I recently read, reviewed and developed a (slightly) subclinical fixation on professor Meir Statman’s book,"What Investors Really Want." That book is actually a rich, vivid, entertaining and potentially game-changing exploration of the places where behavioral finance and investors’ decision-making regarding their traded-asset portfolios intersect (in some cases) or collide (in others).
Of course, as I read it, my hypertext, real estate-addled mind kept leaping from the various fundamental, innate investor desires, as Statman describes them in his book, to their manifestations in many of these same investors’ real estate decision-making.
For the next nine weeks, we’ll take a deeper look at how the wants, needs, values and priorities reviewed in "What Investors Really Want" play a role in our real estate decisions: the good, the bad, and especially the ugly.
This series may have unwittingly already begun. Statman’s first, most fundamental statement of investor wants, is this: "Investors want profits higher than risks." A Feb. 28 Mood of the Market column about how homebuyers, sellers, owners and even renters want to have their real estate cake and eat it, too, explored this same essential truth.
Now that I’ve outed the subliminal influence this book has apparently had on me, let’s take a look at another of its truths — actually, two related truths: (1) "Investors want to play and win," and (2) "Investors do not want to face financial losses." Not stopping there, the book goes so far as to suggest that investors’ cravings for wins can actually turn them into losers.
Ah, so. In this way, then, real estate consumers differ not at all from their stock-trading, mutual-fund-investing counterparts. Actually, the stakes of every single real estate transaction is so high and the experience and education level of the decision-makers so relatively low that homebuyers and sellers probably overindex on this desire to win, aversion to losing and parlaying their need to win into losses, compared to their peers investing in non-real-estate asset classes.
In the real estate sector of American economics and our cultural psyche, the desire for a win has attained epic status — it manifests not as a desire, but a flat-out expectation. At all socioeconomic levels, Americans believe and expect that the simple act of owning a home is an instant financial win — it’s thought of as the one-click, single opt-in to upward economic mobility.
Confusing correlation with causation, those craving to climb the economic ladder cite stats like the one that 80 percent of millionaires hold real estate investments when trying to back up their at-all-costs, shortcut-seeking want and need to own homes.
And fundamentally speaking, they’re right. Real estate really is a strong investment over the long term, which highlights the critical importance of the timelines in which we tally up of our real estate wins and losses. Despite the stunning crashes of the last four years, Forbes’ Stephane Fitch recently reported, a square foot of American real estate emerged from the last decade worth 58 percent more than it was worth in 2000.
(This explains why the widespread adoption of one-, two- and three-year adjustable-rate mortgages was a sentence to widespread real estate losses; the guaranteed win is possible only when you have some flexibility to ride out two or four or eight years of downturn. When masses of homeowners play mortgage musical chairs and the music stops while the chairs are all being reupholstered, everyone ends up with their brick-and-mortgage selves poised over nothing but empty space.)
But here’s the rub: Not only do we want wins when it comes to the value of our homes, we want only wins — and no losses. This is why the last four years have seemed so, so harsh. By and large, most Americans staunchly believed that homes only ever appreciated.
And there are many who had been through a cycle or two before who really never expected to see homes decline in value by 30 percent — even those who believed a decline could or would occur didn’t expect it would happen on the scope or scale it did. And almost everyone’s expectancy of appreciation was more robust than any inklings they had of depreciation.
This expectancy of wins and only wins is precisely why it took so many of us so long to realize how bad things could get and were getting. This same, extreme aversion to any real estate losses whatsoever also underlies many of the panic-driven strategic defaults (aka walkaways), short sales, and even some would-be buyers’ irrational hesitation to take advantage of historic records in price and rate affordability.
So, Statman has it right. In our desperation to win and only win, in real estate we actually create losses. Every single week I hear from buyers who are letting the fear of their home losing even a few thousand dollars in value after they buy keep them from buying at home prices and interest rates that reflect a savings of tens, even hundreds of thousands of dollars from what they would have paid even 18 months ago.
More important, these folks may be missing the last years of a window of opportunity to buy with less than 20 percent down, or the last weeks or months of opportunity to secure fixed-rate financing at interest rates under 5 percent.
I can acknowledge that someone nearing retirement age, whose home is 50 percent underwater in a vastly overbuilt market with a sky-high foreclosure rate (i.e., poor prospects for their home’s value recovering) may have some serious and valid concerns provoking them to consider walking away from their home.
At the same time, I see other homeowners who are only slightly negative in their equity, whose mortgages and incomes are fixed, who put little or nothing down, who have long careers ahead and whose homes are in more robust markets, also wanting to walk away out of what I see as nothing more than this aversion to any losses.
These are the folks I remind that they certainly would not have sent the bank a share of their upside on their home in the years they were ahead as a way of illustrating the irrationality of bailing at the slightest downward fluctuation of their home.
When I first began training as a real estate broker, I was taught to explain the pricing guidance provided by recent comparable sales to home sellers by pointing out that list prices are the realm of sellers’ fantasies, while actual sales prices map out the boundaries of reality.
One village within that domain of real estate fantasy, most of us now realize, is the town of It-Only-Goes-Up, which is just down the road from All-Wins-No-Losses. Maybe, after the bubble burst, then completely imploded, we’re all ready to accept the upshot of professor Statman’s exploration of the fantastical enterprise of looking only for wins, and never expecting losses, in our investments and our real estate dealings: don’t.
