Markets are not nearly as logical as one would expect them to be. The stock market, the commodities market... even the real estate market. Don't get me wrong, the DO move based on logic and reason, and they appear to be very logical... but there is a HUGE component that isn't logical...
There are two emotions at the base that move markets...
Greed
Fear
Those are the base emotions to which markets react. Let me illustrate...
In a euphoric market, greed overcomes fear, and people buy. This creates a bubble. We saw it in tech stocks in the late 1990s and early 2000s. Companies that didn't even have a plan for profitability were being run up because they were being run up. We saw it in housing in the last couple of years. "Houses ALWAYS rise in value", the NAR told us. The most famous example is the Tulip Bubble in Holland in the 17th Century. People were paying "20 times the annual pay of a skilled craftsman" for a tulip contract... not even a tulip.
in all bubbles, someone spoils the party and introduced logic and reason...
"Why should we pay $1000/share for a company that has never shown a plan to actually make money?"
"Why should I pay $600,000 for a tulip contract?"
"Why should you pay $400,000 for a fixer-upper in Braselton that only cost $127,000 to build and was purchased three years ago for $175,000?"
The obvious answer is that logic and reason left the building while people were seeing all of the money they could make. Enter fear.
And again, we have seen this played out before. The price is dropping, everyone is selling and nobody wants to buy. The ball of string is unwinding. We can see it in the tech bust. Companies that WERE making money had their share price crumble because they were "tech-related." the Dow, NASDAQ and S&P300 all saw major declines, much of that in companies that weren't even tech-related.
The "market" was afraid of the possible ramifications. Even explanations with a giant stretch caused further price erosion. It was a mirror image of the run up in prices. Just as anything that could be stretched to seem like a good reason to buy, now anything that could be used to rationalize the fear was used to sell.
We saw it play out with oil in a short period this summer. Back in June, before Goldman-Sachs predicted $250/bbl oil, I was saying it might be a bubble, and that the introduction of fear could cause it to burst. In July, President Bush killed the Executive Order preventing oil drilling on the Outer Continental Shelf. There was still a Congressional ban, but speculators started to fear... prices dropped. We are currently looking at $25/bbl oil. And now there are entities saying that it could go back to $10/bbl... Logic has left the building, and the oil market is in fear mode.
Housing?
There is NO doubt that there was a GIANT bubble in housing. especially out west and in a few areas in the east. And those places also saw 30% and even 40% decreases in value. in some cases, brand new homes were purchased out of the builders bankruptcy for less than it would have cost to build the house... if the land were free. Obviously that isn't a rational price. In some cases, the properties wouldn't even sell at prices that couldn't be duplicated. Fear had taken grip and the pendulum had swung too far in the other direction.
Here in Gwinnett County, near Atlanta, we didn't have the huge run-up in prices. We had an accelerated appreciation, but not to the levels of some of the serious bubble areas. And we have not had the severe decline in values, but there certainly has been a decline. Oddly, the worst hit markets are starting ot move quite well. Phoenix, Southern California and even many places in Florida are posting nice sales increases and the values are coming back to realistic.
Here, and some other markets that didn't have the radical swings (the crash started in those markets) we are lagging behind. We haven't started the positive move yet.
Here is the tip...
The first people to overcome their fear with rational logic are the ones that profit or get the good deals. The ones that wait for the herd are the ones that run with the bulls. And, in the case of a market top, the ones that use rational logic to sell or cut back are the ones that lock their profits.
Now is the time when rational logic is a profitable plan. Not for every property, but for the good ones. I know of a few in various parts of Lilburn and throughout Gwinnett County. I have fellow agents that are tracking deals in other parts of the Atlanta Metro. I have mortgage connections that are hooking people up with great financing.
If you wait for the herd, you get what is left after the first movers pick up the best deals.
Give me a call for a no obligation chat about some of the deals on the market right now.
from my blog at LilburnDwellings.com
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