Meet the flockers
We haven't seen this much peer pressure since high school. Buyers wait
for others to jump in. And sellers won't budge on price till neighbors drop theirs.
By Diane Wedner, LA Times
November 5, 2006
Techie music buffs know that today's must-have device is an iPod. So
they buy them, en masse. Real estate aficionados know that we're in a
downturning market. So buyers wait and sellers hold out, en bloc. The
group-think is the same, only the settings are different.
Behavioral economists experts who study what consumers do and
follow the economic impact of group behavior say that those involved
in real estate are not immune to the same pressures and need for
conformity as, say, high school students sporting pompadours in the '50s,
love beads in the '60s and platform shoes in the '70s.
"People suddenly start wearing wide ties or narrow ones, even though it's
not logical," said Walter Reich, a professor of psychiatry at George
Washington University in Washington, D.C. "In real estate, there are
pressures and trends, too; people don't want to feel out of step."
And it frequently isn't even the trigger event that people react to. When
the Depression hit, only a handful of stockbrokers committed suicide
after the market's crash. What harmed the country was not so much
the crash or their deaths, but the run on the banks those deaths prompted.
Ditto the gold rush. The frantic migration West wasn't caused by hordes
finding riches but by the popular belief that riches could be found. In fact,
most who came in search of them never struck it rich. But when the
masses believe something is a good idea, it takes a sturdy soul to resist
the trends. And when there's a chance to get rich quick, everyone climbs
onboard. Robert Shiller, the Yale University economist who predicted the
2000 stock market collapse in his book "Irrational Exuberance," says the
recent real estate boom replaced the '90s stock market boom, with
the same level of buyer and seller euphoria. Lessons learned from the
tech-bubble bust were ignored. But real estate elation, too, inevitably
faded, and fear now drives people's actions instead.
In this new era, nobody, it seems, wants to be the first on the block to
lower their price, or in the case of buyers, to be first among their friends
to leap into a purchase. And this, of course, has a much bigger impact
on the country's economy than whether they buy a pair of this season's
It's in real estate, psychiatrists and economists say, that interesting
psychological dynamics come into play. Terms such as "denial" and
"loss aversion" begin to fill the notebooks of industry watchers and shrinks
"In a changing real estate market, buyers and sellers freak out and come
up with their own strategies, which actually affect the market," said
Christopher J. Mayer, a Columbia Business School economist. "Buyers
waiting for prices to bottom out can cause prices to drop, and in the '90s
that led to a recession."
So far, there is no recession, economists say, but there are signs of
buyers and sellers slipping into well-worn psychological patterns
following their neighbors' advice instead of solid economic fundamentals.
The urge to follow the herd leads to spending beyond one's means or
failing to set realistic sales prices, behavioral economists say. Or forgetting
that bison sometimes stampede off cliffs, buyers see "everyone" buying
homes and gaining equity, and they want in too. There's always safety in
numbers, consumers assure themselves, and if they make a mistake, the
misery can be shared.
During the bull market, buyers feared being priced out of the market. This
thinking may account for the fact that higher-risk negative-amortization loans
made up 17.4% of all loans in California through July of this year, up from
14.8% in 2005, according to First American LoanPerformance, a data-tracking
Once in, overextended buyers often become victims of "bubble thinking," said
Richard L. Peterson, a psychiatrist and managing partner of San Francisco-
based Market Psychology Consulting. Buyers gamble that the value of their
homes will increase, even if they're losing money every month due to negative
amortization loans and lack of equity actually accruing.
Sellers are another story. The word "denial" must have been created for them,
psychiatrist Peterson said. As applied to real estate, denial is a condition in
which sellers cannot bear to part with their homes for less than what they
believe they're worth, experts say.
No matter the behaviors prompted by real estate cycles, people will continue
to buy and sell, said Ted Goertzel, a sociology professor at Rutgers University's
Camden campus, because housing is a necessity.
"If the market goes down, we know it goes up again," Goertzel said. "People
jump in and buy; they know it won't go down forever."