Heard It On The Grapevine II

Wondering Why So Many People Attended The Real Estate Expo Last Weekend?

"Real estate has always been a national obsession. Individually, as the saying goes, it's the American dream. Collectively in the six years since the Nasdaq imploded, it's been floating the American economy."

"But why now in a moment when even the most maniacally optimistic of real estate agents is admitting that the market may be showing signs of decline? Why now that interest rates are rising and homeownership rates are at an all-time high and savings at an all-time low? Why would over 61,000 people in one of the most overpriced housing markets in the world spend good money to learn about real estate investing?"

"I rarely look to press releases for deeper wisdom, but in this case the Learning Annex offered one possible explanation: "Real Estate in San Francisco is now the drug of choice." This metaphor, of course, suggests that it's a dependence that has grown to be as unhealthful as it is irresistible. Perhaps we're just hooked: We can't stop ourselves from indulging even when we see signs that the party is over. "

"Perhaps the very success of the Expo is an ominous sign of the bubble popping, rather than a sign that the real estate boom is continuing."

"Even though the Federal Reserve has been raising interest rates, they are also increasing the money supply," said Paul H. Levine, president at Lifetime Financial Services. "You also have a lot of money that was going into real estate going into stocks now, since the housing bubble is bursting."

"As the saying goes, When your taxi driver starts giving you stock tips, you know it's time to sell. Well, isn't a convention of this sort simply a collection of all the stragglers to the real estate boom? When dancers have "fun" inscribed over their gyrating bosoms, isn't that a sign that the boom has reached its irrational peak?"

"Australian companies are sinking more money into US real estate than investors from any other foreign country. Evelyn Iritani reports from Los Angeles."

"Thanks to a swelling pool of superannuation money, chardonnay and shiraz aren't the only things Australians are shipping to the US with a frenzy."

"Since November, a few leading Australian companies, led by Macquarie Bank, have poured nearly $US700 million ($A985 million) into California office buildings and shopping malls, setting the stage for another record year in the US property market for Australian investors."

"Recent attempts by companies in China and Dubai to buy US assets have triggered a backlash from American citizens and politicians. But little attention has been paid to the surge in investment from Australia, led by Macquarie Real Estate, Macquarie Bank's Chicago-based real-estate arm."

"Last year Australian companies sank $US6.1 billion into US real estate, up from $US3.5 billion the previous year, according to Real Capital Analytics, a New York real-estate research company. That was nearly twice as much as Germany, the next-largest foreign investor."

What Happens Next?

"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."

"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?"

"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."

"Castle thinking" -- "the notion that a home is a fortress against a cruel world. And it's perfectly defensible. But in many markets the total monthly costs of renting are far below the total monthly costs of owning the same property -- 62% cheaper in San Diego, for example, according to Boston-based Torto Wheaton Research, a unit of property manager CB Richard Ellis Group Inc.

"So you owe it to yourself to be aware that your castle thinking can be a costly predilection. Neuroscientists have even discovered the place in your brain that makes you spend too much on a house. Far from behaving perfectly rationally, real people are pushed and pulled by signals emanating from below the neocortex -- the primitive "lizard brain." That may be why there are so many homes with empty marble foyers, faux Roman columns, dust-collecting Jacuzzis, and exotic drooping conifers on the lawn."

"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."'

"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."'

"The gravest danger of dragging your heels on price cuts in a sinking market is that you can "follow the market down," never managing to sell because your price is always just a little too high, says Christopher J. Mayer, a Columbia Business School economist. He and David Genesove of Hebrew University in Jerusalem found that when prices were falling in Boston in the early 1990s, two-thirds of the houses that came on the market were eventually withdrawn without a sale."

"In parts of the country where the market is still strong, a common sin continues to be overconfidence. Owners typically don't seriously consider a wide enough range of potential housing market outcomes, including the possibility of a steep decline. That leads people to take more risks than they should."

"Prices in some housing markets do raise red flags. A good starting point is to look at the affordability of homes for ordinary families. By that measure greater Los Angeles was the worst in the nation in the fourth quarter of 2005. Only 2% of homes sold there were affordable by families earning the area's median income, according to the National Association of Home Builders. New York wasn't much better at 6%. Other expensive big cities included San Francisco at 7%, Miami at 14%, Boston at 24%, and Washington, D.C., at 27%. Tops in affordability among big cities were places like Dallas, with 60% of homes sold affordable by median-income families, San Antonio."

"Another way to identify a problem area is to compare rents to sales prices. The idea here is that if people's monthly payments to own a house are much higher than what they would spend to rent the same place, tax considerations included, then they must be banking on prices going up so they can sell for a profit someday. That leaves them exposed if prices don't rise."