Many things drive markets but other then extreme new events (wars, natural catastrophes etc.), the most dominant is price, time and carry. If prices move up or down it will attract people to the market. If time goes by with little interest, it eventually will attract people to the market. This is a peculiar thing. People make a market and market psychology is people moving from one opinion to another. Individuals make their own decisions but most people think in herd mentality. The person that can be the first buyer in a sub division is usually a little away from the pack. However, they will by the middle lot more often then not, they don't want to be too far from the pack for long. Very few are not influence by group consolatory thinking. If you listen to Warren Buffett you will know he is pretty opposite the herd most of the time. Most people can't leave the herd. There is great comfort in knowing that you are not on your own.

When a market rises it brings on more interest. Most people will pay a lot more in a rising market without batting an eye. It is the competition which brings on a primal instinct to win. The same goes for sellers in a declining market. Once they give into the idea that the market has been dropping and usually for sometime. They will give in to the buyer's demands. I find that when the sellers really start to give in it is a maturing decline.  You see when the herd groups up and agrees on something and also acts on it. Vis-a-vis the sellers accepting and giving in a large proportion, the market is ready to change.           

When the market is raising and the most demanding seller's are getting their deals and you can't believe it. The market is maturing and ready for a rest or a decline.  A market participant needs to weigh all the emotions to get a good deal. Being a good buyer or good seller is not a game of popularity.

When time passes interest wanes, people eventually start to venture out. It takes the first buyer to step up. Slowly the market starts up again. Unlike a pure price driven market which runs more out of fear and greed, this is a basic quite market which sneaks up on you. In the stock market, investors look for a flat line chart and wait for it to break out.  

The carry to me is critical. But I want to qualify one thing. It is not just pure interest rate cost. It is relative interest rate cost. When rates have been in a range let say 8% for some time and move down to say 6% that is big. If rates move to a new low in rates as it had a few years ago that is big. However, the problem is it takes time now to digest the fact that we are off the low rate bottom. Our real estate market needs a 5% rate market to pick up strongly. Market psychology dictates that people who have 4 ¾ to 5 .25 mortgages won't give them up so easy. If they could replace them reasonable they would give them up and buy another house.  Only time and price will overcome carry. The three components are inter-related. The fact is that relative carry is the key here. It's where you have just been with rates that will dictate the acceptance of the current rate. People perceive their deal. They will buy on the decline in rates as prices go up. They are reluctant to buy when prices drop, even if rates ate just 1 or 1.5 % higher. This is because fear and ridicule of being wrong. 

There is much to say about timing. Truly most can not plan out timing of markets well.  But you can make basic observations that will help. If you can blend carry and price along with time, you should be operating much more efficient than the emotional herd mentality player.

So I say lest look at this market. Well there has been significant price decline, (not bad). There has been about 3 years of time, (not bad). And relative interest rates due to time passing is starting to stabilize in the 5 7/8 to 6.5% range (not bad). Meaning, the more time that has gone by since the low in rates, the better of acceptance, of the slightly higher rate.  The range we are in now is accepted. We must note that a major reversal would probably happen if the interest rates went under 5.5%.

 Move up buyers have a last hurdle which is a function of the market. They must sell to buy. So the chain of sale must occur from the bottom up. First time buyers must buy so the seller of the home they purchased can move up and so on. I think a significant regulation change has a possibility of starting this chain. Fanni Mae raised conforming limit to about $700,000 in Bergen County this may do this. About two weeks ago Fannie Mae took away the premium they were charging for using the expanded limit that was approved a couple of months ago. It was not working with a ½ % or so interest rate premium. Now at close to conforming rate structure, the second link in the chain will use these mortgages.

Is the market bottoming? You decide.  

By Richard Stabile

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