Malkiel

Read It Here First: Illogical Home Sellers

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...