To state the obvious, homeowners like it when property values begin to rise. When a home’s value increases, so does the owner’s wealth. However, when this happens, more and more people begin to view real estate, including family homes, as a form of investment—but this isn’t necessarily a good thing.
Why is that? Because when family homes are treated as investments, they begin to behave like investments—which means volatility can enter the picture.
Price Volatility in the Housing Market
There’s nothing more disruptive to the housing market than price volatility. Yes, the upswings in price can be exciting—but the downswings can be devastating. For some families, they can even be ruinous.
When your home suddenly plummets in value, it’s not just financially draining. It’s emotionally draining, too. One day you think you’re sitting on a plush investment, only for it to crumble the next day. This is something that most homeowners would rather not ever have to experience.
But if the downswings are potentially ruinous, the upswings aren’t that much better. They can create unsustainable levels of borrowing and of consumer spending, only for the inevitable downswing to lead to a glut of foreclosures and bankruptcies.
The Role of Market Psychology
Market psychology plays a major role in all of this. Markets, after all, reflect the actions of many individuals, and as such they can often be understood in behavioral terms. Consider this basic trajectory:
As the price of real estate drops, the response of the market is denial. This means that, rather than acting to minimize their loss, homeowners double down on their real estate investment.
Then, as denial turns to fear, buyers tend to become angry and desperate to maintain their status.
Ultimately, homeowners will move into “emotional bargaining”—listing their home for a low asking price, for example, or making big home improvements to enhance value and buying appeal.
More and more homeowners decide that they need to sell, that this is their only way out of a bad market. The flip side though, is that there are less buyers in the market, which pushes prices down even further.
You can see how shifts in the market can snowball and become self-fulfilling prophecies. And how in all of this, regular families can be met with financial ruin, all because their homes come to be viewed as commodities to be traded or invested in.
Treating a House Like a House
Certainly, we believe that real estate is a positive investment—a good place to put your money where it might appreciate in value over time. Buying a home can be a great investment in your future.
What we caution against is the viewpoint that family homes are precious commodities, and that it’s beneficial to families or to society as a whole, to act upon every little marketplace shift.
We want to help families get into homes they can afford, and enjoy for a good long time—period. To learn more, reach out to Loan Fleet today.