Jun 07, 2012
Why expecting higher prices will help raise them
07 Jun 2012
Posted by Andrew Kantor
Here are two stories about prices that are interesting when taken together.
1. Doctor Housing Bubble explains a Redfin survey that found most people expect housing prices to rise this year:
Delusion runs deep. From February of 2012 to May of 2012 those who believed market prices would “rise a lot” went from 2 percent to 9 percent. Those thinking it would “rise a little” went from 32 to 49 percent. In other words most believe prices will rise in 2012.
Why “delusion”? Because, he says, the economic numbers don’t really indicate that prices will rise. The positive opinion, he says, “is really being driven by psychology and also low interest rates.”
2. But Calculated Risk points out (on its own; not a response to Dr. HB) that, in fact, believing prices will rise will actually make them rise. This isn’t in a self-fulfilling prophecy sense, but simple economics.
If sellers believe prices will rise, they won’t feel a need to rush — they’ll wait for a better offer. And potential buyers will get off the fence when they feel they won’t be getting something that’s going to immediately lose value.
So expectations matter. And so do price fundamentals. Since we are close to normal prices, based on real prices (inflation adjusted) and the price-to-rent ratio, I think expectations of price stabilization have now taken over, and buyers, sellers and lenders are acting accordingly.