Across the country and here in California, home prices are rising rapidly despite the ongoing recession, leading to what economist Robert J. Shiller calls a “uncomfortable feeling. “
In a recent interview on Bloomberg, Shiller presents the idea that people buy in part because of their Fear of Missing (FOMO).
Shiller is co-author of the book “Animal spiritsIn 2009, alluding to the emotional changes driving the economy. According to this theory, emotions (like FOMO) are correlated with the business cycle. Previously it was used in Keynesian economics to oppose decision theory, the idea that assumes that people know the probabilities of future events.
Our animal spirits consist of five main influences:
- money illusion; and
These five categories have important effects on the economy. By ignoring the role human emotions play in purchasing and financial decision-making, policies will be created that will not resist these ever-changing animal spirits. Economic forecasters may also end up ignoring the primary factor that consumer emotions play in market movements.
Housing, a segment of the economy that Shiller says is difficult to predict, is also motivated by psychological factors. the COVID-19[female[feminine the experience of being forced to spend more time at home has stimulated the demand for single-family residences (SFR), but the supply is not there to meet the demand. Shiller recommends that the answer to this imbalance between supply and demand is to build more homes so that prices come down.
When asked if today’s housing market is reminiscent of a time in the past, Shiller points to 1926, a period three years before the stock market crash on Black Tuesday. A real estate bubble has emerged in the state of Florida fueled by easy credit and advertisers have been promoting it as a new leisure destination. As house prices turned south in 1926, foreclosure rates increased.
And yet the market continued to grow throughout the late 1920s and gave way to “uncomfortable feeling” just as we experience it today. Even though housing and the stock markets – asset prices – are booming, not everyone is excited. People know prices are at their peak, but they are hit by FOMO, with months of pandemic inertia and a desire to make purchases that they would otherwise have left on the back burner.
Irrational exuberance, the tendency of homebuyers and investors to ignore clear warning signs, takes its turn as the public watches with jaws gaping as prices continue to rise.
Are your buyers motivated by animal spirits?
How emotions play a role in housing cycles
Traditional economic theory assumes that people act rationally, making economic decisions based on purely economic reasons. In the process of making economics a scientific and calculable discipline, economists largely forgo a major driver of the economy as a whole: the animal spirits of human emotion.
Animal spirits that influence the global economy also influence the housing market. To better understand how this interaction of human emotion affecting real estate works, take a look at the definitions for each category that includes the animal spirit.
Trust is the first key element of the animal spirit. When people feel confident they go out into the world and do shopping. They tend to make decisions spontaneously, instinctively feeling successful in their endeavors. Confidence requires confidence in the system and confidence in a positive outcome. On the other hand, once their confidence wanes, their bad decisions are revealed, and their impetus is to to sell and withdraw.
Comes next justice. Equity is built into the economy by raising expectations about how others should behave. The inputs are equal to the outputs, according to equity and fair theory.
Corruption is the third pillar constituting the foundation of animal spirits. Capitalism, with all its strengths, also has its weaknesses. While it answers what people need, it also answers what people thought they need. Individuals and businesses have the potential to profit by providing products or services that advertise something they are doing that they really cannot do.
Money illusion is the fourth element of animal spirits. The money illusion affects many different segments of the economy, especially wages and debt. Workers resist wage cuts even when the inflation rate is negative because of this money illusion. It doesn’t matter if they can buy more with their money; what matters is the nominal dollar amount.
The final piece of the animal mind puzzle is narration. The human mind thinks in stories. It’s what people remember and what people find compelling. People tell each other stories about why they are doing something or what they want their life to be like. A prime example in the housing market is the American dream of homeownership, or as President Hoover said: a chicken in every pan and a car in every garage.
With all of these elements combined, animal spirits influence immovable because:
- consumer confidence influences people’s willingness to buy or sell;
- people get angry when they perceive injustice, like those who resisted foreclosure measures after the last recession, with an emphasis on “moral duty,” leading to more foreclosures than necessary;
- people react to periods of Corruption or bad faith in the financial markets by withdrawing from them and entering into alternative investments;
- money illusion ignores inflation and instead focuses on nominal amounts, which affects consumer attitudes towards mortgage rates; and
- stories as the American dream homeownership continues to stimulate real estate purchases.
Without understanding the animal spirits that drive the real estate market and the economy in general, we cannot fully describe or predict recessions and booms. Buyers familiar with FOMO are a less obvious and more psychological reason behind the price hike we are seeing so far in 2021.
Other reasons for the rise in home prices include historically low interest rates, tight inventories due to a lack of residential construction, and lack of foreclosure sales due to the current foreclosure moratorium. since last year, which will expire on June 30, 2021.
When foreclosures start to occur, the animal spirits of human emotion can begin their cycle of decline as buyers lose confidence in their ability to pay. Watch how people’s emotions influence the real estate market in the turbulent months ahead.
The current real estate boom is one of the biggest in history