All too frequently, people walk into my open houses who tell me something along the lines that investing in real estate is a bad idea right now because the market is about to crash. My response to such a claim is always "what is going to define this upcoming crash?" In the 1920's it was the stock market crash. In the 1960's it was the credit crisis. In the early 2000's it was the internet bubble. In 2007/2008 it was the sub-prime lending. A gentleman from my last open house claimed that this time it will be lending on vehicles, and maybe health care. My response to his theory was that the lenders were the cause of the last financial crisis. They aren't going to be the cause of the next one because they are under great scrutiny. In addition, the baby boomer generation is officially reaching more than 55 years of age and requiring more from their health care. Although this conversation seems very boring on the surface, it showed me a lot in terms of understanding where our population's attitude is.
You might ask why is this minor conversation so significant?
The significance is that it is a fantastic example of behavioral economics. Simply put, it is recognizing that people are the ones who influence market changes because people are the ones moving their money around. For instance, a stock you own might be dropping in price, but you may "feel" like it is bound to come back when in reality, you might be riding that wave all the way to the very bottom.
Going back to the open house conversation, my interaction told me that people are still behaviorally scared more than 3 years off the bottom of the market. We're at pre-recession highs in real estate and I understand that can be nerve racking to someone who is thinking those are frightening numbers, but the LTV (loan to value) ratio is increasing and distressed sales are decreasing (calculatedriskblog). The other indicator that the market is stabilized or is stabilizing is that the Fed plans on increasing rates in December and would not do so without confidence in the economy. My personal favorite was that CNBC did a segment on boat sales recently. As far as I've been taught, boat stands for "break out another thousand". Of course this is just a joking play on boats not being good investments. However, the fact that CNBC bothered to do a segment on boats tells me that people are beginning to develop enough behavioral confidence or stability in order to think about spending money on something that will most likely not produce any sort of return.
On the flip side, I understand that making such a large purchase can be intimidating and nerve racking. However, I also know that no one wants to be a skeptic who is late to the investing party. Simon Sinek has a great Ted Talk about this concept of being sold on an idea versus a product (Simon Sinek). I think it's a good demonstration of people being sold on their own fear mongering and maybe needing to recognize that they themselves shouldn't be responsible for investing their own money if they are always going to be the last one to the party. It also demonstrates that if you can be aggressive and take risks, you can reap the benefits.
Even Stephen Dubner of Freakonomics had Dan Gibbons of Harvard University and recent Prudential advertisements on an episode of the podcast to discuss cognitive dissonance and the gap between how well we think we're prepared for retirement versus how much we've actually prepared. They discuss the significance and display evidence in a new way in order for people to have a tangible understanding of reality and prompt people to make changes in the way they approach their finances. In the advertisements, you often see people have very disappointed faces when they realize that they aren't prepared for retirement, but they immediately follow it up with some comment about making a change to their lifestyle in order to better prepared.
Although the crunching and analyzing numbers side of managing finances or impacting decisions might be the less glamorous side of finance, I think doing the homework and knowing the fundamentals can really help people to make educated decisions rather than decisions about what they "feel" the market is going to do. For instance, I work with an investor who bought lots of property during the down turn and within 5 years, each property has increased anywhere between 50%-100% in value. This is a direct result of this investor being aggressive and being in a unique position to buy property when other people could not. They beat the pack though because they saw that people were defeated and scared and not in a position to invest. Sometimes being aggressive, taking risks and going against the behavioral grain is what it takes
You might ask why is this minor conversation so significant?
The significance is that it is a fantastic example of behavioral economics. Simply put, it is recognizing that people are the ones who influence market changes because people are the ones moving their money around. For instance, a stock you own might be dropping in price, but you may "feel" like it is bound to come back when in reality, you might be riding that wave all the way to the very bottom.
Going back to the open house conversation, my interaction told me that people are still behaviorally scared more than 3 years off the bottom of the market. We're at pre-recession highs in real estate and I understand that can be nerve racking to someone who is thinking those are frightening numbers, but the LTV (loan to value) ratio is increasing and distressed sales are decreasing (calculatedriskblog). The other indicator that the market is stabilized or is stabilizing is that the Fed plans on increasing rates in December and would not do so without confidence in the economy. My personal favorite was that CNBC did a segment on boat sales recently. As far as I've been taught, boat stands for "break out another thousand". Of course this is just a joking play on boats not being good investments. However, the fact that CNBC bothered to do a segment on boats tells me that people are beginning to develop enough behavioral confidence or stability in order to think about spending money on something that will most likely not produce any sort of return.
On the flip side, I understand that making such a large purchase can be intimidating and nerve racking. However, I also know that no one wants to be a skeptic who is late to the investing party. Simon Sinek has a great Ted Talk about this concept of being sold on an idea versus a product (Simon Sinek). I think it's a good demonstration of people being sold on their own fear mongering and maybe needing to recognize that they themselves shouldn't be responsible for investing their own money if they are always going to be the last one to the party. It also demonstrates that if you can be aggressive and take risks, you can reap the benefits.
Even Stephen Dubner of Freakonomics had Dan Gibbons of Harvard University and recent Prudential advertisements on an episode of the podcast to discuss cognitive dissonance and the gap between how well we think we're prepared for retirement versus how much we've actually prepared. They discuss the significance and display evidence in a new way in order for people to have a tangible understanding of reality and prompt people to make changes in the way they approach their finances. In the advertisements, you often see people have very disappointed faces when they realize that they aren't prepared for retirement, but they immediately follow it up with some comment about making a change to their lifestyle in order to better prepared.
Although the crunching and analyzing numbers side of managing finances or impacting decisions might be the less glamorous side of finance, I think doing the homework and knowing the fundamentals can really help people to make educated decisions rather than decisions about what they "feel" the market is going to do. For instance, I work with an investor who bought lots of property during the down turn and within 5 years, each property has increased anywhere between 50%-100% in value. This is a direct result of this investor being aggressive and being in a unique position to buy property when other people could not. They beat the pack though because they saw that people were defeated and scared and not in a position to invest. Sometimes being aggressive, taking risks and going against the behavioral grain is what it takes
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