Recently there have been lots of reports about the "real estate downturn", along with countless analyses about the reasons — overbuilding, tighter credit, higher mortgage rates, dropping consumer confidence, etc. But one thing I’m not reading much about is buyer psychology, except occasionally in the context of lower consumer confidence or future fear.
One thing missing is a discussion about the changing dynamics of the real estate buying process itself. Or, in short, that the sport’s gone out of it.
At the peak of the market frenzy, in 2005 and into 2006, real estate was a competitive, almost contact, sport. Buyers were charged up with adrenaline, prepared to mark their turf and elbow out any competitors for the house they wanted. Bidding wars, which were common, created excitement. Around the water cooler, buyers who ventured into battle for a house would share stories about bidding wars won and lost. The media carried report after report of skyrocketing prices, and buyers who were flipping houses and making fabulous profits in a matter of months. In hot markets like Miami, Las Vegas and Phoenix, people would camp out overnight to be first in line to grab a contract on a pre-construction condo or townhouse. Real estate was the iPhone of 2005.
So just how much of the sales peak we saw in 2005 was a function of "hype" demand rather than "real" demand? "Hype" demand can take many forms. Owners of a perfectly adequate 4BR suburban split level decide to cash in on their profits and trade up to a larger house in a ‘bettter’ neighborhood. Urban renters decide to buy a ‘second’ home in the country, not because of any long term desire, but because its a way to jump into the hot real estate market. Amateur real estate investors decide to pick up a few condos or rental houses. After all, mortgage money was cheap and widely available, you could leverage yourself to the hilt, and at the time it seemed like owning real estate was practically a license to print money. All of these people — who in "normal" times probably wouldn’t have been buyers — jumped into the market, competing for properties with "real" demand buyers.
I think what we’re seeing today is a market devoid of "hype" buyers. With hype buyers gone and only "real" demand buyers remaining, the market sure seems a lot quieter. The frenzy volume has been turned way down. While the market is certainly more stable and reasoned, for some its probably a lot less "fun." Buying a house today has become rather pedestrian. During the frenzy, buyers would anxiously wait for "The Call" from their broker that the perfect house or apartment just came on the market. They would drop everything and rush out, with the same energy (and understanding from co-workers) as if their partner was having a baby. The more dramatic the better.
I’m sure that the end of real estate as a contact sport is having a pretty dramatic impact — because I don’t think that the downturn being reported in many areas can be explained purely by the ‘fundamentals’ like mortgage rates or tighter credit. A significant factor, I think, is that the "fun" is gone from real estate. Hey, if you want to make a splash at the water cooler, its cheaper to buy an iPhone.