I was having a conversation with a prospective real estate investor the other day. He is very concerned that prices in western Washington State would continue to tumble much like other areas of the US. He said that it seemed like bad timing to buy now. He would rather wait it out to know that the bottom has been reached before venturing back into the water.

I was particularly interested in his point of view because he has proven to be an adroit owner/manager in a non-real estate related business and I respect his abilities. I had to ask the question though: "Isn't it better to buy when everyone else is selling and sell when everyone else is buying?" "Yeah," he offered "but it just doesn't feel right."

Well, I can't "kill the feeling" but this was a good example of why otherwise rational people exhibit crowd behavior. Markets interest me. Human behavior interests me. So, I study these topics, for my interest in them and also to become a better advisor for people seeking to buy and sell real estate.

One book that offers invaluable insite on this topic is "Influence , Science and Practice" by Robert Cialdini is one that has helped me understand herd behavior. I think it falls mainly into the area that Cialdini would call social proof. In other words, we have a powerful tendency to act only when our peers approve of our actions. This may explain why so many people will wait to see prices rise before wading in to buy themselves.

A highly respected Yale economist, Robert Shiller, has also written on this point. In his recent book, "The New Financial Order" he makes a powerful case that market behavior is irrational, i.e. that pricing and trading decisions in any market, securities and housing included, traders are making decisions based upon how they feel and not on measurable (ratio-able) data benchmarking prices to some solid index of values. Shiller has some very interesting ideas about creating what he calls macro markets to insure individuals and groups against financial catastrophes and even guarantying the incomes of people.

Ken Fisher, Forbes 400 billionaire and highly successful money manager in his book "The Only Three Questions That Count" discounts Shiller's abstractions somewhat. What gives Fisher some street cred over Shiller is that he is in the trenches trading for his and his clients' wealth. He is arguably one of the most successful money managers of all time. He states categorically that when consensus sentiment is bearish it is an excellent indicator that it is time to buy.

Coming back to my investor friend though, I can't help but think that our view of investing, particularly real estate investing, is distorted first and mostly because we look at it all wrong using market price abstractions and secondly because market behavior is itself irrational. What I mean is that the right price for housing shouldn't be a speculative exercise and that investors should be rewarded for adding value to the process of helping people become homeowners and not because they were clever or lucky at financing housing inventories held back form delivery to a homeowner. When I tried to explain this to my friend, he was unable to let go of his perceptions of the power of market volatility and timing.

I sincerely hope that we might be able to develop systems of housing finance and trade that doesn't cause so many unfortunate outcomes due to swings in housing markets. What do you think?