Why Sentiment Matters So Much When Selling Stocks or Real Estate

by: Barry Ritholtz

Whenever we discuss sentiment concepts like capitulation or exuberance, we get email asking why. "What's with the touchy-feely crap?" writes a new reader.

One comment summed up this line of thinking perfectly:

"Remember when trading was not all "up in your head"? We've all switched to the marriage counselor's version of investing. Crap."

Actually, trading is always "up in your head" -- but ordinary market conditions mask it. A day like yesterday -- a classic Bear Market rally, with the Dow up 276.74 points, and the Nasdaq gaining more than 3% in the session -- can only occur when sentiment extremes are reached.

Anytime there is a long stretch of asset price depreciation, be it the past 9 months in US equities, or the past 3 years in real estate, the sentiment factors often move to the fore. Consider several psychological factors of sellers: There is remorse for missing highers prices, and a significant price anchoring that occurs with that.

Equity and Housing sellers are similar in that respect. When they miss a given price, all they want to do is get back to it to sell (or buy). How many times have you heard someone say "If only I can get back to break even..." This psychological element of missed opportunity is what underlies the concept of support and resistance lines.

Anchoring plays a big role in the refusal to sell stocks that have fallen. In 2001 and '02, I can't count how many times I heard "I'll sell my Yahoo when it gets back to $200."

In Housing, anchoring its even worse. Without a daily price print, homeowners tend to be even more anchored in past prices. Add in tract developments were homes aree so similar, and its a recipe for the following: "My neighbor got $XYZ last year, and our house is nicer -- we have a new kitchen and a bigger back yard. So we should get at $X plus $50k."

That sort of mental selling analysis is a large part of the reason why there is so much home inventory available for sale. It also explains why prices seem to s l o w l y chase markets down.

Consider the following article about Florida Real Estate auctions. Pay attention to the elements of psychology impacting selling prices:

"Despite the standing-room-only crowd and live music, a recent auction of 22 properties in Port St. Lucie's tony Tesoro community didn't yield a single sale.

It's not that no bids emerged at the June 28 event - it's just that none of them were high enough for the owners of the 16 lots and six homes.

Call it a sign of the times.

One four-bedroom home listed for sale at $3.75 million attracted a high bid of only $1.2 million. Another, a three-bedroom, fetched a $450,000 high bid, though it's on the market for $2.15 million, according to Scott Powell, a Stuart-based appraiser who attended the auction...

What happened at the Tesoro auction is consistent with what agents are seeing around Florida, Boza said.

"Buyers are continuing to look for steep discounts, and sellers are looking for top dollar," he said. "Until sellers readjust their asking prices, there will continue to be an overhang of properties in Florida."

The sellers are stuck in a 2005 or '06 mindset; They are failing to recognize the change in psychology from a period of frantic bidding; they are ignoring the price depreciation, the rise in interest rates and the lack of easy credit.

These are the people who want to sell; the owners who have to sell are a different story.

Property owners balk at low bids at Tesoro auction
Palm Beach Post, Sunday, July 06, 2008

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