I was once bitten by a black bear. The black bear was named Bill, and was one of the live mascots at Baylor University. I was fortunate enough to have been among his caretakers as a student and I had spent many hours with Bill. I spent hours feeding him apples and grapes from my hand, brushing the undercoat from his thick dark fur when the Texas temperatures climbed, and even climbing in the pool with him to give him a bath. Though somewhere near 400 pounds, Bill was a gentle creature, one who I couldn’t imagine ever biting anyone.
Then, like so many good stories, there was a girl that I wanted to impress, or more precisely the girl’s father (my future father-in-law). I wanted to show off a little, so I arranged to introduce him to Bill up close and personal. What I didn’t know was that my future father-in-law was utterly terrified. I’d find out later that he had been attacked by a large dog as a child and still carried the trauma of that into his reactions with animals. Since he was apparently trying to impress me too, he agreed to go into the bear enclosure with me. Bill immediately sensed the terror of the stranger entering the cage and decided to let me know that he wasn’t comfortable with this situation at all. Instead of taking the treats I held in my outstretched hand, Bill took my wrist in his mouth and gave me a little bite. Not hard enough to break the skin, but hard enough for the message to be loud and clear…the meeting was over.
So, you are probably wondering right now, what this has to do with real estate? I’ve noticed lately that there is a lot of similarity between human trauma responses and the volatility of the real estate market.
The Road to Volatility
Market volatility is directly tied to fear and uncertainty. Markets hate uncertainty. That makes sense, because any market at its most basic level is based on human interaction. Humans often react to fear and uncertainty out of a place of trauma. When you hear the word ‘trauma’ you might think of some really bad things…abuse, neglect, PTSD, etc. In the world of trauma-informed therapy (a world I get a unique glimpse into through the work of my wife who is a Licensed Professional Counselor and Certified IFS therapist) those would be known as ‘big-T’ traumas. But the daily struggles of life can form trauma responses known as ‘little-t’ traumas. Both can result in responses like reaction formation which lead toward self-fulfilling prophecies. As French poet Jean de La Fontaine put it, “a person often meets his destiny on the road he took to avoid it.”
In the case of my father-in-law, his fear of the bear actually elicited a response from the bear that perpetuated my father-in-law’s fear.
Our real estate market (and society as a whole) in the post-COVID era exhibits a lot of similarity to that sort of trauma response. That makes sense on a macro level. Our whole world was for a time in the grip of global fear. Our collective human responses to that fear reverberated throughout society. Nothing was untouched by this trauma, with the societal trauma responses evident in politics, monetary and fiscal policies, education, the workplace, family life, and even spiritual life. I don’t have to convince you of that, you lived it too, and the reverberations of those responses are echoing still.
How might this have played out on a micro level in the real estate market? Let’s take the example of a buyer who has lost bids on several houses, which for that buyer would fall into the category of a ‘little-t’ trauma. It’s frustrating and time-consuming to lose out on a house you had hoped to buy. When the market is out of balance with demand outpacing supply, prices will naturally rise, but the trauma response to that has the result of exacerbating the reaction. That buyer, out of fear, may think “if I don’t get this next house, I might be priced out of the market!” Then the reaction formation response results in the buyer, fearful of price increases reacting in a way as if price is no object. The buyer’s response may be “I have to win this next bid at all costs!” Acting out of that response results in the acceleration of the price increases which the buyer had feared. The response becomes a self-fulfilling prophecy, as the buyer bids far above value in order to assuage that fear. This is important, as the above market bid is not reflective of the value that buyer places on the real estate itself, but the value that the buyer places on the avoidance of fear and uncertainty.
The Road of Expectations
In the lexicon of economics, this falls under the umbrella of expectations. Those expectations can often result in responses which are counter-intuitive. Let’s consider the example of another buyer in the market for homes as the interest rates were rapidly rising. Even though the impact of the interest rate increases impacted all of the competing buyers, the trauma response becomes critical in understanding the market reaction. “If I don’t lock in something now, my payment is going to get really high!” Buyers with that same trauma response then bid against each other to lock in that rate, but by doing so create the increased payment that they feared. The higher price and thus increased payment mirrors that impact of the higher interest rates which they feared. The buyer effectively met their destiny on the road they took to avoid it.
We can see this on a macro level with regards to interest rates. The U.S. government has always been tempted to use fiscal and monetary policy to avoid market cycles. As a country, the Great Depression was perhaps our greatest collective economic trauma since the Civil War. Across the political spectrum, there was a response to this collective traumatic experience. The response went something like this: “Market cycles are damaging. We must do whatever we can within our governmental authority, or if necessary expand our governmental authority, to prevent this from ever happening again.” Since the Great Depression, the tendency of the government to react in a heavy-handed way in response to this fear has been present on both sides of the aisle, albeit with different preferred methods of response. Think again to the collective government policy response to COVID. Look through the lens of expectations, reaction formation, and self-fulling prophecy. Through that lens, what do you notice about the volatility in interest rates, inflation, and imbalances in the housing market in the post-COVID era?
The Road Toward Choices
Market cycles are normal and unavoidable, but certainly can be traumatic…just like the rest of life. There will be good days…and bad ones. We will be hurt by people…and we will hurt people. The circumstances of life are such that none of us are immune to trauma. When you think about it, what you are exposed to just by scrolling the news on your phone is traumatic on some level. While trauma is out of our control, we do have the ability to choose our response to it…but it does take some introspection and courage.
Keep in mind that our motivations are usually mixed. It is usually true that part of us is motivated by one thing, while part of us is motivated by another. There are often internal conflicts known as ‘polarizations’ in the IFS model of therapy. Understanding our own motivations and uncovering those polarizations is a large part of the process of introspection. What is motivating is in our responses to the world around us? If we use that lens to view the real estate marketplace, what can we discover regarding the often mixed motivations of market participants?
Bill the bear didn’t have a lot of choice as to how he responded. He bit me, and there wasn’t really another choice for him (although thankfully he chose to bite gently). We, as humans, have the ability to pause and consider our motivations and responses.
As appraisers we can learn a lot from this, both in terms of how to interpret our market and how we interpret our own businesses and careers. I’m certainly not immune to the trauma response. I’ll admit, when the slow down happened last year, it wasn’t long before I was bidding many appraisals out of fear. While there are certainly systemic issues in the appraisal industry that exacerbate the impact of the trauma response, the result of so many appraisers reacting out of fear made a difficult situation that much worse. It took a good bit of introspection to discover some of my internal polarizations around that issue. If you take a moment to be reflective, do you feel like your reactions are automatic, or do you feel like you have enough perspective to choose your responses?
The appraisal market is cyclical, too. During this cycle, I get to choose how to respond, and you do too. Let’s all pause for some introspection and do our best to respond out of a sense of calm and courage. What might happen if, instead of setting out on a path of avoidance, we calmly faced our circumstances head on? We might find that we can choose a destination to be pursued, instead of a destiny to be avoided.