As I was reading my emails today, I came across this:
OVERCOMING THE PSYCHOLOGY OF FEAR
Amid the constant bombardment of market-related information over the past weeks, there’s one important question that isn’t getting the attention it deserves. Why is it that a house that sold in an immediate bidding war for $500,000 two years ago now sits on the market for 12 months when it’s priced at $300,000? Why aren’t potential home buyers becoming more active as homes become more affordable?
Psychologist Daniel Kahneman can explain. Kahneman was awarded a Nobel Prize in economics for the discovery that because of the way we humans are wired, we fear losing far more than we enjoy winning. When something precious is at stake, we fixate on the downside risk. This fear, which probably relates to millennia of survival, is an incredibly powerful emotion that short-circuits reasoning, no matter how highly disciplined the decision-maker is.
On top of this innate fear of loss, the models that financial markets once relied on to assess credit risk have proved to be about as useful as a Magic Eight Ball. So what do investors do? They buy the safest securities they can find: U.S. Treasuries.
Clearly, it’s vital to restore confidence, encourage broader investment, and eliminate the perception that asset prices will keep dropping. These three objectives have been at the heart of initiatives from the Fed, Treasury, and FDIC. But although these programs seem to be having a positive impact, there’s a limit to their effectiveness. After all, fixing credit markets is second nature to the Fed and Treasury. Slowing or stopping falling home prices is another story.
The solution, according to Economics 101, is to decrease supply and/or increase demand. On the supply side, lenders including SunTrust Mortgage are making an enormous effort to keep struggling homeowners in homes and avoid putting more properties on the market. On the demand side, the Treasury is extremely serious about lowering mortgage rates, as shown by its recently announced plan to spend up to $500 billion to support the market for agency mortgage-backed securities.
Unfortunately, the level of fear has reached a point where many home buyers don’t recognize the opportunities they’re missing. But unlike monetary and fiscal policy where most of us are only spectators, we can all play a role in influencing buyer psychology by communicating these facts to them:
- Mortgages, both agency and non-agency, are readily available.
- Mortgage rates are currently at some of the lowest levels ever seen.
- Through a combination of lower rates and lower home prices, housing affordability has returned to levels not seen in many years.
- While it’s true that there are a lot of houses on the market, they are not all created equal. The good ones will go fast as buying starts again.
History tells us that attitudes can be changed by a single voice that finds a way to be heard. Names like Roosevelt, Churchill, and Mandela come to mind. If these individuals had the power to turn widespread fear into confidence, imagine what an entire industry could achieve! What can you and your colleagues do today to help spread the good word to your customers?
Go Platinum Lending is your local lender that is here to help YOU make the best of todays market. Prices are low and so are interest rates. Call us!
Go Platinum Lending
Ph 559-683-LOAN (5626)
Fx 559-683-3788
www.goplatinumlending.com
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