Economics and Emotions (part 1)
Ok. I am on an interesting kick at the moment. A co-worker and I have been discussing the real estate markets. We both seem to agree that the situation is a mess, but differ on the root causes and solutions. Unfortunately (or fortunately), we will probably never agree, and I am just getting my thoughts down here as I go.The fundamental difference in our positions is who to blame. His position is that the "creative lending schemes" have led people to pay more than they otherwise would for homes. He maintains people are paying this inflated rate due to perceived benefits of living in an area. I maintain that people are in fact basing their decisions on perceptions, and this emotional decision making is leading to irrational economic choices.
When the only benefit to a party is one of perception, that perception is subject to manipulations that lead to paying a premium beyond the perceived benefit and artificially inflating costs. As an example, if the perceived value of area A over area B would lead a buyer to be willing to pay 100 per sqft vs 70 per sqft, then the value of living in A in quantifiable at 30. The problem is marketing and manipulation which create artificial concentrated demand in area A leading to a price of not 100 but 110 or 120. The 10 to 20 extra is an irrational premium.
The real problem with this is the interwoven nature of real property transactions. If the price at A can be artificially increased to 110 then how long before B goes to 80, not through an actual increase in value, but just by following the market? There is a cascading increase in the overall market due to the unrealistic market pressures of emotions.
The worst part of this is the emotions being played upon would actually lead to stability in the market if the buyers were responding rationally. The instinct is to protect and provide for your family. Traditionally the best way to do this has been to pick a home and stay there for a long period of time. What the marketing is actually doing is telling people that their choice of locations is wrong and the only way to provide safety and security is to move. This undercuts the very stability sought by home buyers. It also leads to a culture of instability with not concept of community. Children are uprooted frequently, people don't know their neighbors, family and friends become an afterthought to the race to the next "best" place. People no longer buy homes they buy houses.
I think part of the problem is also the concept that Americans have been sold that their home is an investment. It is not. A home is a place you settle and raise a family. A house can be an investment. And if it is done right a house can be a good investment. But in order to properly derive profits from a house, there must be value added (i.e. investment in time or money). The notion that you should be able to make a profit with no work is abhorrent to capitalism. The house you live in should not be an investment it should be a home. My coworker argues you take a risk of the value going down and that makes up for making a profit through market expansion (which I have already said I have an issue with). It does not. If you buy a HOME you don't care if the value changes in the short term because your plans are long term. The worst case scenario with buying a HOME, is in 30 years or so you own it. By that time, in a proper life, you have raised a family and are preparing for retirement. You might consider selling the house if you don't need the room, or keep the place as the family home. This is the way our grand parents and back did things, and it worked.
The last point for this post is about bankers. I do not excuse them outright. They are enablers of major proportion. They are however only a symptom of a bigger problem. For a number of years now developers and realtors have been getting very rich selling upper middle class people the perfect new home, and new buyers more home than they could afford. The bankers have been going along to get along. Now that the market is softening, everyone is crying for intervention to keep the straw house they have built from crashing around their ears. It is only a major crash that can fix the situation, unfortunately many good (albeit ignorant) people are going to get crushed if that happens. I truly expect the government will figure some way to string the situation out 10 more years so the boomers can get their money and get out, then let it crash on my generations head (and that's a lot of what makes me angry).
posted by Thomas @ 10:09 PM
0 comments
