This is my very different take on home buying; I examine the “underside” of our market and some of the psychology of buying .
• #1. When house prices rise reliably (as from 1963 to 2004), it is almost impossible to overpay for a house. It was an efficient market, and rising prices covered many mistakes. Investing in Sonoma County Properties was a no-brainer. More leverage and more at stake just paid off more in the end. We did not need to be “brain washed” by advertising or led by the hand. This consistent rise taught us more than an ad ever could: buy a lot of house with as little down-payment as you could.
• #2. A house is not just an investment, it’s a place to live. This is the only significant financial investment that has two functions. Things like cars and boats always go down in value, so most of the time, if you’re investing, you’re doing it in something that you don’t have to fix, water, fuel or live in. You shouldn’t fall in love with a bond or a stock or a piece of gold, because if you do, you won’t be a smart investor. The problem is that you just might fall in love with a house. Not the smartest reason to make the largest financial investment of your life but then again, you get to live in it and its done all the time.
• #3. The psychology of down markets is irrational. Rising house prices might be efficient (many bidders for a single item lead to higher prices), but when there aren’t so many bidders, irrational sellers (see #2; those that are in love with their homes) don’t lower their prices accordingly. So, inventories get longer and it’s easy for the prospective buyer to think that a certain price is the ‘right’ price because so many people are offering houses at that price. Just because someone offers a price, though, doesn’t mean it’s fair in a given market. Our current market does not suffer from as much of this because of the “Foreclosure Factor”. The banks are not in love with any of the homes they own and the other sellers have to compete with them by lowering the price or hold on to their homes.
Part 2 coming soon.
