Typically, possessing knowledge is advantageous. With knowledge, we’re better rounded, appreciative, and more aware.
When we know the facts, we make informed decisions. Better decisions?
Consider the “curse of knowledge” in decision making.
The “curse of knowledge,” says Wikipedia, “is a cognitive bias that leads better-informed parties to find it extremely difficult to think about problems from the perspective of lesser-informed parties.”
The first to suggest the “curse” in print were economists. Their research suggested bad decision making results from the inability of the knowledgeable party to accurately predict the actions of those lacking knowledge. This leads to circumstances with economic impact, as those who know better “suffer losses in a deal when they should not” because “informed parties are unable to ignore their better information, even when they should.”
Further, this “curse” negates “market consequences resulting from information asymmetry—one party knowing more than the other and being at an advantage because of it.”
Essentially: When you know, it’s impossible to imagine the state of not knowing.
The “curse of knowledge” seems an interesting component in all sorts of decision making situations. Imagine its implications in the real estate market…
How does the “curse” affect the seller setting a price? Or the negotiation of sale? The actions of the buyer or realtor? Or the mortgage underwriter?
‘No man’s knowledge can go beyond his experience.’–John Locke
Although American consumers remain upbeat about home buying, they remain more pessimistic than in 2013 and 2014, according to Gallup. Currently, 69% of consumers believe “now is a good time” to purchase a home. This is down from the 74% that believed this the past two years, although similar to findings from 2009-2012--when “just over half endorsed home buying.”
Reasons for lessening confidence now may be the result of expectations that prices will rise (59%), a climate favoring sellers. Also, a strengthening economy and potential for increasing interest rates may dampen enthusiasm.
More from Gallup: “In U.S., Fewer Non-Homeowners Expect to Buy Home.” Forty-one percent of non-homeowners don’t believe they’ll buy in “the foreseeable future,” compared with 31% two years ago.
Home ownership rates have declined along with potential buyer expectations to purchase. In April 2015, 61% of survey respondents owned their homes, 34% rented, and 5% had other housing situations—most of them lived with parents.
“That percentage of home ownership is the lowest Gallup has measured in its 15-year trend,” perhaps reflecting a transition to a “new normal” regarding home ownership. Younger consumers are buried in debt, and fewer expect to buy.
“For an economy that could benefit from a housing recovery for sustained growth this decade, this news may not be the most welcome.”
‘A good decision is based on knowledge and not numbers.’ --Plato
A greater exploration of “Why Don’t You Buy a House Already?...” as conducted by Zillow provides many explanations.
Twenty percent of renters prefer to rent, while 53% indicate “poor credit or other financial barriers keep them from buying.” Other findings:
“It’s not surprising that some renters do not have down payments or qualify for home loans. About a quarter say they’re struggling just to pay the rent.”
Indeed, “Even Inexpensive Homes Too Pricey for Many Workers,” says another Zillow article. “The incomes of low-paid workers are not keeping pace with rising home values,” and for the lowest third income level of U.S. workers, wage growth is up 15% as home values are up 41%.
This low-income cohort pays the greatest percentage of their income in housing. In fact, 26% of their monthly income goes to pay the mortgage. Meanwhile, middle-income workers pay 16% of their incomes on home loans, and high-earners pay 12%.
The National Association of Realtors (NAR) concurs home prices are up. “Metro Home Prices Maintain Steady Growth in First Quarter of 2015,” due to large demand and lesser inventory. “The number of areas experiencing double-digit price appreciation doubled compared to last quarter…” the association notes.
This translates to an increase in median single-family home prices for 85% of markets. Fourteen percent of metro markets experienced lower prices from the prior year.
“Sales could soften slightly in some of these markets seeing sharp price appreciation unless housing supply markedly improves and tempers its unhealthy level of growth,” according to Lawrence Yun, NAR chief economist.
Are higher prices the reason that “66 Percent of First-time Home Buyers Make a Low Down Payment”? From December 2014 to February 2015, the 66% majority made down payments from 0-6%. This is less than 77% in early 2009, and up from the 61% in 2014.
“A low down payment enables homebuyers to purchase a home sooner and start building equity rather than saving up for a few more years. However, a lower down payment may not necessarily make a mortgage more affordable because of the effective increase in mortgage rate arising from risk adjustment fees.”
Learn “Why Homebuyers Face a Tough Spring,” per the Associated Press. Factors include: low inventory, low rates pressuring buyers to seal deals prior to increases, and rising prices in tight markets.
There also are fewer foreclosed homes for sale, a condition that fostered lower prices after the housing boom. Bargains are scarce in many locales. “Distressed sales are dropping precipitously,” according to Daren Blomquist of RealtyTrac. Homes owned by banks are down 34%.
Still, “House Flippers Seeing Record Returns,” says cnbc.com. Four percent of house sales in Q1 2014 were flips, amounting to 17,309—the lowest number since mid-2011.
“The average gross profit on a flip, however, soared to $72,450, up from $61,684 in the first quarter of 2014.” This reflects the biggest profit since the survey began in 2011 “and is attributable to tight supply in the housing market, which is pushing prices higher faster.”
However, it is becoming more difficult to find properties that qualify as “good flips.”
Finally, see “Emerging Trends in Real Estate,” per pwc.com.
Among the trends:
This very detailed report will get you up to speed on real estate expectations for the remainder of the year.
The hindsight bias is another cognitive phenomenon in which thinkers believe, after an event, that they knew it all along. But in reality, during an event, “many different answers…may make you realize you did not know the material quite as well as you thought you did.”
Many factors contribute to housing decisions and circumstances, including bias and knowledge of various players. Perhaps the consumer’s best course is to understand that various views exist in a transaction process--even if they’re not well understood due to varying motivations, inhibitions, and personal experience.
Per Confucius, “Real knowledge is to know the extent of one’s ignorance.”