Survivor Bias in Real Estate!

Understanding the Hidden Danger

Have you ever heard the phrase “they don’t make ’em like they used to”? This sentiment often extends to real estate, where we frequently hear tales of skyrocketing prices and unbeatable returns. However, this narrative can be skewed by a cognitive bias known as survivor bias.

What is Survivor Bias?

Survivor bias occurs when we focus on the successes of a particular group or event, while ignoring the failures. In the context of real estate, this means we tend to focus on listings that remain on market (in a sense survive or remain actively listed) and those properties that have appreciated significantly over time, overlooking those that have SOLD (dropped off the market) or those that have depreciated or remained stagnant for various reasons.

The Illusion of Ever-Rising Prices

This bias can lead to a distorted view of the real estate market. We may mistakenly believe that property values always increase, ignoring the inevitable market cycles, annual seasonal cycles and economic downturns that are often only semi-predictable.

Here are some ways survivor bias can influence our perception of real estate:

1. Media Coverage: News outlets often highlight stories of individuals who have made significant profits from real estate investments. These success stories can create a sense of FOMO (Fear Of Missing Out) and lead to unrealistic expectations or rash decision making whereby folks end up paying WAY more for a home than they will recover (at least in the short term).
2. Social Media: Platforms like Instagram and TikTok are filled with influencers showcasing luxurious homes and high-end real estate deals. This can further amplify the perception of ever-rising prices and, sadly, often inflate the idea of using real estate as “get-rich-quick” scheme. While it is possible to make relatively quick and lucrative money through real estate, there is a LOT of hard work, often in the form of sweat-equity, that goes on behind the scenes that many folks do not factor into their number crunching calculations.
3. Family and Friends: Anecdotal evidence from friends and family who have made money from real estate can reinforce the belief that property is always a good investment and, while I am biased as a real estate professional to certainly sway on the side of YES real estate IS a good investment, the optimal word in this sentence to consider is whether or not it is “always” a good investment for everyone. It can really depend on the time and place and phase of life as well as the end goal for any particular piece of real estate.

The Reality Check: Focusing on Sold Prices, Not Active Listings

One of the biggest mistakes people make when trying to gauge the real estate market is focusing on active listing values rather than sold price values. Active listings can be overpriced, underpriced, or simply not reflective of the true market value, so looking around and saying “but my neighbor is listed for $X” or “I see that the going price is X based on what’s available” is not a reliable or accurate marker in the market. It is the sold prices, the prices for places that you no longer see on the market, that truly indicate what buyers are willing to pay for a property in a specific market.

To get a more accurate picture of the market, it’s crucial to:

• Consult with a Real Estate Agent: A knowledgeable agent can provide insights into recent sales, market trends, and realistic expectations.
• Research Sold Prices: Look at historical data to understand how property values have fluctuated over time.
• Consider Economic Factors: Factors like interest rates, employment rates, and local economic conditions can significantly impact property values.
• Be Realistic: Avoid getting caught up in hype and unrealistic expectations.

While real estate can be a profitable investment, it’s essential to approach it with a realistic mindset. Remember, past performance is not indicative of future results. Market conditions can change rapidly, and what was a lucrative investment yesterday may not be today. I will caveat with the generally understood notion that real estate, historically over the long haul, seems to appreciate well, but we are talking in the long run, not in a short time period, typically.

To make informed decisions, consider the following:

• Diversify Your Investments: Don’t put all your eggs in one basket. Spread your investments across various asset classes to mitigate risk.
• Do Your Research: Thoroughly research the specific market you’re interested in, including historical trends, economic indicators, and local regulations.
• Consult with Professionals: Seek advice from real estate agents, mortgage brokers, and other experts to gain a comprehensive understanding of the market.
• Be Prepared for the Worst: Even the best-laid plans can go awry. Have a contingency plan in place to deal with potential downturns.

By recognizing the impact of survivor bias and adopting a more balanced perspective, you can make more informed decisions about your real estate investments.

If ever you have questions, feel free to reach out as I am here and happy to help!