In classical economics, thatÂs 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.

Aversion to loss, the stress of selling, as well as a person's love of their home (ie someone thinks their home is worth more because they love is) are of course psychological points ignored, but sometimes people simply cannot afford to take a loss. Not everyone has $50K sitting in the bank to pay off the mortgage when they are upside down. I'm not sure losing a ton of money is "in my own best interest". Even if I accepted a job across country for twice what I currently make, viewing the mortgage loss against my salary gain might not make that move fiscally sound.

" but sometimes people simply cannot afford to take a loss."

True, but then why bother listing it for sale at a price it will never get? Seems like a lot of hassle/stress for nothing. Not to mention what it does to the inventory numbers, buyer perception of the market, etc.

"Even if I accepted a job across country for twice what I currently make, viewing the mortgage loss against my salary gain might not make that move fiscally sound."

Exactly the point the article makes about how a 'market freeze' hurts the economy by impacting the efficient movement of workers...

True, but then why bother listing it for sale at a price it will never get? Seems like a lot of hassle/stress for nothing. Not to mention what it does to the inventory numbers, buyer perception of the market, etc.

Hope? Delusion? Chasing a falling market? Uninformed seller?

for majority of the homeowners house is more than an asset. It has certain emotional value as well. When it is time to sell the house only a very small percentage of sellers are able to treat it as a pure business transaction. Given the personal attachment to this asset many homeowners may not want to "give their house way" in the falling market. You will also find many homeowners fishing for the 2005's peak price in today's market. I do not call them sellers as they are not serious about selling just interested in getting their wish price even though they have clearly missed the peak by at least a year and a half. But nonetheless they do increase the inventory numbers as they are listed on market.

"for majority of the homeowners house is more than an asset. It has certain emotional value as well."

We're talking about 2004-2006 vintage buyers. The people who have been in there houses for 20+ years can and do (as the study presented above proved) lower the price and sell. Regardless of the emotional investment, these longtime owners seem to have the fewest problems accepting the market as-is.

I've been watching a house in my 'hood that was purchased in 05 for $250,000. According to the title records there are $230,000 worth of loans on the property. They listed it early last spring for $300,000. It is now in foreclosure and they never, after months and months on the MLS, lowered the price in any significant way (they lowered it to $299,000). They could of easily lowered the price to break-even months ago and walked away free and clear. I'm seeing this more and more and I just don't get it (well, the article did clear some of it up).

I wonder if age has anything to do with it? As in...people who have owned property over several decades are familar with the cycles. That would be as compared to younger people who purchased their first houses during the recent boom years & came into homeownership hearing all of the buzz that real estate would do nothing but appreciate. The next time around, these HOs will have more experience, equity, and pricing flexibility.

/tricia

I think you're onto something Tricia. I've been through so many housing cycles that I wasn't really surprised at what's happening now. The bigger surprise for me was that the boom lasted so long. A lot of people have bought into the 100% financing thing in our area and quite frankly have NO equity in their home and little flexibility in pricing. While us "old timers" know the value of having equity in our homes means having flexibility when we go to list.

Interesting article. Thanks for posting it.

I wonder if the psychology may be even worse this time. So many people were so aware of the increase in home prices in their neighborhoods during our recent long boom. Some owners did cash-out refinancing, so they developed a true attachment to a higher price. Others seem to have become psychologically attached to a number, and they too seem to be stubbornly sticking to their price.

Experience with cycles may curb the psychology. But, older homeowners may simply be more able to drop their price (either more equity to sacrifice or more able to bring a check to closing).

I can see where there is a "loss aversion" mentality. There are an awful lot of homes on the market where I am, not because they have to move but more like testing the market to see what they can get. And it doesn't seem to matter much -- old or young. Actually the homes that are owned by the elderly or are in an estate are much more stubbornly married to the price.

Driving my DH crazy but I stubbornly refuse to pay more than comps. So I guess it's a stalemate. :)

Last house I refused to budge on - they took it off the market. I guess they are going to wait a few years to try it again. I may be not buying, but others are not buying at the asking prices either.

I have to keep telling DH don't fall in love with a house, 'cause I will walk away.