess ultimately I’m saying this: the vast majority of home buyers either buy at the same time…or wait at the same time. Thus the “herd” illustration. Most of these folks will wait to buy until prices rise again..that statistic comes from being in Real Estate through 3 different market cycles and experiencing it firsthand.

    I tend to agree with Warren Buffet’s great quotation “We simply attempt to be fearful when others are greedy, and greedy when others are fearful.” Those buyers taking the plunge right now are typically doing very well…sometimes their appraisals even come in $50,000 over their purchase prices.

    I would also suggest that whenever the national media discusses the real estate market it tends to have only slight relevance to the Mid-Peninsula. We truly are uniquely blessed.

    I don’t think I’d count on a quick return to 10-20% annual appreciation but I truly believe in our area’s ability to hold it’s value and be a consistant location for investment.

  4. The reality is that most of us prefers to follow, especially if the “domain” of concern is not a top strength of ours.

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