Why housing bears are wrong (Part 5)
Part 5. People don't sell unless they absolutely have to.
Let me continue with my answer to fransgeraedts. Apart from the fact that a large outflow of capital is unlikely as housing remains a very attractive investment vs. stocks, there are several psychological reasons discouraging such an outflow:
a) The sale usually involves a 6% commission plus thousands of dollars in relocation expenses. This factor is sufficient to discourage active trading. In other words, if you anticipate a 5-10% dip in prices, there's no point selling to buy back later. It is very seldom that the seller will anticipate a drop big enough to justify this attempt at market timing.
b) Most people have very low tolerance for stock volatility. People will prefer to make less money but without huge peaks and troughs.
c) Homeownership is attained at a relatively advanced age, so homeowners with substantial housing equity tend to be older than the average population. For many of them, moving housing equity into stocks is impractical because stock investing requires a 10-15 year time horizon, and they're not sure if they have that much time left.
d) The decision to sell a primary residence always involves the risk of never going back. You can miss out on a stock and still buy back half of a position later. But if you sell a house and don't fare too well with your wonder stocks, the decision could prove irreversible. They won't let you buy back one half of your old house.
e) There is also the psychological factor. People, especially at the old age, tend to stick with what has worked for them. For a homeowner who has substantial equity in the house, real estate investment has obviously worked well. He is unlikely to change his investment approach without a very compelling reason.
Reason #5. Bears are wrong about capital mobility because they underestimate redeployment costs - both real and emotional.