Psychology of the "Boom"

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Submitted by mydogsarelazy on October 4, 2006 - 2:12pm

Hi Everyone,

Has any good work been done about the psychology of the real estate boom?

Yes, I know there are plenty of obvious factors, but just to get things going I wonder if 9/11 and all the anxiety it caused for Americans might have been a force. Homes are "secure" and make us feel good, right?

Just wondered if there are any good articles or theories out there.


Submitted by VanMorrisonFan on October 4, 2006 - 2:39pm.

The collapse of the tech stocks fueled the way for the real estate boom, in more ways than one. Others have written on the way the Fed reduced interest rates to stimulate the economy, which made it possible for people to afford more home.

Psychologically, though, homes were an easy sell. No one really understood what the tech stock companies were doing. They had some process or software or gizmo they were working on, but there was a lot of smoke and mirrors at work. Four walls and a roof are easy to understand, and tangible as well. You can touch them. You can sit in your real living room (nothing virtual about that) and watch your real television from the comfort of your real easy chair.

As with the tech stocks (remember all the talk of the "new paradigm" where "earnings don't matter?") the realtors had their own buzz words to encourage buying. "Everyone will always need a place to live" presumably meant that price was unimportant in buying a place to live. "They aren't making any more land" meant that you were lucky to buy the lousiest house in the lousiest neighborhood.

Alexis de Tocqueville wrote that in a democracy people are never sure of where they "fit in" to the social ladder, so they are always competing for one upmanship. In an aristocracy, of course, people know EXACTLY where they fit in, so no matter what they do they can never change it. In a democracy people are constantly seeking to show that they are as good as, if not better than, their friends and neighbors, so if everyone is buying a new home, or fixing up their home, then you must do so as well.

The logic of "panic buying" applies to things as varied as tulips in Holland, tech stocks, homes, and just about anything you can imagine.

Remember the Dr. Pepper commercial? I'm thinking of the one that said, "I drink Dr. Pepper and I'm proud/I'm part of an original crowd?" If you're part of a crowd, how can you be original?

Submitted by ltokuda on October 4, 2006 - 2:40pm.

You might want to try reading the book "Irrational Exuberance" by Robert Schiller. The second edition is out now. It talks about real estate bubbles as well as stock market bubbles. He believes that psychology plays a major role in the formation of bubbles. He supports his views with a lot of historical data and psychological studies. I definitely recommend it.

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