Secret #15 – More Reasons Why House Prices Can Increase Surprisingly Fast
Far more than for most other goods, when house prices are increasing, house prices are determined by the most optimistic buyers.
An optimistic buyer of stocks will buy more stocks at the market price but for houses the most optimistic buyers often also pay MORE than market price and those overpriced sales immediately become comps (“comparable sales”) which help increase the value for all nearby comparable houses. One over-optimistic buyer can increase house values in a whole neighborhood.
The most optimistic house buyers set prices for everyone in rising markets.
Even if people expect stock prices to increase they don’t pay more than the current market price when they buy the stocks. Not always so with houses.
Maybe it’s because it takes so much time to buy a house that some optimistic buyers are happy to overpay because they think prices will continue to rise anyway and since they finally found a house they want to buy, they can stop spending so much time searching for a house they want to buy.
Deadlines. In addition, home buyers often have a deadline to buy a house because their current rental lease ends, or the sale of their current house closes, on a specific date. That approaching deadline can add a lot of pressure on those buyers to pay more than market price just to end their home search and to avoid the chaos of finding temporary quarters while searching for their permanent home and then having to move twice. You don’t have a deadline like that when buying stocks.
Most Distressed Sellers. In the opposite way, distressed sellers who sell well below market price to make a quick sale can influence the market value of all nearby, comparable houses. It wasn’t the market that lowered house values a bit in the neighborhood, it was that one distressed seller. People don’t usually sell their stocks for less than the current market price but it can happen with houses, especially in falling markets when sellers want to sell before prices fall further.
This is even more true today than in the past because the prices of comps are so easy for everyone to find on the internet. An unusually high or low sale price has a bigger impact today on nearby house values.
Most Optimistic Lenders. A similar phenomenon is seen at the macro level with lenders. The most optimistic lenders increase their supply of money chasing houses and that helps determine house price increases for all houses in their markets. When prices start falling, the lenders who used to be the most optimistic, may be the first to be forced to significantly tighten their lending standards and significantly reduce the amount of their money chasing houses.