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 
skinny-legged jeans.

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 
alike.

"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.

'Bubble thinking'

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 
firm. 

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."