Rates or confidence: which “rescued” real estate?

It’s an article of faith for the real estate skeptic that abnormally low interest rates rescued real estate before home prices had a chance to decline to their natural level. That’s probably because it’s an article of faith for the real estate skeptic that real estate has to be “rescued” by some fluke or widespread human failing, whether it’s socially-engineered interest rates, the herd instinct, and/or the willingness of the average man and woman in the street to be manipulated by the news media and/or the current administration and/or an ever-hyping real estate industry. However, it’s rare to find a real estate skeptic who specifies what the “natural level” of home prices is, or why that natural level is the natural level.

I don’t blame the real estate skeptic for being skeptical, because I know that the real estate skeptic places a heavily-discounted value on homeownership. In fact, it makes perfect sense. If you, Mr. or Mrs. Real Estate Skeptic, are so uninterested in homeownership that you wouldn’t buy unless home prices sank to 1953 levels—and maybe not even then—then it’s obvious that whoever is willing to buy at 2013 levels is either a herd follower or a dupe of Big Interests.

Because I’m in the business of helping buyers buy and sellers sell, I’ve known for years that people, even those predisposed to buy, won’t buy unless they feel good about buying. That’s why only a handful buy in “buyer’s markets”: rare is the person willing to stick out his or her neck when a depressed economy makes the future uncertain, no matter how much the Fed tries to tempt home-buyers out of their foxholes. And that willingness, that feel-good feeling about buying, comes from within, not without. People can’t be coaxed, bullied or badgered into buying, not by their agents, not by their spouses and not by their parents. Furthermore, they’re not as easily fooled by industries and governmental bodies as the real estate skeptic thinks (and the real estate skeptic is never fooled). Some people, such as the real estate skeptic, are immune even to the strongest pressure of all, market momentum.

So I’ve always thought that confidence, not rates, ignited this boom. “You can lead a horse to water, but you can’t make him drink.” Strengthening consumer confidence is the only real difference I see between 2010 and 2012. Rates were historically low in 2010, and we can rule out a sudden dip in home prices in early 2012 as the trigger for the run-up: California’s median sales price was actually about 10 percent higher then than in early 2009, according to California Association of Realtors® statistics. Certainly rates have been gasoline on the fire since 2012, but they weren’t the kindling. Now I have what I think is proof, and definite proof that it pays to occasionally clean off your home office desk: a brief article I printed October 12, 2010 from that day’s edition of NAR’s “Daily Real Estate News”, headlined Survey Finds Reluctance to Buy Homes Rising. I’ll quote most of it:

“A survey by legal information Web site FindLaw.com found that 63 percent of adults [apparently FindLaw neglected to survey children about their home-buying intentions] are less likely to buy a home because of the state of the economy. The survey found that only 8 percent of people were swayed by either record-low mortgage rates [then under 4.5%] or an abundant selection [another answer to the question, “why shouldn’t I wait to buy until the market recovers?”], with 28 percent saying that neither of these factors had any impact on their decision…High unemployment rates, declining housing appreciation, and fear of foreclosures are the key factors that are causing many people to shy away from the idea of purchasing property…”

In other words, bad news always trumps manufactured enthusiasm. Call it low consumer confidence or just plain fear, it’s a far more important market driver than anything a Fed chairman can cook up. And so is its opposite.

copyright © John Fyten 2013

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