Article Pool

Free Article Directory!

• Home
• Submit Article
• Recent Articles
• Top Authors
• Top Articles
• Article Distribution Service
• Article Writing

In Financial Markets, the Herd is usually Wrong

Published by Lawrence Roberts | December 26th 2008 | Views:

Loading

|

Financial markets are fickle monsters. Whichever way the herd moves the market will go the other direction. During the Great Housing Bubble rally, prices were pushed up the herd mentality. As prices rose, more and more people were convinced prices would continue to rise, so the pool of buyers swelled. Credit standards dropped to qualify more buyers, and the party went on and on.

When credit standards were basically eliminated in 2004 and downpayments were eliminated, the buyer pool saw one last burst of activity until everyone that could buy, did buy. The herd had all "gone long" on real estate. The problem came when the pool of available buyers was exhausted and there was nobody left to push prices any higher. Once the herd had all purchased, the only thing they were able to do was sell. When the entire herd became sellers and there were no more buyers available, sales volumes dropped off, inventories increased and prices began to fall.

The behavior of the herd can be illustrated through the behavior of the individual participants. There are hundreds if not thousands of people out there trying to get out of their properties. The collective term for this group is called "overhead supply." It is overhead supply that will prevent any appreciation until the market clears them out. The way markets normally do this is through a process known as "capitulatory selling." People resign to their fate and sell at a loss. Some will do it willingly, and some will do it through foreclosure, but the market will clear them all out eventually.
Rate this article:

Total Vote: 5, Rating: 4/5




Comments (0)
Post a Comment