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Rumors of a Downward Spiral

By Datta Khalsa, Broker

A local lender recently shared a parable with me about recessions that sums up a lot about the nature of how such an economic trend can perpetuate:

This guy goes into his local barber shop and says, “I heard the stock market is down and a recession is coming.” The rest of the appointment goes on as normal, but at the end he tips the barber a little less than his usual.

After work, the barber stops by the neighborhood bike shop and tells the owner, “Hey, I was planning to buy a new bike for my kid, but I hear the market is down, so I’m just going to get some accessories for his current bike, and he can ride it another year or two.”

After the barber leaves, the bike shop owner calls the restaurant proprietor across town and says, “You know that banquet we were planning for our employees? I think we’re just going to do a potluck this year and hold the event at our house.”

The next day the restaurant guy calls the barber to cancel his upcoming haircut and says “hey, I’ve decided to cut back my appointments with you to every other month until this recession blows by.”

A week later, the barber decides to close the shop for a couple days a week because he can see that business is starting to slow down, and he’s also feeling a little relieved that he didn’t spend the extra money on that bike for his kid.

Markets tend to be self-fulfilling prophesies as people talk about them, and real estate markets are not immune to this. Headlines these days tell us that real estate market is slowing across the country after the Fed raised interest rates by the largest margin in history to put the brakes on inflation, and talk started about a recession looming.

But a few funny things happened on the way to the recession: National unemployment plunged to its lowest levels in years, while wages soared to all-time highs. Multiple economists are starting to predict that inflation (and interest rates) return to normal levels inside of the next year. And at least in our local real estate market, inventory remains stubbornly low. Why?

For one, even as many prospective buyers find themselves priced out of the market, many would-be sellers are equally paralyzed at the prospect of giving up their low interest rate and property tax base if they put their home up for sale. And with buyers caught between fear of a recession and Fear Of Missing Out—amidst mixed economic data, FOMO generally still prevails.

Recognizing this, astute agents and sellers are using strategic underpricing tactics to draw buyer’s attention to their listings, thereby fanning the flames of FOMO, which has continued an ongoing trend for multiple overbids even in the face of the doom and gloom of the economic headlines. Because as long as you have multiple buyers competing against you, it’s hard to mount a convincing argument that we’re in a downward market.

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