Chaos Theory and Real Estate

By: Victor Normand
Published: February 2016

The National Association of Realtors (NAR) was established exactly 100 years ago in Chicago for the purpose of making the real estate industry into a highly regarded profession. Despite its influence on national housing policy as the largest trade association in the country, its true mission remains to elevate and sustain, high ethical and professional standards in its membership.

Consumers have a right to assume that their real estate agent has integrity, knowledge and experience, as well as the motivation to bring those qualities into every aspect of every deal. But is it also reasonable to expect the real estate agent to make sense of the chaos that often prevails in the marketplace? The answer is that a good real estate agent recognizes chaos for what it is and is positioned to guide clients through the disorder.

Sometimes real estate chaos has a limited effect on market behavior, like very low housing inventory level; and sometimes the impact is profound, like the bursting of the sub-prime lending bubble. Real estate is a dynamic segment of the larger fluid economy. As much as we would like to think that there are hard and fast rules governing the buying and selling of real estate, experience tells us otherwise.

Mathematicians were the first to realize that chaotic events are not random events. Chaos theory emerged in the 1970’s, as a way to predict behaviors. We have all come to know this theory by what is referred to as the butterfly effect, where the air currents generated from the wings of a butterfly as the initial event, can result in a hurricane pounding a distant shore. The hurricane is no random event, in this sense, chaotic events are predicable, but just because an initial event is known, meaningful predictions cannot always be made.

So, when a consumer is trying to figure out their next real estate move; trying to understand the “chaotic” market which is subject to the flapping of butterfly wings both far off and around the corner, it’s no wonder that confusion or misjudgment can rule the day. Thoughtful real estate agents cannot with absolute certainty predict the future, but they realize that chaotic systems have some kind of order.

A good real estate agent understands the complex cycles of the housing market, and also understands that specific situations are rarely repeated exactly. And an accomplished real estate agent knows that clients have chaos in their lives as well. Families get larger before they get smaller, financial circumstances change, and life events are unstoppable, and these things are not random either. Having these insights is what makes a real estate agent a professional.

Chaos theory is complicated, but has been useful in real life applications. It has been used to solve previously unsolvable problems in quantum mechanics and cosmology. It has revolutionized the understanding of heart arrhythmias and brain function. Computer simulation games would not exist without it.

Understanding Chaos theory is not required as part of real estate licensure, nor are continuing education courses ever offered on the subject. But true real estate professionals, like every Resident Expertsm, use its principles every day to understand the market and as importantly, to understand their clients.