Read It Here First: Illogical Home Sellers

David Leonhardt has a terrific column in Wednesday's NYT that hits upon many of our favorite themes:

Real Estate sellers (like other humans) are often irrational;

Price "Anchoring" occurs with many investors;

Here's what we wrote back in September 2007:

Prices have slipped, but not nearly enough to eliminate the inventory. This has lead the usually cheerleading folks over at the N.A.R. to yet again lower their forecast for 2007 existing-home sales for the seventh-straight month. The real estate agent trade group is now predicting a drop of 8.6 percent in home sales versus last year. And, they expect new-home sales will fall a whopping 24% to 801,000 this year, and to 741,000 next year.

Prices have failed to come down enough to jump start more activity. Sellers have been stubbornly sticking to their imagined top tick prices of 2005. Thus, Supply remains high, and if we believe the NAR or OFHEO, prices have slipped only slightly. Econ 101 informs us that until prices fall appreciably, the inventory situation will not improve.

There is a psychological component to all this: It very much reminds me of the investors who, when having missed selling Amazon (AMZN) at $400 and Yahoo (YHOO) at $200 and EMC (EMC) at $80 and Cisco (CSCO) at $60, refused to take 10% less. So they ended up riding the stocks all the way to multi year lows.

Speaking of the NAR, we continue to note their counterproductive cheerleading. Over a year ago, we noted a group of Palm Beach Real Estate agents blamed the NAR for putting unrealistic expectations in the minds of sellers:

A growing number of Realtors in Florida are frustrated with the state and national Realtors groups' efforts to 'spin' the market as one that is strengthening and where home prices are stabilizing.

Many (though probably not yet most) Realtors are frustrated by customers who continue to list their homes at price levels that are 'unrealistic,' and as a result, sales volumes - and thus commissions - continue to remain depressed.

While Realtors have noted to customers that many home builders in Florida have slashed new-home prices in order to move bloated inventories, many home sellers are still holding off, hoping - along with FAR and NAR - that prices will start moving back up soon.

courtesy of NYT

Previously:
Real Estate Inventory Still Building

Quote of the day: Realtors Get Real

Source:
Be It Ever So Illogical: Homeowners Who Won’t Cut the Price
DAVID LEONHARDT
NYT, March 26, 2008
http://www.nytimes.com/2008/03/26/business/26leonhardt.html

See also:
How Easily Can Your Brain Be Fooled?

The Psychology Behind Common Investor Mistakes

Comments

[papita:]

where have you been Ritholtz? do you really think you are telling us anything that we don't already know? I lived in Boca for 19 years and we know how everything down here is unrealistic.

2008 Mar 28 05:59 AM

[Malkiel:]

It isn't irrational behavior on the part of sellers to refuse to lower price if the lower price puts them seriously upside down. Sellers who are only slightly upside down may be willing and able to pay the loss to effect the sale, but in this overpriced market many are sitting on paper losses orders of magnitude greater than their annual income and the only rational strategy which staves off ruin, so long as they can meet the monthly mortgage payment, is to continue advertising at a price they can accept while occupying the home. This is why I originally expected it to take much longer for prices to fall as to increase; upside-down owners will bide their time hoping to outlive the market conditions, as many have in past real estate downturns. What seems to be driving prices down so fast recently is that foreclosed homes (where the mortgagee has been taken out of the pricing equation) are the ones selling. 40% of finalized sales in LA last month were foreclosures. The stubborn upside-down sellers are not going to follow the price curve willingly because they can't, so it will take a very long time, years and years in many cases, for them to acknowledge the market trend...

2008 Mar 28 12:54 PM

[Fred W:]

Realtors need to reduce their commissions to levels that equate to the actual value provided to the home sellers and buyers...less than 1% imo.

2008 Mar 28 03:42 PM

[Robert DiAl...:]

Realtors should be duly compensated for the services they provide.

2008 Mar 29 09:03 AM

[tomyris:]

How cruel are the markets . Here is Mr. Ritholtz educating us on inflated hosue prices yet those Homebuilder stocks are amongst the best performers this year .

Looks like house sellers are not the only crazy ones out there.

2008 Mar 29 10:26 AM

[sammyg123:]

The advice that is given in this is found in the articles that Barry references at the bottom. I highly recommend reading both of the articles How Easily Can Your Brain Be Fooled? and The Psychology Behind Common Investor Mistakes. That advice is quite free, and it is the most important kind, because it shows how we, as investors, are limited by nature in making investment decisions, whether to buy or to sell. Barry is simply pointing out that home sellers face the same irrationalities that other investors have when it comes to the psychology of investment.

2008 Mar 30 12:39 AM

[johngonole:]

Realtors were highly overpaid during the boom time. House get listed and then sold withing two weeks and they got huge pay for it. On the otherhand now times are tough and they will have to work hard to outmarket each other to make the sales.

Personally I think realtors are almost as much to blame as the bankers. They promoted the falso notion that house prices always go up and thus they should be considered as investment assets. Well unless you can rent the property out form more than the upkeep, property taxes, mortagage, etc it is a bad investment. Home prices are still no where near where they make since as investments. I can get a better return with an index fund for sure not doing any work.

later,

John

2008 Mar 30 03:07 AM

[curious cat:]

it is rather amusing to think that i expected a bubble in housing years ago and waited for a decline all those years before finally buying my house about a year ago. i negotiated a price that i could afford and probably paid a lot less than the owner wanted to sell for at the time. currently, he is happy to have sold when he did and i am probably looking at a slight paper loss.

so, what's the problem? do i care that interest rates are coming down and i might have the opportunity to refinance to a less expensive monthly payment? do i care that my home might be revalued lower for insurance and tax purposes? do i care that builders might have less work and therefore lower their rates, so that i can afford upgrades to my home? do i care that home depot has less customers, allowing me to buy cheaper supplies? nope, none of the above.

the only actual problem comes from having lots of homes on the market, thus lowering prices to the point where undesirable elements can move into my neighborhood. but, hey, if they can get a loan in these harder times, maybe they're not undesirable after all! maybe anyone buying a home now is pretty smart and able to manage their finances, just the kind of people you want next door.

when the dotcom bubble burst, there were lots of people shorting the stocks, forcing those holding stocks to lose value, have margin calls and face a new reality. they could not hold on, regardless of whatever they perceived their stock to be worth. the opposite is true of housing. no one is able to short this market. they cannot borrow your house and sell it for less than what you think it's worth. only fear can cause people to lose their perspective and face a new "realty". all the people who live in areas that are still desirable in america have tacitly agreed that their homes will not be worth less. they do not sell for less and voila! just don't listen to your realtors.

your homes are even more valuable to many of you now. lots of people do not need to leave or sell and taxes and insurance rates should decrease, or at least remain the same for years. sure, there are areas of weakness caused by oversupply and speculation. they went up substantially and may be damaged by crowd panic and severe competition from new home builders, but most of us do not live in those areas and are simply afraid of the talking heads on tv showing us that values have decreased by an "average" of x dollars across america, etc. ignore them.

rates are being lowered to within the grasp of those who want to buy. if you do not panic, simply to create a bigger market and more commissions for the glut of realtors who showed up late to the picnic, you will greatly minimize your pain and everyone else's.

that's my story and i'm sticking to it.

2008 Mar 30 11:31 AM

[curious cat:]

...and, another thing. how about considering the replacement value of your home before you sell. no one is able to materialize a house in your neighborhood for zero cost. you are not dealing with tulips or dotcoms here, where the value was completely disproportional to the cost or completely abstract.

so, take a look at your insurance company's explanation when they bill you. what do they think it would cost to replace your house? that's a pretty good place to start. then, remember the three most important things in real estate: location, location, location. if you have the best view, the safest area, the closest commute, the best weather, or whatever, let that be your lot value and add that to the replacement cost.

be patient, be reasonable and, above all, be honest. you probably had to compromise when you bought your house. your wife wanted a lake view, you wanted a smaller mortgage. your wife wanted three bedrooms and a large fenced in yard, you wanted a closer commute. this is the same process that other buyers go through when they look at your house today. emphasize the positives for them.

2008 Mar 30 12:34 PM