How many economists does it take to "get" a real estate market?

How many economists does it take to "get" a real estate market?

These days it seems like every second economist is predicting "the end of the real estate bubble".

This puzzles me, because aside from a handful of markets where rampant speculation is attracting national headlines, we're not in a bubble—and that's using the economist's own definition.

Sure, we're in a hot market, and it's a market that may be cooling. But a Ph.D. economist should know the difference. And should know better, too, because when an economist shouts "bubble" in a crowded marketplace, it's like a fireman shouting "fire" in a crowded theatre.

The out-of-control speculation that leads to classic bubbles is missing from our local real estate. That's ironic, considering our reputation for wacky prices, and plenty of people will disagree with me. But there's a subtle but important nuance, one lost on the average man or woman in the street and apparently on the average economist as well: here, people buy homes to live in, not to sell quickly for big profits. And I have a feeling that's true of most real estate markets, again, with some high-profile exceptions.

So instead of a bubble, we have something that to the casual observer still smarting from that ill-considered dalliance with pets.com looks the same: the upward curve of a normal real estate cycle. Let's stop and ponder that last phrase. "Cycle", as in "goes up and down". "Normal", as in "it happens all the time".

So why do so many trained observers called "economists" insist we're in a bubble, and that "the risk/reward ratio looks unfavorable to home buyers"?

That "risk/reward ratio" is the tip-off. Economists assume that the housing market is like the stock market, just another financial market driven by the profit motive and expected rates of return. The sole objective of buying stocks is to make money. Therefore, to the economist it follows that the sole objective of buying a home is to make money. Both are just investments, right?

But the trouble with seeing home buyers solely as investors is that it's a one-dimensional picture of a three-dimensional object. One of the biggest reasons home buyers buy has nothing to do with profit and everything to do with warm fuzzies: they just want a home of their own. But emotion, like so many other market nuances, doesn't fit the economist's mathematical models.

Of course, buyers do think about profit potential, but ironically I've found that the more important profit is to a buyer, the less likely he or she is to buy. Buying today is overwhelming enough without trying to guess which home, neighborhood or city will give the biggest pay-off in five years. At least in my experience, that uncertainty invariably paralyzes the profit-conscious buyer.

The economist doesn't know this because he didn't hear it in the hallowed halls of Old Boy U. So here's an irreverent idea: let him roll up his sleeves and work with buyers. Then he might be qualified to advise them.

We laugh at the ancient Greeks for thinking that reading the entrails of birds revealed the future, but I have to wonder if economics offers us anything more sophisticated. Economists have tremendous credibility as Science Age oracles, explaining the unexplainable. Someone should tell them that one of real estate's most powerful drivers is an ancient and unscientific concept called "home".