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Real Estate and Rational Markets ?

By Lonn Dugan

Industry Observer

March 11, 2008 11:36 PM

Classical economic theory says markets are rational.

According to the theory, we don't need to regulate markets or control them, because they always behave rationally.

At risk of oversimplification, the idea is that principles of Supply and Demand take care of things. If people want it they will buy it. If they don't they won't. No need for government to interfere. You cannot legislate morality or fair prices or anything else when it comes to markets. Hmmmm........

WHEN IT COMES TO REAL ESTATE.....

Was 2000 - 2005 Rational? Was 2006 - 2007 Rational? What would be rational for the market to do in 2008?

Penny for your thoughts?

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Brian Sharkey

SharkeyRE LLC - Singer Island, FL

SharkeyRE

Lonn,

Bring it right down to the basics. I was talking with an"informed agent" about the values of property, interest rates and inflation. It amazes me how some people think they understand and don't really.

Let me pose a question back see how you field it: Why is it most likly that interest rates will increase in the future?

Yes the market will self correct.

Mar 11, 2008 11:43 PM

Charlie Ragonesi

AllMountainRealty.com - Big Canoe, GA

Homes - Big Canoe, Jasper, North Georgia Pros

The market was 100 percent rational. Lenders said sure we will give you money, sure you can buy a home, sure you can have the American dream. So you would have had to be irrational to pass this up. The irrationality came from lenders make credit to easy

Mar 12, 2008 12:09 AM

Tom Davis

Harrington ERA,DE Homes For Sale, $$ Save $$ Buy Today ! - Dover, DE

FREE Delaware Homes Search!, $$ Save $$ - Find Homes! Delaware Realtor

Yes credit may have been given out too easily but it makes it more difficult for those that have good credit and the process is taking longer sometimes.

Mar 12, 2008 12:14 AM

Michael (Mike) Elliott

Nottingham Real Estate Group - Hamilton, NJ

There is rationality to a degree. But folks began to feel like prices were never going to stop, so they were paying dumb prices, as we can now see. I saw it in 2005, that was the point in my market where things got out of control. Things work in cycles, don't sweat it. We will look back on this market and 2009 and think, "Wow, I should have bought THEN". Bank on it.

Mar 12, 2008 12:26 AM

Lonn Dugan

Toledo, OH

Brian: Good comments. Real Estate Interest Rates will increase because the market is rational : ) The pendulum has swung and only has one way to go. Lenders sales volume on loans is very low right now. Lenders have bills to pay, so rates will be pressured upward. Further, at current prices, people will start buying homes again. DEMAND for credit will drive rates up further.

Charlie: Lenders were also part of the rationality. If people would buy the loans in record numbers, and if most people do pay their mortgage, then it was statistically rational to offer the product to a willing market. Of course, they charged more for that easy availability, which was also rational. And of course, when the product did not perform as desired, the lenders drew back because they no longer wanted to "buy" subprime borrowers loans.

Tom: Yes, the changes have made it hard for regular folks to buy houses. This too will come back.

Mike: I am with you. It's a great time to buy. Most people miss the turn in any market cycle. Market Timing is the hardest part of any investing strategy. I have predicted that the turn is closer than the economists think. Why? Because the market is rational. There are a lot of great buys out there. If you are thinking about getting into real estate as an investment, it's time to Pull the trigger!

Mar 12, 2008 11:18 PM

Real Estate and Rational Markets ?

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