Behavioral finance FAQ / Glossary (Real estate)

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Dates of related message(s) in the
Behavioral-Finance group (*):
Year/month, d: developed / discussed,
i: incidental

Real estate market

anomalies / herding / boom

05/06 08/1i
+ see bubble / crash

Location, location, location,
but mood also!

Some market traits in real estate

Torn between personal preferences
and collective evolutions.

The tiles might hold but the market might crash.

Compared to the publicly traded assets markets (*) The real estate
market is highly heterogeneous ( locations...) and
its and its saleable assets are highly individualized (look,
size, comfort...).

(*) although real estate investment funds exist in many countries).

Also, the affect of the individual buyer (and seller)
plays an important part in the choice of a real estate asset it invests in.

This is notably the case in housing if the buyer's uses it as its
own dwelling
. Play a part in that case:

* Not only practical aspects (costs, comfort, access, safety...),

* nor just esthetical ones (here we enter the realm of emotions)

* but also behavioral aspects / biases, are decisive such as:

Trophy seeking / status seeking,

As well as the commitment and endowment effects

(attachment bias, sense of wealth...).

But even if individual play a crucial role, the RE market is very sensitive
alsoto various collective factors
such as:

Economic / financial incidences

Some fundamental economic facts (notably interest rates, inflation,

demographics, wealth and purchasing power in the area...),

Climactic / ecological factors,

Political and administrative incidences.

Also speculative collective moves, which are precisely

helped by the not too transparent structure of that
market.


Common creeds

The common belief by home owners (except of course just after

a crash) that their asset guarantees eternal money gains
as its price can only rise.

That creed can make them overpay their home by not seeing that real
estate prices rise often just compensate inflation (see "money illusion")
and that price excesses can be followed by price collapses.

Price trends (see below) because of mimicry / herding can affect
those assets like any orhers.

The subprime crisis (see below) took advantage of that bait.

 

In real estate, price moves are driven essentially by
medium or long term cycle-trends
(see that term).

At the difference of stock markets for example, there is usually few

short term volatility, except in exceptionally chaotic periods, or fully
exuberant periods in highly exuberant places.

Actually, it is practically impossible to measure day-to-day variations.

When excess strikes

The roof might soar or collapse.

The floor might sink or reemerge.

All the factors mentioned above lead to some repetitive excesses,
such as booms and busts, or, in financial language, bubbles and crashes
(in prices,  in construction volumes...).

What can strike here are as well

* physical phenomena (from scarcity to glut),

* as economic ones (interest rates, economic situation)

* and behavioral biases, such as herding, already mentioned).


Relations between real estate cycles

and the economy and finance in general

Real estate booms and busts have important consequences on
finance / banking
(credit bubble, bad loans, real estate bonds
defaults).

The housing loan sector, an important banking / financial activity, is
particularly sensitive.


Conversely, the financial sphere can have its responsibility

in real estate fortune or plights. See the "current occurrences" below.

The main one results from lending to (in fact burdening)
not really solvent prospective owners with too much debt, too high
interest charges and too low down payments (overleverage: see
that word).


Last but not least, real estate price cycles / trends also influence
the whole economy
(see "wealth effect") and monetary policies.

Recent occurrences

Roofs falling on your feet.

Some dark sides of real estate finance were seen in

* The "subprime lending" crisis that started in the US

in Aug 2007 (see the "bubble / crash" glossary article),

* Other real estate crashes in other countries (Spain, Ireland...)

which economy became largely dependent of the building sector.

This was linked to easy money that brought lending overleverage.

Also, what played a crucial role in the US real estate blind excesses
were complex and obscure financial "vehicles"
(securitization of bad loans held by shadow banking entities
called "vehicles" and invention of related derivative financial
contracts).

The devil is often in the details as is often said.
In that case it was the ...vehicle drivers!

That crisis spread to banks, financial markets, financial
institutions, public debt, and also to the whole global economy,
as the "bubble + crash" glossary article describes

(*) To find those messages: reach that BF group and, once there,
     1) click "messages", 2) enter your query in "search archives".

Members of the BF Group, please
 vote on the glossary quality at BF polls

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This page last update: 25/08/15  

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