Why Are Home Prices Falling Again?
This post first appeared in the June edition of: Cirios Trends Special Edition: Mid-Year Review – Will Housing Slide Again?
Ask any housing expert worth his (or her) salt why home prices are falling again and you’ll likely hear a litany of reasons, all of which sound completely plausible: Tax credit expiration, weak job market, high inventory levels, shadow supply, strategic defaults, negative equity and a tight lending
environment.
This sort of analysis isn’t wrong, per se, but all too often discussions about home prices and the real estate market ignore the most fundamental of all economic indicators: Confidence.
As we showed on the previous page, shifts in confidence are closely tied to movements in the stock market. And, as we have written previously, the stock market is the most widely used barometer for the country’s economic health. It stands to reason then that the relationship between stocks and home prices could be similarly close.
In fact, they are. Below is an updated graph we showed earlier in the year, where you can see how home prices and stocks tumbled in tandem throughout 2008, only to both find support at almost exactly the same time last spring.
Similarly, as stocks have swooned in recent months, so too have home prices begun to slip. And while it’s easy to point to the above factor as reasons for the fall, it only tells part of the story. At its core, buying a home remains a highly emotionally decision. For as much as we at Cirios preach that our clients should focus on making a sound economic decision, it’s impossible to leave emotions out of the picture.
When people read headlines about crushing debt loads in Europe, rising unemployment, bankrupt states and the Gulf filling up with oil, it naturally affects the way they make economic decisions. Interestingly, however, this relationship may not be as straightforward as we may think.
Conventional wisdom favors the idea that events drive social mood – that is, we react to what’s around us. Logical enough, but there is another school of thought: Socionomics, which counters that social mood drives events, and specifically our reactions to those events.
In other words, just because there is an oil spill, or because California is broke, people won’t necessarily get skittish and stop taking risk. Instead, prevailing social mood provides a context in which decisions are made. And depending on that mood, the whims of millions of unique minds, reactions to similar events will vary over time.
The theory isn’t yet mainstream, but as new media increasingly captures humanities real time pulse, this isn’t the last time you’ll hear Socionomics and social mood uttered in the same breath.