The irony of falling prices and first-time homebuyers

Advertisement

When the housing mania was in full bloom, many first-time home buyers were understandably panicked about being locked out of home ownership and missing the boat to get onto the property ladder. This was the case in both the UK and in the United States. In the UK, deals were done at upwards of six times a mortgage borrower’s annual salary. Now that prices are falling, things are quite different.

Now, first time home buyers are a bit sceptical and hesitant about buying property for fear of negative equity. It is ironic that people were rushing into the market at any cost as prices rose and are now almost shunning properties as prices fall.

To my mind, this is a clear case of the recency effect.

The recency effect, in psychology, is a cognitive bias that results from disproportionate salience of recent stimuli or observations. People tend to recall items that were at the end on a list rather than items that were in the middle on a list. For example, if a driver sees an equal total number of red cars as blue cars during a long journey, but there happens to be a glut of red cars at the end of the journey, he or she is likely to conclude that there were more red cars than blue cars throughout the drive.

The inverse of this effect is the primacy effect. The recency effect is compatible with the peak-end rule.

Furthermore, the effect also refers to the effect in autobiographical memory that people recall more recent than remote personal events.

Another example of the recency effect is applied by lawyers. The key witnesses will go at the end of list (or the beginning to take advantage of the primacy effect), so the jury will keep them in mind while they deliberate.
Wikipedia

Related Posts
1 of 1,030

It’s as if during the bubble days all we could remember was rising prices and now all we can remember is falling prices. Wikipedia says it is theorized that recent memories take primacy in our minds because of the larger amount of processing needed to incorporate them into long-term memory.

Subscribe to our newsletter

But, whatever the reason for the recency effect, it was very much a factor in creating a sense of panic for first-time homebuyers during the bubble. Now, it is preventing first-time buyers from making the plunge.

So, first-time buyers fed the decline in home inventories on the way up, increasing prices in so doing. Now, they are on strike — and this can only serve to increase the inventory of houses for sale, and will ultimately lead to further downward pressure.

Very ironic, indeed.

Get real time updates directly on you device, subscribe now.

Do NOT follow this link or you will be banned from the site!