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The Psychology of Housing Market Extremes:

Home sales volume and prices fluctuate in somewhat predictable cycles in many areas. For example, an 8-10 year period has separated Westside market highs and lows in the 1970’s, 1980’s, 1990’s, and the decade of 1997-2007. The current down market shows 25-35% price declines in the Westside. Nearly all of even the most pessimistic prognosticators believe that the Westside has already experienced the greatest price declines that can reasonably be expected. So why are so relatively few buyers willing to make offers on well-priced homes that may be available at 30-40% discounts from recent high levels? Why do they remain on the sidelines until the market shows significant signs of increasing prices or wait until increases in interest rates offset the savings they hoped for by waiting?

The emotional component that influences this “fence sitting” in the purchase of a home may be the concern that if they pay “too much” they will feel foolish and regret the purchase. Buyers often neglect to appreciate that the property they purchase is actually a home, where daily life happens and long-term memories are made.

No one ever rings a bell to announce a market bottom. Therefore, feeling the need of certainty that the time has come to purchase at the lowest possible price causes many people to miss the opportunity to make great purchases. Few think to make an offer to purchase at a discount from the present market level. Without taking a long-term perspective, these fence sitters may end up paying 5-15% more than they easily could have negotiated as the market bottom was being established.

The media has a major impact in the psychology of the housing market. There are often contradictory interpretations of the statistical evidence of how and when a market cycle reaches the turning point. The result is a heightened degree of anxiety that adds uncertainty to the purchasing process for home buyers. In the current cycle, though most of the evidence indicates that this is an excellent opportunity for buyers, the wait and see attitude continues to be fueled by emotional factors. The buyers who are not moving beyond their fears will likely continue to sit on the sidelines until some combination of events or “news” triggers a shift in their comfort level.

Buyers can also be emotionally affected in purchasing when the market is moving up and approaching a top. Psychologically they begin to fear that they will miss the opportunity to purchase a home, and this fear adversely affects their reasonable decision-making process. They may then tend to make offers that in retrospect were not financially wise. Many buyers become subject to a sense of pressure and are influenced by the media “hype”. That so many people do react emotionally to this pressure tends to continue to drive prices up, once again illustrating a “self-fulfilling prophecy”.

Residential real estate has true underlying value and those buyers who can work through their emotional components and focus on their individual circumstances will increase the probabilities of making better long-term decisions.

For the past 24 years Michael Edlen has provided real estate counseling services to prospective buyers and sellers. Most of his business is derived from a referral base of over 900 past clients. More information is available on www.MichaelEdlen.com. He can be reached at 310.230.7373 or Michael@MichaelEdlen.com

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