Psychology of Home Buying: When Prices Are High and Supply Is Low

Scarcity makes everything feel worse.

written by oz chen

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I’m kicking myself for not buying real estate in 2021 when rates were were still low.
I remember looking at a duplex in Long Beach. Fair condition. $650K. 30 year mortgage. 3% mortgage.
I still thought it was a bit high.

Fast forward to 2023: mortgage rates have double. Home prices haven’t gone down that much to make up for it.

In a survey of 2000 home buyers, most feel they’re at least 3-4 years from home ownership, 20% say it’ll never happen, and two out of five Americans think they need to win the lottery to become homeowners.

This could all feel…defeating.

If you’re wondering “When can I afford a home? Will prices come down? …”

Then I’ll dive into why the housing market feels so bleak and why scarcity makes our brains go haywire.

Then we’ll finish off with some jedi mind tricks to feel a bit better about it all.

Scarcity is not just mindset; it’s a number

When there are too many dollars chasing too few goods, we have scarcity.

“High prices always reflect the intersection of strong demand and limited supply… In particular, supply appears to be restricted in many high price metropolitan areas.” (NBER)

Numerical scarcity is already bad enough. But scarcity can feel even worse when amplified with other psychological effects.

Scarcity x Competition

I went to an open house for a small – but good condition – 3 bed 2 bath in an OK neighborhood. It was packed.

The house ended up getting sold $50K above asking.

When there’s competition for scarce resources, we tend to inflate the value of those resources.

You see this incentive on the selling side too – realtors are want to use scarcity messaging, regardless of the actual demand of the product.

This is the emotional side of supply and demand.

But why do so many people want a house in the first place?

Scarcity X Social Proof

Social proof is the tendency to follow others, especially when uncertain or unsure.

There’s an existential question behind uncertainty: What should I do with my life?

This is a gaping hole of a question that, for better or worse, can be filled by this societal template:

Go to college. Get a job. Start a family. Buy a home.

When everyone else is talking about home buying – a conversation supported by cultural norms – this exacerbates the feeling of scarcity.

I want this thing that everyone else wants.

And if you’ve already committed to something – then find out you cannot have it – it only makes you want it more.

More Zillow searches. More open houses. Make an irresponsible decision with crypto to get more cash. (Ok, that’s just me).

The most dangerous thing scarcity can lead us to do is… the impulse buy.

A house is not something to impulse buy

Ramit Sethi interviewed several couples experiencing financial stress from buying a home.

  • Episode 111: “We rushed into buying a $730K house. Now I can’t sleep at night.”
  • Episode 105: A couple with 3 kids, $0 saved, $80K in debt – want to buy a home.
  • Episode 69: “We make almost $300K per year but we can’t afford our mortgage.”

These podcasts show a side or real estate that’s rarely talked about…becoming house poor. This is when too expensive of a home ruins your finances.

78% of new U.S. homeowners had regrets about purchasing their homes (2022 report). Of those that have regrets:

  • 49% say homeownership is more expensive than they anticipated
  • 47% say that they have had too many unexpected issues with their home
  • 47% say there is too much maintenance and upkeep involved

As Warren Buffett said:“The five most dangerous words in business are: ‘Everybody else is doing it.’”

If you’re read up to this point, then you might think I’m anti home-buying. I’m not.

A home can work out and increase wealth and all that jazz. But if you’re in a competitive market, that will require more upfront work, creativity and a level of financial readiness.

If I’ve shat on your dreams, then it’s not all bad news.

The Silver Lining Section

I’m going to quickly outline a few opportunities, alternatives and jedi mind tricks to aid your psychology about home buying.

Macroeconomic changes can happen

For the past couple years there has been a level record of homebuilding to fight housing scarcity. Maybe one day we’ll become like Germany, which has an exemplary record of affordable, stable housing that encourages homebuilding.

Blogger Financial Samurai said there might be a window of opportunity in 2023 for home prices to fall.

Interest rates may stabilize and fall too.

The mindset takeaway is that when it comes to markets, there is always opportunity – you just have to be patient.

Have an investing mindset

If you’re in a competitive, urban market, then you might have to adjust your expectations.

Because everyone wants the best house in the best neighborhood at the best price.

If you want real estate badly, then you can invest in up-and-coming neighborhoods. Instead of a Class A city, perhaps it’s a Class B town. This could be a long term approach where one home, if managed correctly, affords you the opportunity to buy more desireable homes down the line. Maybe it’s better to not wait for the perfect “forever” home and get a “for profit” home now.

On this topic of taking alternate routes to your forever home, consider these…

Creative strategies

  • Buy a home with a group of other people. It could be friends, family, whoever you trust. It might even support your communal dreams, if you have them. Check out resources like CoBuy Homes.
  • Help your parents build an ADU. Start small, get some rental income and experience this way.
  • Ask your parents for money. If you have good relationships, it’s worth it to get over your ego and ask your parents to help you with a down payment (or more!)
  • Try rent to own platforms like Divvy.
  • Get a remote job and move to a lower cost of living area. Remote real estate investing is also on the rise – sites like Roofstock may be a starting point.

And if those don’t serve you know, then mental it’s a change in mentality that’ll help.

Just keep renting.

Resist the narrative that “rent is just throwing money away” because it’s not – it’s a service that you pay like anything else.

Think about it this way: you might be getting a discount on your living costs by renting. Here’s a chart of median rent vs median mortgage in major cities—this doesn’t even include down payment and other phantom costs.

When you rent a car or, hell, furnitive, no one things of that as a bad thing.

I think we just have a primal instinct for “home” and don’t like the idea of someone having control over us. When a landlord raises rent on you, you feel like your economic security is in the hands of someone else.

Accept that home buying is a mostly an emotional decision.

One that’s driven by scarcity, social proof, and culture.

Whatever the approach, I hope to leave you with this: owning a home does not say anything about you as a person.

Don’t let scarcity and other people’s financial beliefs drag you into a bad money situation.

liked this article? tell your mom, tell your kids


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