Expensive Feelings: How Emotions Impact the Real Estate Market Cycle

When things are going well, real estate investors tend to forget that the economy is always moving through cycles. These cycles, as shown in the chart below, include peaks, contractions, troughs, and expansions. These phases are triggered by feelings like optimism, euphoria and fear. Each phase triggers different emotions within an investor and these emotions become what drives the real estate market.

Because emotions are such an important driver in prices, selling creates a stronger urge in others to sell. This can create anxiety which turns into fear and eventually, panic or despair at the bottom of the cycle when investors are prone to forgetting the fundamental value of their asset and surrender.

In good times, the opposite is also true. When friends see friends buying and doing well, they tend to do the same. These feel-good vibes are contagious and lead to hope, optimism and euphoria. There are multiple examples in the real estate market where euphoric buyers jump into a poor purchase decision without fully evaluating the investment. The keys to 'riding the high' are understanding that not all properties are created equal and that a fundamental property will stand the test of time.

So, where are we in the cycle of emotions in Summer 2024? Some buyers are exhausted and are prone to making emotional decisions when they are better suited to stay the course. Investors may be considering selling because it creates closure and feelings of safety. Unfortunately, that would mean investors are doubling down on their pain. They took punishment all the way down as prices fell and exited right before they rose again which means they didn’t participate in the inevitable rebound.

What is the correct choice for a smart, emotionless (AI robot?) investor in this market? We know that Warren Buffet prefers to be greedy when others are fearful and fearful when others are greedy, and a smart investor will do exactly that. Buying high-quality assets that are out of favour and then selling them to the more emotional investor when market euphoria returns is the best way to outperform.

At no time in recorded history has the housing market pulled back and not set new highs. Today’s buyer must get past their fear but if they can, they’ll reap the rewards provided by the inevitable turn upwards of the market cycle.

Originally published on LinkedIn by Tim Bolton, VP of New Development

With files from Russell Investments