Is home buying impulse buying?
There's a current of thought these days, as there always is after a real estate market peak, that the late great boom was driven solely by emotion—that it was nothing more than a national orgy of impulse buying.
Who thinks this? Mostly it's Mr. Science and the other self-described rationalists who like to believe that everyone except them, which is everyone in the real estate marketplace at that moment, is an emotional, gullible lemming. It's also the would-be market timers, who proclaim they'll buy only at the exact moment—year, month, day, hour, minute, second, nano-second—real estate prices hit bottom.
The buyers-are-lemmings theory is always popular with people who aren't in the marketplace because they can't buy, or are afraid to buy, or aren't ready to buy. And because their experience in real estate is usually sparse to non-existent, these people don't understand that home buying is the one purchase least susceptible to impulse buying.
The real story, as it always is when dealing with the urban legends of real estate, is far less cartoonish and far more complex.
For one thing, it's just not that easy to get into contract when the market is booming. Maybe you don't have to beat off competition to buy a home in Cleveland, but the Cleveland market, like many Middle America markets, never really boomed. In my area, the communities immediately surrounding Stanford University, and in many other "hot spots" around the country, a buyer can't just walk into a house and say, "I'll take it. Gift wrap it and I'll pick it up at 4:00".
That's still true in my area. Weighing the pros and cons of each home I like this one but I can't afford it, and I can afford this one but I don't like it; finding the right home or, more likely, settling on a livable compromise; and even more important, successfully fending off competing buyers for the home, typically takes buyers in my area weeks, months and occasionally years (with either one extremely patient agent or with a sequence of less-patient agents). Those weeks, months and years are a "cooling off period" extraordinaire that's cooled the jets of many a would-be buyer, including many a Mr. Science, self-described rationalist and would-be market timer.
Then there's the "cooling off period" home buyers get from the contingencies in the purchase contract, once and if they get into contract. A contract contingency guarantees the buyer a period of time, often a week or two and sometimes more, to do her due diligence on her home purchase. What's due diligence? In a home purchase, due diligence can mean that the buyer verifies she qualifies for a loan, or makes sure the home's condition is acceptable. If the buyer finds that she can't get the loan she wants, she can walk away from the transaction during the contingency period with legal impunity and with her earnest-money deposit back. Or if the buyer's inspections uncover $10,000 in termite repairs that no one knew about, again, she can walk away during the contingency period as if the transaction never occurred.
That's why sellers hate contingencies, and the hotter the market was (or still is) in your area, the more likely it is that buyers were (or still are) competing for homes and that sellers had (or still have) the leverage to reject purchase offers with contingencies. Which raises the possibility that buyers were and occasionally still are being railroaded into making risky offers. It's an easy conclusion to make—unless you've been a buyer (a real buyer, that is, not just someone who can't drive past an open house) or worked with buyers. Because for every buyer willing to compete aggressively for a home, there are probably ten who'd never get in a multiple-offer situation, never close the door on bailing even after getting into contract, and never get into contract without thinking they held all the cards. Which, experience suggests, includes most if not all Mr. Sciences, self-described rationalists and would-be market timers.
And finally, there's the escrow period. In my area escrows are typically about thirty days, although they can be shorter or longer. Granted, it takes courage (or a major panic attack) for a buyer to walk away from the three percent earnest-money deposit customary here, which in a market of million-dollar homes (and that's entry level) can easily be $30k or more.
You bet, except that the seller doesn't automatically get to keep the buyer's entire deposit, or even part of it, even if the buyer defaults without a contingency to protect her. In fact, the standard contract rescission form in my area has the seller returning the entire deposit to the buyer in exchange for the buyer releasing all claim to the property so that the seller can sell it to someone else. I'm not an attorney, but it strikes me that our rescission agreement has the seller paying off the buyer with her entire deposit so that the seller can legally get into contract with another buyer. And it's an open question as to how many sellers will keep their homes off the market so they can fight a buyer over three percent when they can sign the rescission, put their homes back on the market and get one hundred percent of the purchase price or thereabouts from another buyer. (Some sellers will, so don't default without legal advice.)
But in markets where the average home price is $250k, I don't have too much trouble seeing the truly remorseful buyer more-or-less gratefully parting with considerably less than $10k to get out of a panic-inducing transaction and, as I say, the actual damage to the buyer may be much less or none at all.
So every home buyer has at least two and often three "cooling off periods". Two present no contractual risk to her money. Two typically range in time from weeks to a month or more. The third can go on forever, and sometimes does.
Contrast this with the cooling off period for a car purchase, which in California, that notoriously pro-consumer state is...zero. Zip. Nada. No way. Doesn't exist. Once you sign the purchase paperwork in the dealership's sales manager's office you're stuck with the deal and the car, even if you didn't read the fine print (and unless you can prove the car meets the legal definition of "lemon").
How about a cooling off period for that life insurance policy you just bought? Also doesn't exist, according to my local BBB's Web site. Maybe having second thoughts about that stock purchase you made after that hot tip came through your fax machine? You're out of luck.
And if a transaction does have a cooling off period in this state, it's usually just three days. Yes, California does give you sixty days after you receive the contract to cancel a car service agreement. And "dance studios must allow you to cancel up to six months after your transaction", timely information now that Dancing With The Stars enthralls the nation, although "you will, of course, have to pay for the services you actually received".
By now it must be obvious that, despite the absence of a Federal or state cooling off period to protect California real estate buyers, and despite the fondest hopes of the urban legend tellers, no home buyer can be rubber-hosed through a real estate transaction.
But the truth, as always, is even more nuanced than that. Virtually no home buyer gets into contract on a whim. And no home buyer gets through escrow on an impulse.