Fear of Missing Out Fuels Housing Market
While both interest rates and home prices in South Florida have increased, there is still an upsurge in real estate investment and purchases. Typically, rising mortgage rates and higher than normal home prices would lead to a slowing of the real estate market. Yet, researchers at the Federal Reserve Bank of Dallas find that a fear of missing out or FOMO is the precipitating reason for the market to continue to soar.
Why is there a FOMO?
Consumer behavior, whether positive or not, plays a role in purchasing decisions in general. Regarding real estate purchases, potential buyers have seen prices rise and housing inventory drop while residential rentals spiral. Rents have risen upwards of 30% from last year, while homeowners with a fixed rate mortgage would have not seen any major changes to their housing costs. Residential buyers also face competition with all cash buyers, leading to frustration which may be motivate such buyers to take a chance at a house.
Picture courtesy baymgtgroup
A FOMO may also be due to a fear of missing out on lower mortgage rates (before they continue to rise) which would make home ownership more unaffordable coupled with concern that, as rental rates rise, it becomes more even difficult to save for a home purchase.
Further, as the market continues to increase home prices, some potential buyers have seen houses that they may have been interested in further go up in price. According to Redfin, for example, the median sales price of a home in the South Florida tri-county areas is $450,000, a 20% increase from last year. As a result, there is a fear by some that they may miss out on equity gains if they do not purchase.
Can this lead to a housing bubble?
Picture courtesy LA Times
The current market where higher prices and mortgage interest rates are not slowing down sales may be moving from typical market fundamentals due to a FOMO. The researchers at the Federal Reserve Bank of Dallas are concerned that this fear of missing out “may become exponential (or explosive), resulting in greater misalignment until policymakers intervene , investors become cautious, or even a bust occurs.” The last time there was such “exuberance” was before the 2008 crash.
A major difference, however, between the housing market in 2008 and now is that in 2008 the issue was excessive borrowing, and now the issue is less housing inventory. Therefore, some economists believe that if there is a bust, it would be of a lessor magnitude for those very reasons. Eventually prices will become more “normal”—and when that occurs those home purchasers who buy at the top of the market will have to wait years to sell in order to obtain a return on their investment.
What does this all mean?
Our fear that we may be missing out is driving the housing frenzy. No one truly knows when we will reach the highest point as a seller to obtain top dollar for our homes. While there are incredible over-ask sales occurring, those sellers still face higher ask prices when buying. With rents increasing at alarming rates, the market continues to heat up. As a result, home affordability becomes out of reach for many while everyone is braced for a housing correction.
From The Trenches
originally posted at: https://southfloridalawblog.com/fear-of-missing-out-fuels-housing-market/