Greed and fear are vastly over-rated.
It's widely accepted that two of our less noble emotions, greed and fear, drive the stock market. This may be true, although my motivation seems more a case of naive optimism, but I know beyond a doubt that the most common mistake pundits and economists make is to assume that greed and fear are the sole drivers of the real estate market.
Yes, greed and, to a much greater extent, fear do exist in real estate, but the every-market-is-the-same mindset that lets the analysts wander so far outside their field of expertise with so clear a conscience overstates the influence of greed, except at the speculative edge of the market. My years in the trenches tell me there's another emotion at work in residential real estate, an emotion not taught in grad school and so unknown to the analysts, an emotion far more powerful than greed, one which, for lack of a better, more suitably dry and academic phrase, I'll call the nesting instinct: the desire for the security and stability of owning where you live.
It's that, and more. Oh heck, I'll just say it: people fall in love with homes.
Of course, by linking homeownership with security and stability, I seem to have forgotten the wave of foreclosures and short sales roiling California, Nevada, Arizona and Florida. But let's forget for a moment that sloppy or non-existent loan underwriting, worsened by a tough recession, made homeownership less than secure for an unfortunate percentage of recent home buyers. On the other hand, let's not forget that the first wave of distressed homeowners would never have been, in normal times, homeowners—the illusion that tripped them up wasn't the security of homeownership, it was that they were homeowner material. The victims of risky loans aren't walking advertisements for the foolishness of homeownership, they're casualties of an opportunistic lending environment—speaking of greed. And let's never forget the many homeowners, both recent and long-term, who've remained homeowners through thick and thin and never regretted it, except maybe when they fell off a ladder cleaning their gutters. Wouldn't it be great to see a news feature on them every now and then? Maybe they could teach us as much as the victims.
But for the economists and bloggers, the real estate market is all about greed and fear. You can understand why the bloggers would think this, since they've quarantined themselves from homeownership until it's a sure-fire risk-free investment—the strategy of the "smart investor"—which no market will ever be. But the economists would seem to be a different matter. Sure, their grad school professors assured them that it was all about greed and fear, because their professors assured them that it was all about greed and fear, because their professors...and yet another woolly academic tradition is reverently handed down from generation to generation. But you'd think that at some point the successful economist not only would be a) able to afford homeownership, but b) seriously tempted by it, and c) maybe have an original thought now and then.
In other words, reality, if not intellectual curiosity and a minor independent streak, would be bound to intrude on their vacuum-sealed world. So let's say that a large percentage of our greed-and-fear economists have bought homes.
Okay, so what? Nothing, except that to buy a home you need to move beyond the home-is-just-an-investment theorizing of the economist. No one, or at least no client of mine, buys a home just because it looks good on a spreadsheet. No, you have to fall in love with a home to buy it. So haven't at least a few economists fallen in love and realized it? Is the power of accepted error that strong?
Of course it is. And more to the point, so is the power to fool yourself. Johnny Analytic don't do emotion.
Here's an example. Years ago I worked with a client in the financial services industry who told me straight up that his approach to home buying was analytical, not emotional. None of this warm-and-fuzzy nesting stuff for him. After a few months of tangents and false alarms we finally found "the perfect house". As I showed it to him, I saw him fall more and more in love with it, until I half-way expected him to compose a sonnet to it. It was nice to see, and from a human, not a commission check, point of view. Johnny Analytic bonds emotionally with four walls and a roof. Film at 11. As we made a date to write an offer the next day, I reminded him that I'd said he'd have to fall in love before he'd make an offer.
He grew stern and said, "No, no, it's just that the house works for me". None of that gushy love stuff for him.
Well, he didn't get the house—we were a day late—and months later he was still lamenting the cruel fate that permanently separated him from either a) just a house that worked for him, or b) the wood-framed love of his life.
Somehow I think it was more the latter.