Why do Real Estate Bubbles persist for so long? Everyone in the market has a feeling that prices are just too high but people keep on buying. Additionally, there's the belief that "if my neighbor’s house sells for x, surely my house should now sell for x + 5%". Once this mentality sets in, sellers become entrenched in their higher prices and buyers hope that someone will be there to bail them out in the future. This is the basis of the Greater Fool theory.
Trust Your Instincts
If your gut says don’t buy this property, listen to it. There are probably hundreds of available properties and neighborhoods for you to choose from, so don’t rush into something that doesn’t feel right. If you have done research and the purchase seems over valued, or an area is really starting to get news coverage, beware of the fall.
Critically Analyze Market Trends
Ask yourself what makes this pricing situation warranted. Are there new jobs in the area, has downtown started to creep out because of affordability issues, or have they built some form of mass transit nearby? Really try to figure out what factors are increasing the prices. It is important not to just listen to other people, but look critically at the market and make a judgment for yourself.
Avoid Hindsight Thinking
Hindsight bias is looking at a current situation knowing everything you know today and assuming you would/could/should have done something differently in the past. Everyone has a story about how they just missed out on a great opportunity. The problem occurs when they project these feelings onto a new investment. If you make investments in order to avoid missing out on the next big thing, you will often be taking too much risk.
Never trail the market. A problem a lot of real estate sellers get into is they price their properties in anticipation of continued market appreciation. When the market begins to turn, sellers try to hold their prices steady. This causes a sharp increase in time on the market. As a side note, increasing time on the market is a great indicator of a market taking a turn for the worse. Once time on the market increases, inevitably some sellers will begin the process of accepting lower offers or reducing their sales prices because they need to move quickly. The sellers who are too slow to reduce their price will have to make even greater concessions and face an even longer time on the market.
Bottom line, don’t assume someone will be there to bail you out. While there are plenty of fools out their, it is never fun to be the greatest fool. It can cost you significant time and money.
