Is housing set to blow, or are there more gains ahead？ Here's how to navigate an anxious market
Confused about the direction of the housing market？ It's no wonder. You hear stories about sellers slashing listing prices to attract buyers, but home prices nationally have risen more than 10% over the past year. Inventories of unsold homes are on the rise, yet homebuilder Lennar Corp. just reported a 34% jump in earnings. And the much feared rise in 30-year mortgage rates seems to have stalled.
In this muddled situation, what should you do, whether you're on the buyer's end of the seesaw or the seller's？ Cut your price now or hold out for more？ Rent or buy？ Go for a bigger house or a smaller one？ In the New York City suburb of Larchmont, N.Y., where prices are off their peaks, confusion reigns. Says Realtor Carol Higgins： “Buyers are complaining that prices are astronomical, but sellers are still thinking they'll get what they saw their neighbors get last year.”
Let's be honest： No one can predict with certainty which way home prices will go in the next year or so. Over the past several years almost everyone who has tried to forecast the direction of the housing market has been wrong （though BusinessWeek Chief Economist Michael Mandel takes a shot）.
We can, however, tell you how to avoid some critical psychological and financial mistakes in today's anxious markets. No matter how smart you are, it's easy to fall into certain mental traps that can cost big bucks. Instead of concentrating on the fundamentals, people tend to be ruled by their feelings and the compulsion to compare themselves with their neighbors. If your brother-in-law made a killing in real estate, you're determined to do the same. “So much of what drives the housing market is human interpersonal dynamics,” says Yale University economist Robert J. Shiller.
What follows is a set of practical guidelines for navigating today's choppy and uncertain real estate markets. The suggestions come from behavioral economists, who study the kinds of erroneous decisions people tend to make repeatedly, as well as from hands-on real estate experts. In addition we'll tell you which cities are more vulnerable to a drop in prices and which are less at risk.
CONTRARIAN COOL 冷靜的獨(dú)立分析
A first rule of thumb is to avoid herd behavior, which is what lured a lot of people into overpriced houses in the first place. The expectation of rising prices became a self-fulfilling prophecy as office mates and in-laws tried to leapfrog each other. The prevailing mindset： “You see people who aren't particularly talented, who aren't hard-working, who buy a house with nothing down, and they've been getting rich doing it. If they're getting richer, then you're falling behind,” says Robert H. Frank, a Cornell University economist and author of Luxury Fever. Another attraction of herd behavior is safety in numbers. Millions of buyers can't all be wrong, can they？
Also, behavioral economists have discovered in laboratory experiments another attraction of herd behavior. Misery really does love company： People seem to worry less about losing a lot of money if they think everyone around them will suffer the same fate.
Still, the rewards of thinking independently can be high. Richard X. Bove, a financial services analyst at boutique investment bank Punk, Ziegel & Co., put on his green eyeshade and concluded that Florida real estate was overpriced. So earlier this year he bailed out. Bove sold his 5,600-square-foot St. Petersburg （Fla.） home for $1.2 million, twice what he paid for it a decade ago. The plan was to rent while he waited out a housing decline. But Bove couldn't find a suitable rental, so he lowballed a four-bedroom house in Tampa and got it for $740,000 —— 30% below the asking price.
In a softening real estate market, one of the most dangerous mental mistakes is what behavioral economists call “l(fā)oss aversion,” which is the tendency to do dumb things to avoid, at all costs, recording a loss. Some sellers are so averse, they gamble the market will bounce back rather than cut their prices.
Indeed, real estate agents often have a much clearer idea than sellers that demand has softened. “The hardest thing is to convince the sellers of the change in the market,” says Alfonsina Rechichi, an agent at Coldwell Banker Residential Brokerage in Katonah, N.Y. “There's a sense of fear among brokers that you sense at open houses,” says Saul Greenstein, a renter in Washington, D.C., who suspended his house search because prices were too high. “The self-confidence you saw a year ago has been replaced by fear and pandering.”
Even owners who stand to make a big profit on a sale often set the price too high. In this case the mental error isn't loss aversion but outdated thinking. New research shows that sellers set their listing price, in part, based on information six months to nine months old. That means if you don't pay close attention, you will tend to underprice in a rising market and overprice in a falling one.
STUNG ON BOTH ENDS 買賣雙方的痛
Two smart people who just might be guilty of that in the New York City suburbs are Joe Watson, a neurosurgeon, and his wife, JoAnn, who has a PhD in genetics. In relocating from New Rochelle, N.Y., to McLean, Va., they planned to come out even by selling and buying at roughly the same price： $1.2 million. Now they're getting stung on both ends of the transaction. The Virginia house is costing them “significantly more” than $1.2 million, and they can't get what they want for their 1937 Tudor in New Rochelle. Says JoAnn： “We were advised by two brokers to price it initially at $999,999, but my husband and I wanted to start at $1.19 million because we thought we could get it.” Even after nudging the price down to $1.09 million, though, there haven't been any offers. JoAnn has taken to blaming the shoppers. “It's a great house,” she complains. “Why doesn't anyone realize it？”
MANAGE YOUR CRAVINGS 控制你的購(gòu)買欲
What people can do is be aware of their human tendency toward status-seeking. Cornell's Frank suggests channeling the drive more productively. If getting your kids into a good school district is a priority, for example, try to satisfy your lust for status by buying a smallish house in a prime school district instead of a showplace in a worse one. “You have some choice,” says Frank. “There's room to do better.”
A foible that helps account for America's obsession with real estate is what you might call the tangibility fallacy. It's the all-too-human tendency to regard tangible things like houses as more stable and trustworthy than intangible ones like stocks and bonds. It's true that a house provides more comfort than a book entry in a stockbroking account. But that doesn't mean it's a better investment.
In fact, except for the past few years, house prices have risen only 1% or so faster than the rate of inflation. But just try telling that to Ron DeLucia of Jacksonville, Fla., who at the age of 68 is selling his current home and buying a bigger one across town, in part because he and his wife think a house is a more trustworthy asset than shares of stock. Says DeLucia： “We all went through the crash of the market. I lost $150,000. You never get that money back. I think the stock market is going to go down. I'd rather put the money we have in hard assets like property.”
And finally, it's easy to lose your head over housing if your thinking isn't disciplined. To find your moorings, try to focus on the fundamental factors that determine value. On that score it's somewhat reassuring to realize that prices in the U.S., though high, are not out of line with other major countries. Finding properties that are exactly comparable is difficult. But in an unscientific survey, BusinessWeek correspondents rounded up listings for a few homes for sale around the world. There's a four-bedroom in Kleinmachnow, a pricey suburb of Berlin, going for $525,000. In the upscale Golders Green neighborhood of London, 20 minutes from the city center, a four-bedroom house is on the market for $1.56 million. And in Tokyo's Suginami Ward, three bedrooms squeezed into a cozy 987 square feet go for $566,000. These kinds of prices have a familiar ring.
Confused about the direction of the housing market？ It's no wonder. You hear stories about sellers slashing listing prices to attract buyers, but home prices nationally have risen more than 10% over the past year. Inventories of unsold homes are on the rise, yet homebuilder Lennar Corp. just reported a 34% jump in earnings. And the much feared rise in 30-year mortgage rates seems to have stalled.
In this muddled situation, what should you do, whether you're on the buyer's end of the seesaw or the seller's？ Cut your price now or hold out for more？ Rent or buy？ Go for a bigger house or a smaller one？ In the New York City suburb of Larchmont, N.Y., where prices are off their peaks, confusion reigns. Says Realtor Carol Higgins： “Buyers are complaining that prices are astronomical, but sellers are still thinking they'll get what they saw their neighbors get last year.”
Let's be honest： No one can predict with certainty which way home prices will go in the next year or so. Over the past several years almost everyone who has tried to forecast the direction of the housing market has been wrong （though BusinessWeek Chief Economist Michael Mandel takes a shot）.
We can, however, tell you how to avoid some critical psychological and financial mistakes in today's anxious markets. No matter how smart you are, it's easy to fall into certain mental traps that can cost big bucks. Instead of concentrating on the fundamentals, people tend to be ruled by their feelings and the compulsion to compare themselves with their neighbors. If your brother-in-law made a killing in real estate, you're determined to do the same. “So much of what drives the housing market is human interpersonal dynamics,” says Yale University economist Robert J. Shiller.
What follows is a set of practical guidelines for navigating today's choppy and uncertain real estate markets. The suggestions come from behavioral economists, who study the kinds of erroneous decisions people tend to make repeatedly, as well as from hands-on real estate experts. In addition we'll tell you which cities are more vulnerable to a drop in prices and which are less at risk.
CONTRARIAN COOL 冷靜的獨(dú)立分析
A first rule of thumb is to avoid herd behavior, which is what lured a lot of people into overpriced houses in the first place. The expectation of rising prices became a self-fulfilling prophecy as office mates and in-laws tried to leapfrog each other. The prevailing mindset： “You see people who aren't particularly talented, who aren't hard-working, who buy a house with nothing down, and they've been getting rich doing it. If they're getting richer, then you're falling behind,” says Robert H. Frank, a Cornell University economist and author of Luxury Fever. Another attraction of herd behavior is safety in numbers. Millions of buyers can't all be wrong, can they？
Also, behavioral economists have discovered in laboratory experiments another attraction of herd behavior. Misery really does love company： People seem to worry less about losing a lot of money if they think everyone around them will suffer the same fate.
Still, the rewards of thinking independently can be high. Richard X. Bove, a financial services analyst at boutique investment bank Punk, Ziegel & Co., put on his green eyeshade and concluded that Florida real estate was overpriced. So earlier this year he bailed out. Bove sold his 5,600-square-foot St. Petersburg （Fla.） home for $1.2 million, twice what he paid for it a decade ago. The plan was to rent while he waited out a housing decline. But Bove couldn't find a suitable rental, so he lowballed a four-bedroom house in Tampa and got it for $740,000 —— 30% below the asking price.
In a softening real estate market, one of the most dangerous mental mistakes is what behavioral economists call “l(fā)oss aversion,” which is the tendency to do dumb things to avoid, at all costs, recording a loss. Some sellers are so averse, they gamble the market will bounce back rather than cut their prices.
Indeed, real estate agents often have a much clearer idea than sellers that demand has softened. “The hardest thing is to convince the sellers of the change in the market,” says Alfonsina Rechichi, an agent at Coldwell Banker Residential Brokerage in Katonah, N.Y. “There's a sense of fear among brokers that you sense at open houses,” says Saul Greenstein, a renter in Washington, D.C., who suspended his house search because prices were too high. “The self-confidence you saw a year ago has been replaced by fear and pandering.”
Even owners who stand to make a big profit on a sale often set the price too high. In this case the mental error isn't loss aversion but outdated thinking. New research shows that sellers set their listing price, in part, based on information six months to nine months old. That means if you don't pay close attention, you will tend to underprice in a rising market and overprice in a falling one.
STUNG ON BOTH ENDS 買賣雙方的痛
Two smart people who just might be guilty of that in the New York City suburbs are Joe Watson, a neurosurgeon, and his wife, JoAnn, who has a PhD in genetics. In relocating from New Rochelle, N.Y., to McLean, Va., they planned to come out even by selling and buying at roughly the same price： $1.2 million. Now they're getting stung on both ends of the transaction. The Virginia house is costing them “significantly more” than $1.2 million, and they can't get what they want for their 1937 Tudor in New Rochelle. Says JoAnn： “We were advised by two brokers to price it initially at $999,999, but my husband and I wanted to start at $1.19 million because we thought we could get it.” Even after nudging the price down to $1.09 million, though, there haven't been any offers. JoAnn has taken to blaming the shoppers. “It's a great house,” she complains. “Why doesn't anyone realize it？”
MANAGE YOUR CRAVINGS 控制你的購(gòu)買欲
What people can do is be aware of their human tendency toward status-seeking. Cornell's Frank suggests channeling the drive more productively. If getting your kids into a good school district is a priority, for example, try to satisfy your lust for status by buying a smallish house in a prime school district instead of a showplace in a worse one. “You have some choice,” says Frank. “There's room to do better.”
A foible that helps account for America's obsession with real estate is what you might call the tangibility fallacy. It's the all-too-human tendency to regard tangible things like houses as more stable and trustworthy than intangible ones like stocks and bonds. It's true that a house provides more comfort than a book entry in a stockbroking account. But that doesn't mean it's a better investment.
In fact, except for the past few years, house prices have risen only 1% or so faster than the rate of inflation. But just try telling that to Ron DeLucia of Jacksonville, Fla., who at the age of 68 is selling his current home and buying a bigger one across town, in part because he and his wife think a house is a more trustworthy asset than shares of stock. Says DeLucia： “We all went through the crash of the market. I lost $150,000. You never get that money back. I think the stock market is going to go down. I'd rather put the money we have in hard assets like property.”
And finally, it's easy to lose your head over housing if your thinking isn't disciplined. To find your moorings, try to focus on the fundamental factors that determine value. On that score it's somewhat reassuring to realize that prices in the U.S., though high, are not out of line with other major countries. Finding properties that are exactly comparable is difficult. But in an unscientific survey, BusinessWeek correspondents rounded up listings for a few homes for sale around the world. There's a four-bedroom in Kleinmachnow, a pricey suburb of Berlin, going for $525,000. In the upscale Golders Green neighborhood of London, 20 minutes from the city center, a four-bedroom house is on the market for $1.56 million. And in Tokyo's Suginami Ward, three bedrooms squeezed into a cozy 987 square feet go for $566,000. These kinds of prices have a familiar ring.