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In Real Estate price is not everything. It is important, of course, but not everything. Were price to be everything, then only low-priced products would sell and there would be no reasonable explanation as to why all those multi-million dollar mansions sell as well. When it comes to purchasing a house, other factors must be taken into consideration to understand the rationality - or lack thereof - of the Buyer’s decision-making process. Buyers are typically a nervous bunch, and understandably so. It is not easy to consider an investment that runs into the thousands of dollars, and any time you commit yourself to sixty months of $2,000 or so monthly payments your palms tend to perspire. Such factors as heritage, education level and risk-absorption and management play a pivotal role as well. More exotic relationships between money and nominal wealth in the minds of people - whether such relationships are clearly understood or merely hearsay - are even more important.

There is something impliedly strange in making decisions and humans, for a reason or another, tend to shy away from them. They like to stay in their comfort zones of blissful indecision. “Nothing ventured, nothing lost” is the way many people look at making any kind of move that might be to their benefit. And the purchase of a home or other real estate is one of the most beneficial decisions that can be made in our society, even at the wrong price. Making decisions is not easy, so people more often than not decide not to decide. This can be very frustrating, especially in retrospective. There is such a thing as Buyer’s remorse in reverse: how many times we real estate professionals hear comments the likes of ‘why didn’t I buy it myself’ or ‘why didn’t I think of it’ from prospective purchasers referring to properties that have already sold - and which they themselves could have bought instead of someone else.

I call it Buyer’s “alter ego”, which is a reflection proximately caused by the misinterpretation, whether effective or subjective, of what economists refer to as ‘the money illusion’. In Economics the term “money illusion” refers to a tendency to think in terms of nominal rather than real monetary values. Which tendency can be in part explained by the fact that the average consumer thinks and does things by reflection. A real estate purchaser will very well decide to buy a loft as opposed to an apartment not necessarily because he likes lofts more or because he thinks they are a better investment, but because his very close friend has just bought one or because his very dear girlfriend has stated that she likes them more, or merely because it is trendy to purchase lofts. And the fact that lofts are typically more expensive or that, ultimately, this particular consumer will end up living in a refurbished warehouse have little weight on his rationalization of the purchase.

Some colleagues in the industry are quick at resorting to statements the likes of “Buyers are Liars”. Personally I have never quite subscribed to such oversimplified, somewhat derogatory qualifications and, in fact, have found them to be untrue more often than not. Buyers are not liars to the extent that they normally tell up front which product they are looking for. Where, however, confusion lies is in the fact that economic transactions, particularly as large as real estate acquisitions, can be represented either in nominal or in real terms. The nominal representation is simpler, more salient, and often suffices for the short run, yet the representation in real terms is the one that captures the true value of the transaction. People are generally aware that there is a difference between real and nominal values, but because at a single point in time, or over a short period, money is a salient and natural unit of measurement, people often think of transactions in predominantly nominal terms. Consequently, the evaluation of transactions often represents a mixture of nominal and real assessments, which gives rise to money illusion.

As an example, consider a Buyer that purchases real estate in a downward market deflating at the rate of, say, five percent a year, and that he is able to purchase his real estate assets at a price eight percent off asking. This consumer will focus on the nominal discount of eight percent without, in fact, realizing that his real term savings consists only of three percent. Likewise a Seller, even if aware of the true value of comparable houses, may anchor on the historical price he paid for the house and will be reluctant to sell for a price less than the nominal anchor. Which, then, explains why so many listings are brandished as ‘overpriced’ in a downward trend: in times of shifting relative prices people’s reactions will be determined by the change between an item’s current price and its historical, nominal anchor. And which, in ultimate analysis, denotes a lack of experience and sophistication of many market participant and decision makers which affect their personal reactions to changes of price and market conditions.

Luigi Frascati

Luigi Frascati is a Real Estate Agent based in Vancouver, British Columbia. He holds a Bachelor Degree in Economics and maintains a weblog entitled the Real Estate Chronicle at http://wwwrealestatechronicle.blogspot.com where you can find the full collection of his articles. Luigi is associated with the Sutton Group, the largest real estate organization in Canada, and is based with Sutton-Centre Realty in Burnaby, BC.

Luigi is very proud to be an EzineArticles Platinum Expert Author. Your rating at the footer of this Article is very much appreciated. Thank you.

[tags]real estate,homebuying,economics,money illusion,real value,nominal value[/tags]

A fascinating trend from an economic perspective is the growing popularity among consumers to purchase a second home. Whether it is being used as a vacation cottage, it is rented out or is merely an alternative to one’s primary address, the purchase of a second home is typically viewed as a Status Good. Additionally, this trend runs exactly opposite to the Theory of Marginal Utility and it thus makes the discipline of Real Estate the great exception to the general rule.

In every society, from the Marxist to the Capitalist, there is a fairly sizeable minority class which always has a surplus of cash from income or an ability to borrow sufficient for its expenditure to have stimulative effects on the general economy. Whereas in past historical times this minority class consisted mainly of the royalty and the aristocracy, it now comprises something like 25 percent to 30 percent of the population of a developed country. Because the education system in advanced countries is as egalitarian and selective as it has ever been in history, and because the skill requirements of a modern advanced economy are higher than ever before, this minority class tends to be clearly divided from the remainder of the population in terms of intelligence, educational attainments and cultural tastes

With extra spendable resources at its disposal and a fairly higher degree of education, knowledge and experience, it comes to a point where this minority class focuses its energies and resources to the acquisition, holding, perusing, renting and reselling of consumer items which are out of reach of the remainder of the population at large. As such, these items have a distinctive connotation denoting a higher status within society - if none other than in the minds of the beholders, and are called Status Goods. A second or subsequent home is possibly the crown jewel of all consumer goods and the quintessential status symbol.

More specifically, a Status Good is a purchasable item which becomes fashionable enough to have an effect on consumer spending, sufficient to produce a significant boost to the general economy of a nation, or a region, or a culture. The main motivation driving its purchase and use is that of denoting high status in society. Because of its desirability the price of a Status Good is able to carry a high profit margin and thus new providers enter the scene quite quickly with competitively high prices. This explains the recent development of resorts areas throughout the world. Here in British Columbia, for example, Whistler is already a world renown ski resort and site of the 2010 Winter Olympics. The real estate development of Whistler and Blackcomb Mountain in this past decade has seen land prices multiply exponentially from an average of CAD $75,000 in 1995 for a standard residential lot to CAD $750,000 in 2005 for the same lot. Anyone who owns an interest in land in Whistler these days definitely fits the foregoing definition and profile of status consumer.

As stated before, the purchase of a second or subsequent home runs exactly opposite to the Theory of Marginal Utility. “Marginalism” is the economic line of thought that postulates the notion that what is most important for decision-making and to determine economic value is the marginal or last unit of consumption or production. For example, one automobile is very useful for getting around. An additional automobile might be useful in case the first is being repaired, or for spare parts, but it is not as useful as the first. A third automobile has even less utility than the first two. Given the price of cars, one would not expect many people to own three cars because the benefit they receive on the third car would be unlikely to exceed the price. In essence, “marginal utility” is the additional benefit that a consumer derives on an additional unit of a commodity output. Such additional output is said to have economic value if the additional benefit exceeds the price of the output. The concept grew out of attempts by 19th-century economists to explain the fundamental economic reality of price.

As it relates to real estate, therefore, the usefulness of a second or subsequent home should diminish and, in accordance to the Theory, so should its price, so that second or subsequent homes should not possess economic value and, thus, demand for them should be minimal to none. Clearly, this is not the case in that real estate is not viewed as a disposable commodity but, rather, it is perceived as an appreciation-generating vehicle - a real capital asset. As proven empirically, second homes as Status Goods are a vital component of consumerism, in that they stimulate demand and production and, thus, economic growth.

Luigi Frascati

Luigi Frascati is a Real Estate Agent based in Vancouver, British Columbia. He holds a Bachelor Degree in Economics and maintains a weblog entitled the Real Estate Chronicle at http://wwwrealestatechronicle.blogspot.com where you can find the full collection of his articles. Luigi is associated with the Sutton Group, the largest real estate organization in Canada, and is based with Sutton-Centre Realty in Burnaby, BC.

Luigi is very proud to be an EzineArticles Platinum Expert Author. Your rating at the footer of this Article is very much appreciated. Thank you.

[tags]home trends,real estate,investment,holding,economics,marginalism[/tags]