Bull Psychology

Psychology in the market place is a funny thing.

I still haven’t found a way to quantify it. Pollsters will ask “intent to buy” questions of consumers and then real estate boards and marketing companies will spin it in the media to mean “majority of people between reader A and reader B think real estate is a great investment” etc. Who doesn't want to be part of the majority?

In a recent exchange in another web-place, as a response to some stats I used to back up my bear assertions, a poster had this to say: “many people have total confidence in the market here and that alone makes it unlikely prices will drop.”

I haven’t believed that confidence in the market matters much in the big scheme of market psychology. Because confidence, like all psychological factors in the market place, waxes and wanes.

I’ve found myself drawn back to this exchange frequently over the past few days. I tend to get a train of thought stuck in my head and until I’ve worked it out it nags at me like my mother did when my room was messy; I learned the only way to get rid of the nagging was to get down and do the work.

My neighbours recently bought a home. It was on the market for only a few hours just around the corner from where they currently live. They walked through it and made an offer to the owners to pay their asking price if they agreed to a deal subject to an inspection—I’m not sure if they made the deal subject to the sale of their own home or not. It doesn’t really matter, because they have confidence in this market.

This purchase was specific. They were looking for a particular house that fit a particular need at a particular price. It popped up and they pounced. They’re happy with their decision and that is really what matters to them, because they are buying a home and not an investment—future price gains were not the determining factor in their buying decision. But how much does the fact that they pounced influence their confidence in this market?

When it came to pricing their own place, they didn’t quite see eye-to-eye with their agent. They wanted a slightly higher asking price (and I should state that in this case we’re talking about literally one percent of the total price). Their agent wanted slightly less for whatever reason their agent gave them. Ask me my thoughts on their house and I would tell you that I think their home is in a very good neighbourhood, offers many income opportunities to help with the mortgage, has good bones and requires no work to make it livable, but lots of work to make it like all the newer updated places with hardwoods, granite and stainless.

I can see more upside to buying it than down, especially long-term, but in this market, with these conditions (more competition for less buyers), it may not sell as quick as they’d like or for as much as they’d like. I’ve seen so much insanity lately that I won’t be surprised in the least if it sells very soon or even in two months time. For them, I hope it's soon.

A while back I wrote a post about a Realtor respecting their client’s wishes. I thought they had good reasoning behind their decision and felt the agent should have respected this. Conversely, many others felt that selling then buying was the less risky venture. I was definitely in the minority about the right or wrong behind this family’s decision to buy before selling and I can see the why in that reasoning now. Important lesson learned for me.

This family is confident in the market. And that confidence led to this decision and this risk: they may have to carry two mortgages for a time or accept an offer they would otherwise reject due to financial pressure. I wonder how many other families are in this same situation right now in Victoria? I wonder how many young professionals who have bought re-sale condos with the intent of updating them and selling them for profit can’t carry them for long if they can’t sell them fast? I wonder how many of those same purchases are secondary properties and not primary residences, and thus doubling up the risk? I know of one handy man who sells cars for a living and rents the condo he lives in on Bear Mountain (because he can’t afford to buy it) who has flipped no less than 3 re-sale condos in the past 16 months. What kind of pressure is he under to sell his next (or current) project? How many of the available listings in Victoria do these kinds of scenarios represent? Twenty per cent? Thirty? More?

All of these anecdotal examples of potential situations are borne of confidence in this market. I can understand the rationale; after all we’ve witnessed the longest, most sustained upward pressure on real estate valuations in Victoria’s history; you’d have to be crazy not to get on the gravy train. I can see why some people—especially the ones who are too busy making money in the market to do market research—believe that we’ve reached a new pricing trend paradigm.

I was a geek in grade school, didn’t have much confidence because many other kids didn’t hold me in high esteem. I’m still a geek, but I’m much more confident because I’ve learned to value myself (and because Mrs. HHV thinks geeks are hot). Perhaps the most important lesson I learned, and learned the hard way, was too much confidence can be a bad thing.

Confidence in the market? Analyzing it rationally is a bit much for me. I think I’ll stick to things I can quantify. Like price to rent and sales to listings ratios, investment fundamentals and liquidity, and, above all else, making sure that if I’m wrong I learn from my mistakes and still be able to provide Mrs. HHV and me a decent future.