On today’s show we’re talking about overshoot. Overshoot is a phenomenon that exists in all kinds of systems. Overshoot exists in physics. Overshoot exists in individual behaviour. Overshoot therefore exists in markets.
What is this overshoot that we’re talking about? Imagine if you were driving down the highway at high speed and the sign for your turnoff was only visible after your exit. Most people would miss their exit. That’s why there are plenty of signs leading up to your exit, telling you to prepare to get off the highway. Then the designers of the highway add a special lane to help you slow down for your exit so that your exit is nice and orderly.
If there were no signs, then the exit would be chaotic. People would slam on the brakes. They would try and back up into oncoming traffic to get off the highway. Or if they get off at the next exit, they’ve clearly got some ground to make up. They overshot the exit.
Overshoot happens because of momentum, and because the signs appear too late.
So what does this have to do with real estate?
Overshoot can happen in real estate markets too. There is a shortage of supply in the market. So builders construct lots of new houses. They continue to sell well. Builders keep building and building and building. By the time the signs start to appear that the market is over-supplied, the market is already over-supplied.
The greater the lag time between the decision to start construction and the market data, the greater the amount of overshoot.
Host: Victor Menasce