There's a panic underway in the United States. It's hitting financial markets hard. Bear Stearns went under because of mismanagement and enormous mistakes in their investments, but it was not inevitable that the bank had to go bust. The difference between taking a major beating in the market and actually going bust happened because of a good old fashioned run on the bank.
A run on a bank is a kind of collective panic. Within the context of the panic, everyone's behavior appears to be rational. We say that panic spreads -- an excellent description of why it is rational to "panic" when everyone else is. It might seem that there's a similar panic in the real estate market.
Comparing and contrasting the housing market with the the market for financial companies reveals a critical difference. Like the financial sector, there are serious, structural problems in the real estate market. Both markets have increased risk these days. Both have seen prices drop dramatically. Like the financial sector, there is a crisis of confidence in the real estate market. The idea that now is a bad time for real estate becomes a self fulfilling prophecy as the idea is repeated in the media and in conversations all over the country.
On the other hand, falling prices in both markets create buying opportunities. The crucial difference is in the degree of risk that balances these potential rewards. While there is a significant chance that a bank or finanical institution might go bankrupt and the stock price fall to zero, there is no chance that a house's value will fall to zero. Housing prices may be punished by structural problems and the spreading of fear, but there will never be a total panic that causes everyone to abandon home ownership. These days, lowered risk is especially valuable.
Dean Rock is a full-service real estate professional at Coldwell Banker in Lancaster. Dean's professional and volunteer activities are focused on long term health of Lancaster County's economy and society. Dean's areas of interest include historic homes, land preservation, low-income home ownership, education and youth social work. Click here to learn more about Lancaster PA real estate.
