I’ve been saying all along that the wider availability of the information would influence the pace – and possibly the extent – of the extremes in which these trends develop.
In a truly rational and well informed market the market psychology would be a minor influence at most. Prices would be based primarily on the other economic fundamentals.
If you want an example of what happens with a well informed market, look at groceries. That’s a commodity class that is widely traded by everyone, and yet the prices vary more based on the underlying supply/demand than anything else. The availability of the relevant information and the ability and willingness of the buyers and sellers to analyze that information is such that there is very little irrationality in those markets. Now obviously as a consumable commodity these groceries don’t present any investment upside per se, but irrationality in the market isn’t caused by the true investor who has and analyzes their own data. It’s caused by the people who rely on their “experts” to tell them what to do.
When I compare what’s happening today vs. what happened in the early ’90s, several things really stand out. Unlike in the last peak/trough cycle, this time we had some people predicting this downswing absolutely would occur – last time there was hardly anyone who was committing to such a position. This time some of those property owners who are money-minded were well enough informed to decide to actually sell their properties and move into rentals – that didn’t happen at all last time. This time we have people who are actively planning on the market losing enough pricing that they’ll be able to get a good deal whereas last time there were so few of these people that it almost wasn’t worth mentioning.
All of these more recent developments are tied to both the increased availability of the raw data and the ability of the people at street level to analyze it. We are seeing more rams and fewer sheep this time, and I expect that trend to increase dramatically as a result of the losses that rack up during this downswing.
The beauty of blogpower is that everyone who participates – even those who lurk – can pull in data and commentary from all over. These various sources of information can then be compared to one another for accuracy and reasonableness, and the people can make their own decisions about which way to go and how to get there. The masses will increasingly be less dependent on the “experts” – many of whom have hidden aggendas – to tell them how to think or what decisions to make. Those experts who are being honest and objective will gain the most influence. Those who play the game as advocates for the special interests will be ridiculed. It’s already happening that way.
Look at how Zillow and some of the other info sites are already influencing people’s opinions about full service RE brokerage and commission structures. As with stocks even those players who do gravitate toward using the experts to work their transactions will be operating from a higher level of knowledge of the market in which they are participating. The number of people who can be misled by a broker who may not be working in their best interests will decline, especially as more people come to understand the benefits of doing their own research prior to making these decisions.
There are already reports in the mainstream media about how bloggers had foreseen the direction and extent of this downturn well in advance of it happening. As time goes by, more and more people are connecting up with these blogs. While it’s true that some of these newcomers are sheep and some of these blogs are hormonally bearish in their orientation, there are also some people who are analytical and some blogs (like this one) that are data driven and analysis heavy.
Blogs like this one are not bearish because their principals are bitter, but because they are following the data and comparing the trends to the fundamentals. When those price trends come more in line with these fundamentals, the focus of Piggington’s will evolve to looking for the best time and the best areas to invest in RE again. Some of the same people who have been calling out the declines all along will eventually reverse course and call for increases, possibly at a time when the mainstream still thinks of RE as a loser.
I think the next big test of the blogpower in the RE markets will come when the markets turn again. If the correction to trend doesn’t overshoot the trendline into “undervalued” territory – as has happened in every other cycle prior to this, like during 1994-1996 – it will be in part because a lot of people will have learned what to look for and will have both the means and the will to get back in at the fair price rather than at the best price. If that happens, it’s possible the big swings we’ve been seeing will flatten out.
The more well informed the majority of players in the market are, the more rational the market will become. Because RE is not a very liquid asset, a rational RE market will flatten out and will move more slowly in concert with the underlying fundamentals rather than by manipulation.
Unlike with stocks, an opinion of value of real property can be developed by an outsider without relying solely on any information or misinformation provided by the seller. An RE seller cannot cook their books or overstate earnings and get away with it for even the one transaction unless the buyer is lazy and doesn’t bother trying to verify anything. That’s why I think the RE markets can flatten out and become more rational in the long run.
