Prices So Low You’ll Be Psyched Out of the Market
“To buy or not to buy…” is a question on many minds, as mortgage rates and home prices take a simultaneous, entangled tumble.
In November I asked the question, “if it’s a buyer’s market, where are all the buyers?” Whether your attitude about home prices at their peak was that Seattle real estate was in demand for good reason, or that prices were falsely inflated, they’ve fallen some — and many sellers are ready to deal.
So why not buy? Because this may not be the absolute bottom of the market. OK, that’s probably true, given that many foreclosures are still to come. But we won’t know what price is bottom until the market starts to climb again.
“Loss aversion” is the answer, says one Eastside real estate blogger. Sounds almost redundant, right? Who wants to lose? But we’re not just afraid of loss, we’re so afraid to lose that we’d rather get in when the market’s hot — which is exactly when prices are inflated and we stand to lose the most.
How does that work? The overall change in satisfaction when you lose is greater than when you win. From the Wikipedia entry on loss aversion:
In prospect theory, loss aversion refers to the tendency for people strongly to prefer avoiding losses than acquiring gains. Some studies suggest that losses are twice as powerful, psychologically, as gains.
So in order to avoid losing, we buy high and sell low.
But here’s the caveat, also from Wikipedia:
…if a person has only $1000, getting $1000 simply doubles their wealth (which would be desirable), but losing $1000 would wipe them out completely (which might be a matter of life and death). In this case, given the need for money for food and shelter in order to survive, the individual will be far more motivated to avoid losing $1000 than to try to gain $1000.
In other words, if you don’t have much money to gamble with, stay out of the casino. Sitting on a lot of cash and wanting a long term investment? This is a terrific time to buy. Found your dream home? Buy it.
Looking for a quick rise, easy money, and a fast turnaround for your last few bucks? You might want to try the next “bubble.”
Debra Sinick said:
Hi Ruby,
Thanks for the link to my article! I agree with you, fear of loss is a huge motivator (de-motivator?) for a lot of people. How ironic that buyers make offers without financing, inspections, offer over full price, and include their first born when the market is going up. Fear of loss, fear of paying more for a home later, controls that situation. Buyers think you’ve got to get in before it’s too late and you lose.
Now in a buyers market, buyers are worried they will lose on their investment. With prices down, will they go down further? No one knows for sure. I have said the very same thing in a post last fall, no one knows when the bottom hits, until after things are on the way up. So in this buyers market, there’s a lot going for buyers these days with interest rates, lots of choices, opportunities to hit hard with negotiation. If someone chooses to buy, do not plan to sell for at least 3-5 years. Don’t even think about selling in the near term if you are a buyer new to the market.
January 26, 2008 10:29 AM
Ruby said:
Thank you, Debra for trying to answer a question that has been on my mind for awhile! Good post.
January 27, 2008 1:38 PM
Debra Sinick said:
Ruby,
You had some great thoughts, too!
January 27, 2008 2:21 PM