Can't Sell Won't Sell

[Gremlin]

September 23, 2007

Economic View

A Reality Check for Home Sellers

By AUSTAN GOOLSBEE

ECONOMISTS and other humans don’t always see eye to eye. “Economists tend to think people are crazy because they won’t sell their houses for less than they paid for them — and people think economists are crazy for thinking things exactly like that,” said Professor Christopher Mayer, director of the Paul Milstein Center for Real Estate at Columbia Business School and an authority on real estate economics.

With house prices falling in many markets around the nation, this particular quirk of the human psyche might end up costing the economy a great deal, Professor Mayer says.

Classical economics can’t explain this behavior. That’s because people who refuse to sell their houses for less than they paid for them are violating a cardinal rule of the market: stuff is worth what it’s worth. It doesn’t matter what you paid for it. But when Professor Mayer and his co-author, David Genesove, a professor of economics at the Hebrew University in Jerusalem, studied the Boston condominium market in the 1990s — scene of one of the biggest real estate busts in recent American memory — the actual patterns of human behavior did not seem to follow the standard rules at all.

From 1989 to 1992, prices in Boston fell sharply, with condominium prices dropping as much as 40 percent. For a great many of those who bought condominiums during that period, selling could be done only at a significant loss. And, basically, many people refused to sell.

Their study, “Loss Aversion and Seller Behavior: Evidence From the Housing Market,” appeared in The Quarterly Journal of Economics in November 2001. The professors gathered data on almost 6,000 Boston condominium listings from 1991 to 1997 and showed that for essentially identical condominiums, people who had bought at the peak and were facing a loss generally listed their properties for significantly more than those who had bought at a time when prices were lower.

Properties listed above the market price just sat there. In the Boston market over all, sellers listed their properties for an average of 35 percent above the expected sale price, and less than 30 percent of the properties sold in fewer than 180 days. In other words, much of the market went into a deep freeze as many people held out for market prices that no one would reasonably pay.

In classical economics, that’s not supposed to happen, but the episode did comport with the behavioral economics theory of loss aversion: people have a visceral — some might say “irrational” — hatred of losing money. They try to avoid doing so, even when it goes against their own best interests.

Move ahead to September 2007. Many regions may be starting down a path like that of Boston’s market freeze of the 1990s. Wherever prices decline, look for lots of sellers holding out for unrealistic prices in a vain attempt to recoup their losses. It’s a hang-up that people have, and it can cause big problems. A number of houses with high prices just sit on the market while everyone waits.

One source of difficulty arises from a basic fact of real estate economics: about half of home purchases are by people moving within a metropolitan area. If sellers can’t sell their houses because they want too much for them, they also can’t become buyers of new homes.

“The buyers and the sellers are the same people in this market,” Professor Mayer said. “So if the sellers price so high that they, effectively, put themselves out of the market, it shows up on the buying side, too.”

He notes that economists at the Federal Reserve and elsewhere keep close tabs on this kind of behavior because the purchases of durable goods like furniture, appliances and televisions tend to run hand in hand with home purchases — and durables have a disproportionate influence on the business cycle. Further, because the freezing of the housing market makes it harder for people to move, it reduces the likelihood that they can quickly relocate for higher-paying jobs. Dysfunction in the housing market can spill over into the job market, too.

So by being hung up about whether your condominium will sell for what you paid for it, you aren’t just driving yourself crazy trying to get a buyer. You may be threatening the very performance of the economy and driving up the unemployment rate — provided that many others behave in a similar way.

What is to be done? Well, if you are holding out for an above-market price to recoup your losses, perhaps you would do well to hear the advice that Professor Mayer gives his own family members.

“If you want to sell your house then you list it at the market price and you sell it,” he said. “If you don’t really want to sell then don’t put it on the market. But don’t say you want to sell and then set the price so high that you spend the year cleaning up every morning, having people walk through your living room and look in your medicine cabinets and reject you. That’s just painful — and expensive.”

His research offers a simple lesson for everyone out there waiting for a high price to push them back into the black: Get real.

http://www.nytimes.com/2007/09/23/business...and&emc=rss

I am sure this mentality is going to set in once people realise that they look likes t*ts bragging about paper profits to their friends down the pub.

_

[Guest The_Oldie]

Classical economics can’t explain this behavior. That’s because people who refuse to sell their houses for less than they paid for them are violating a cardinal rule of the market: stuff is worth what it’s worth. It doesn’t matter what you paid for it. But when Professor Mayer and his co-author, David Genesove, a professor of economics at the Hebrew University in Jerusalem, studied the Boston condominium market in the 1990s — scene of one of the biggest real estate busts in recent American memory — the actual patterns of human behavior did not seem to follow the standard rules at all.

[Injin]

Classical economics can’t explain this behavior. That’s because people who refuse to sell their houses for less than they paid for them are violating a cardinal rule of the market: stuff is worth what it’s worth. It doesn’t matter what you paid for it. But when Professor Mayer and his co-author, David Genesove, a professor of economics at the Hebrew University in Jerusalem, studied the Boston condominium market in the 1990s — scene of one of the biggest real estate busts in recent American memory — the actual patterns of human behavior did not seem to follow the standard rules at all.

Jesus. This guy is in an economist?

Stuff isn't "worth what it's worth" at all. Value is subjective. People already valued the home that they bought as being more than the money they paid for it upon initial purchase at the top of the market, or they wouldn't have bought it in the first place. Why does this dipshit think that as the market value of an item falls it's value to it's owner will decrease?

[starsign]

Jesus. This guy is in an economist?

Stuff isn't "worth what it's worth" at all. Value is subjective. People already valued the home that they bought as being more than the money they paid for it upon initial purchase at the top of the market, or they wouldn't have bought it in the first place. Why does this dipshit think that as the market value of an item falls it's value to it's owner will decrease?

i'm not sure he does. You can value your property however you like, but the only value that matters is what someone else is willing to pay for it. That's what he says and that is real life.

[Unexpected]

Jesus. This guy is in an economist?

Stuff isn't "worth what it's worth" at all. Value is subjective. People already valued the home that they bought as being more than the money they paid for it upon initial purchase at the top of the market, or they wouldn't have bought it in the first place. Why does this dipshit think that as the market value of an item falls it's value to it's owner will decrease?

Its simple logic vs emotions and people get very emotionally attached to their paper profits. This "dipshit" is obviously thinking logically rather than like the emotional sheeple.

[alabala]

Thanks for the Read

http://pluto.huji.ac.il/~msfalkin/0101-paper.pdf

[eek]

Jesus. This guy is in an economist?

Stuff isn't "worth what it's worth" at all. Value is subjective. People already valued the home that they bought as being more than the money they paid for it upon initial purchase at the top of the market, or they wouldn't have bought it in the first place. Why does this dipshit think that as the market value of an item falls it's value to it's owner will decrease?

Yes because the information is worthless. as it fails to tell the full story and without that the behaviour may not be clear.

While people may be able to sell by walking away, in the US that leads to a large tax bill that may be hard to pay (the bank forgiving a $50,000 loan is seen by their tax man as $50,000 of taxable income for which they want their fair share, asap).

Its typical economics either looking at a leave and ignoring the burning forest, or looking at the forest and ignoring the signs of dutch elm disease on the leave.

Edited September 25, 2007 by eek

[Wlad]

Value is subjective.

Utility and value are supposed to be objective, price subjective, with price being the same as value in a perfect market.

[Magpie]

Utility and value are supposed to be objective, price subjective, with price being the same as value in a perfect market.

That raises complicated economic debates, certainly many economists would disagree with this formulation.

http://en.wikipedia.org/wiki/Subjective_theory_of_value

[Guest DissipatedYouthIsValuable]

Utility and value are supposed to be objective, price subjective, with price being the same as value in a perfect market.

Utility and value are also subjective. Today, for instance, I haven't bought a wheelchair.

[Injin]

i'm not sure he does. You can value your property however you like, but the only value that matters is what someone else is willing to pay for it. That's what he says and that is real life.

Yes exactly. People value things for their own reasons. Market price is just a measure of hundreds of such decisions, it doesn't mandate anything. Assuming voluntary trade, the only possible reason to buy a house for £1,000,000 is because it's worth MORE THAN £1,000,000 to the buyer. That is, they already bought it for less than it's worth to them. As the price drops, then they are in effect getting offered less and less over time for something that to them is worth more thanwhat they paid for it.

No one will sell (voluntarily) for less than their own estimation of value. This is very basic economics.

Its simple logic vs emotions and people get very emotionally attached to their paper profits. This "dipshit" is obviously thinking logically rather than like the emotional sheeple.

See above.

Utility and value are supposed to be objective, price subjective, with price being the same as value in a perfect market.

Exactly incorrect. The only thing that can be measured objectively is price and that's just the result of many interactions. Utility is entirely subjective. Value is entirely subjective. Goods and services do not have an objective value if they did communism would work with it's central planning woodoo.

[It is different this time]

Why does this dipshit think that as the market value of an item falls it's value to it's owner will decrease?

The owner can always live in 'la la land' and deny it but he would come stuck if he had to move because no one would meet his delusional expectations.

[Injin]

The owner can always live in 'la la land' and deny it but he would come stuck if he had to move because no one would meet his delusional expectations.

And at that point he will lose a shitload of value by his own estimation. That being the case, it's perfectly rational to expect him or her to hold onto what they have bought for as long as possible or until they are either offered more for it than they paid or an outside factor forces the issue. This is obvious and well known. My problem is why this economic "expert" is mystified by such behaviour. It's first week of A level thinking.

No one loses value voluntarily, only outside forces can force the issue.

[bobthe~]

No one will sell (voluntarily) for less than their own estimation of value. This is very basic economics.

I think it depends on a couple of other things in the housing market.

1. If you are trading up, whether you can see the benefit of selling at a lower price because you are getting a house that is correspondingly cheaper.

2. Whether the cost of maintaining the mortgage on that house or flat exceeds the benefit you are getting for that perceived value, hence people in negative equity will just drop the keys back with the Building Society. Do you class that as "voluntary", though?

3. EAs will eventually manage those expectations downwards once the crash gets in full swing, as they don't want to be wasting their time on properties that just won't sell because they are too expensive.

I thought the paper was a good study of how people behave in a crash. Certainly tied in with personal anecdotes on what happened in the last crash as well.

Look at the yahoo boards on Northern Rock shares to see all the rainbow shades in between as well.

People fool themselves that their house has value because of the price they paid for it originally. If you bought recently you have a higher expectation than someone who bought 10 years ago. You also have the worry of losing potentially a large sum of money but that will just be a trap that prevents you from moving on with your life.

I think that is what it was saying.

But I also agree that I thought this was an obvious thing and shouldn't be a surprise. Maybe Economics is taught "Pure" rather than "Applied".

[Benedict]

A good article I thought. One thing he didn't point out that I think is likely - people are more likely to bite the bullet and write off a big loss if they're living somewhere they really don't want to live. If you're in a nice house in a nice area near to good jobs then you just take yourself out of the market, so what's on the market is disproportionately crap.

[Unexpected]

This is obvious and well known. My problem is why this economic "expert" is mystified by such behaviour. It's first week of A level thinking.

He is not really much mystified by this behaviour. He does however point out that its illogical and destructive. Its a bit like holding NRK shares as they go down the pan just because you bought at £12. Better to have sold at £8 surely.

[Unexpected]

That raises complicated economic debates, certainly many economists would disagree with this formulation.

http://en.wikipedia.org/wiki/Subjective_theory_of_value

I won't tell if you won't

[bobthe~]

I won't tell if you won't

I like this entry. I don't understand it but I particularly like the bit that says

Any goods that are in unlimited supply, or in a greater supply than that demanded, would have no value.

So 100% drop it is then

[dstars]

Our economist friend seems to be missing the fact that if the market (actual people) was rational and efficient then there never would be crashes or bubbles in the first place, so the behaviour he finds so irrational would never get to occur in the first place.

Economics is a branch of human action; someone should tell this guy that humans are kinda excitable.

But good for him for being baffled. I once watched tomatoes being thrown at the Bank of England's currency 'expert' when he was presenting a study that found out that people *'pull' their bids as prices fall. (He was presenting it to traders; other economists might have found his study quite baffling, but traders got big laughs.)

Geniuses all.

* If one wants to buy at a lower price than the current price that price usually seems attractive (when the price is higher than the price one is currently prepared to pay) - until it actually gets there, and because it necessarily gets there on a downwards trajectory it sometimes doesn't look so attractive after all. Right now there are tons of poor souls who want to 'get on the ladder' but when the price actually meets their (diminishing a la the credit crunch) budget they'll pull their bids; thus adding force to the crash.

[dstars]

He is not really much mystified by this behaviour. He does however point out that its illogical and destructive. Its a bit like holding NRK shares as they go down the pan just because you bought at £12. Better to have sold at £8 surely.

Cutting losses in a trade, as I'm sure many of us here have found out, is very painful. The ability to cut losses is often what distinguishes clever people from stupid people. Stupid people can ride the waves but getting out of a trade is what matters.

But Cap'n Jean Luc Picard, who runs the Templeton fund, once held bonds for a 93% loss. He wrote a book about it and made even more money as journos asked how he had the nerve to hold. (It wasn't his money.)

[margesimpson]

Jesus. This guy is in an economist?

Stuff isn't "worth what it's worth" at all. Value is subjective. People already valued the home that they bought as being more than the money they paid for it upon initial purchase at the top of the market, or they wouldn't have bought it in the first place. Why does this dipshit think that as the market value of an item falls it's value to it's owner will decrease?

Er, he doesn't. What something is worth to a seller is a matter of (his) opinion. What the market is prepared to pay is fact on the day it sells.

Remember too, the words are the journalist's - paraphrasing the findings of a report - not the economist's.

And your own assumptions may be wrong too - particularly when dealing with the psychology of a bubble market. People don't necessarily think the house or apartment is worth what they paid for it. But they do think someone else (a greater fool) will be willing to pay even more for it in the future.

[bobthe~]

Am I missing the point of the original article?

This has got to be coming from an EA in the US.

No-one is buying because no-one is selling at the right price.

This article is not about market theory, it's about trying to dislodge the seller's reluctance to shift from their perceived value and earn the EA a nice commission. It's more VI spin, albeit going in the right direction in the middle of a crash.

I say, wait for real value to catch up with your house's perceived value. In fact, why not just apply the maximum annual growth of the last 10 years and apply that to your house every year. Otherwise if we all capitulated, think of the damage it would do to Britain. Sit tight and soak up the pressure.

And relax.

[Magpie]

I like this entry. I don't understand it but I particularly like the bit that says

So 100% drop it is then

For the most part that wouldn't apply to housing because there will generally be some demand for a specific property.

However property can become all but worthless - witness the terraces in semi-derelict areas of northern cities that were changing hands for a a few hundred quid only 15 years ago. One can imagine an outcome where some of the excess supply of condos and/or executive city centre apartments goes the same way.

So 100% across the board, of course not. But in specific cases, it's not impossible.

[Magpie]

I won't tell if you won't

[gavp]

If house prices crash then the gap in price between your current property and the next one up the ladder will shrink in absolute terms. So provided you don't have negative equity it makes sense to sell at a loss, as you can upgrade more cheaply. Of course, as can be seen by some of the responses here, people will refuse to do that and wait for the market to re-inflate to catch up with their percieved value of their property, at which point the window of opportunity has closed again. Irrational behaviour.