Orlando Real Estate

The Psychology of Economics

November 20th, 2008 8:05 AM by David W. Welch

It has been many years since I sat in ECO 101 and studied endless supply and demand curves. That was not my last course in economics, in fact I even took a couple of post graduate courses as I contemplated a second masters degree in economics. In all those courses, I cannot recall speaking at any length about psychology. In one of the last courses I took as well as a banking course I had as an undergrad we spoke a little about the Fed's power to impact the market with their commentary. We probably discussed consumer confidence as a leading indicator, but that was probably the end of that discussion.

A lot of what our country is dealing with right now has to do with those supply and demand curves. I don't want to take anything away from Keynes. We really over built houses here in Orlando, and we really went overboard on condo conversions. My point I have been trying to make is that the primary reason the supply and demand curves get out of balance, is psychological. Supply was getting low for housing here in Orlando, and demand was growing because our job market was the strongest in the nation. Read some of my blogs from a few years ago. Jobs equate to the need for housing, so there were real pressures on prices and the supply curve. Buyers began to fear that they would never be able to buy a home, and investors, builders and sellers took full advantage of the market situation. In the end, greed and fear  drove the economy more so than need for housing.

Now we see the same two forces, greed and fear, driving things back the other way. Just like the driver that hits a slick spot in the road and over corrects out of a fearful reaction, our economy is now over correcting. Just think of the bailout as the stability control that comes in a lot of newer cars. It is expensive and probably is not going to do as much as people think, but it is comforting to know it is there. Given the fragile psyche of the consumer these days, it might be just the thing to quiet some fears. If Detroit was building Prius' they might not be looking for a bailout too.

David Welch, Orlando Real Estate Blog

Posted in:General
Posted by David W. Welch on November 20th, 2008 8:05 AM

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