“Be fearful when others are greedy, and be greedy only when others are fearful.” – Warren Buffett
Investopedia defines “herd instinct/mentality” as a phenomenon where people join groups and follow the actions of others under the assumption that other individuals have already done their research. Herd instincts are common in all aspects of society, even within the financial where investors follow what they perceive other investors are doing, rather than relying on their own analysis.
I wrote in my last real estate article on 5/4/22 about Huge Decrease in Supply in Q1 and Spike in Demand. Over the last few months, we have seen a material decline in the financial stock market, a spike in inflation, and an increase in mortgage interest rates that have really impacted the local real estate markets. Some have estimated that 30-40% of buyers who were actively looking to purchase during Q1 have postponed their search due to the macro dynamics. Real estate prices have declined in recent months, but that’s from a large rise of 15%+ for SFRs (condos didn’t see quite as much) in most areas during the 1st 5 months of 2022 so prices are still meantingfully net higher than from 2021 values.
Certainly, any buyers whether 1st time or move up who elect to wait and see how various aspects of the market and their personal situation shakes out until things stabilize would be totally rational.
- In the high technology-centric Bay Area, many people’s liquidity/down payment are invested in the NASDAQ stock market which is down 21% YTD. People who rely on stock options from a single company to fund down payments may be down even more.
- We are hearing about layoffs regularly these days, so there may be a bit of uncertainty as to job stability.
- Jumbo fixed 30 year mortgage interest rates have risen from a low of 3% last year to over 5% raising monthly payments and thus affecting loan amounts.
- There is always a fear that prices may decline further (suppose not much different than in rising markets either!)
Above, I reference a famous Warren Buffet quote and start this article defining herd mentality. There is one strategy around investment theories to not follow the herd and always do what the herd do. The following would be some reasons to actively seek to purchase an owner occupied home when others may want to wait a bit.
- Most people’s financial situation has been negatively impacted in the last few months, but to the extent that your financial situation makes it tenable to still make a purchase, there is significantly less buyer competition. In Q1, most every SFR in a good neighborhood at $3m and under often yielded 3-15 offers while buyers had less than a week to decide. Currently, there are more of choices for buyers with much less or no competition.
- Buying a house to live in yields intangible emotional benefits above and beyond just a financial return. This is a perspective I tell all my owner-occupied buyers regardless of market conditions.
- It is nearly impossible to perfectly time a financial or real estate market. In the SF Bay Area, like the general financial markets, over a 7-10 year medium term horizon, Bay Area estate prices are generally always net higher.
- For the move up buyer who currently own a property and wish to wait for their own value to rise again first, just a reminder that if your smaller property rise, your move up property will likely also rise, but at the higher price point.
- The higher interest rates no doubt has affected payments and mortgage amount. All of this macro trends has directly and indirectly affected real estate values to account for that dynamic. Two things to consider: 1) read my article from 5 years ago on Historical Mortgage Rates that even at our current rates, it’s actually not considered that high (my 1st house purchase, my mortgage was over 7% and I refinanced a year later at 6%! Crazy, huh?!), and 2) if and when mortgage rates start to drop again, there is always the possibility of refinancing to a lower rate in the future, so the current rates is likely not locked in for the entire 30 years.
Of course, if your liquidity was all in cryptocurrency or in a single recent IPO unprofitable company who has lost most of its value this year, then now may not be the right time to purchase. If your company has gone through a couple rounds of layoffs and you are not feeling confident, it may be best to hold off. There are pros and cons for every individual situation. While I am a realtor, I have the unique background where I have lived in the SF Bay Area for last 25 years going through multiple periods of growth and recessions, in past life been VP at several high profile technology companies that had major exits and blowups so I understand our local technology markets, and finally, I hold two degrees in Finance. Thus, I always am happy to brainstorm with clients and friends on evaluating the risk and rewards of various options.