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Lindley Estes is a business writer for The Free Lance-Star and Fredericksburg.com. This blog is on Fredericksburg-area business. Send an e-mail to Lindley Estes.

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Rising prices + flawed human reasoning = good news for housing market

Though it makes no sense, the human brain prefers to buy investments after they have gone up in price.

The same investor who wouldn’t touch a beaten-down stock at $20 a share jumps onboard when euphoria sends it to $30.

We don’t do that for almost anything else. Most people love to get a good deal on just about everything they buy. But most of our brains aren’t wired to think the same way about stocks.

When it comes to stocks, that human tendency to favor assets rising in value has little positive effect on the economy, other than perhaps for brokers on commission. But when it comes to housing, that same tendency can have real positive effects economically even if it makes equally little sense for the individual buyer.

I’ve been told many times over the past few years that one of the big reasons people aren’t buying houses is because they’re afraid prices will keep falling. Of course there are other factors as well, including a tough job market, tight credit and falling net worths.

But many people with good, secure jobs have opted not to buy because they fear prices will keep falling. The mentality doesn’t make sense. Like with stocks, a house at a low-enough price is a good value, particularly when you compare the after-tax costs of owning with renting. So if it’s a good value, it shouldn’t matter if prices fall another 5 percent after the purchase is made.

But the reality is it does matter to most people. Our brains hate experiencing losses. It’s why we are affected so much more by losses than gains.

As we all know, housing is crucially important to the economy, particularly in a bedroom community such as Fredericksburg. Anyone who has bought a house knows what a multiplier effect the purchase has on spending, including buying furniture, putting in landscaping, paying for maintenance and more.

So here’s the good news for the local economy: housing prices appear to be on the rise. The median sales price for the region in May, $228,000, was up 15 percent year-over-year. It was the second-highest monthly median since the collapse of Lehman Brothers in September 2008.

The May numbers don’t appear to be an anomaly either. Year-over-year median prices rose almost 18 percent locally in April.

In theory that’s bad news for buyers, who now have to spend 15 percent more for a house than they would have last year. But in reality that trend will probably bring out more buyers who aren’t as worried anymore about continued declines.

That could bode well for continued improvement in the local economy. Which goes to show that irrational human behavior can sometimes work out OK.

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Permalink: http://news.fredericksburg.com/businessbrowser/2012/06/15/rising-prices-flawed-human-reasoning-good-news-for-housing-market/

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