Read it here first: Illogical Home Sellers

David Leonhardt has a terrific column in yesterday’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 at $400 and Yahoo at $200 and EMC at $80 and Cisco 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


Real Estate Inventory Still Building

Quote of the day: Realtors Get Real


Be It Ever So Illogical: Homeowners Who Won’t Cut the Price
NYT, March 26, 2008


See also:
How Easily Can Your Brain Be Fooled?

The Psychology Behind Common Investor Mistakes

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What's been said:

Discussions found on the web:
  1. Diogenes commented on Mar 27

    I thought that it was a basic economic concept that “prices are sticky downward.”
    I studied that in economics.

  2. lurker commented on Mar 27

    Maybe some just want to break even (the mortgage is bigger than the current market price).

  3. scorpio commented on Mar 27

    see Mish’s site today for letters Citibank is sending out to its adjustable-rate holders, trying to refinance them at HIGHER rates than their mortgage terms would warrant, completely aside from recent Fed efforts to supposedly bring lower rates (we all know Fed just trying to fatten up big finance co’s margins by lowering their rates and looking away while they continue to gouge higher rates from customers). shocking. if anyone can be shocked by how these companies continue to act.

  4. JeromeParis commented on Mar 27

    Scorpio, could you give Mish’s site address?

  5. AGG commented on Mar 27

    Being proud and stubborn inhibits logical behavior.

  6. candi commented on Mar 27

    Saw the first “Public Awareness Campaign” ad in yesterday’s weekly:

    “In 2008, the campaign will go even further, countering some of the recent negative national media reports related to the housing market with facts about the value of housing as a long-term investment and helping local and state REALTOR® associations educate consumers about actual conditions in their local real estate markets.”
    Home Values Ad Campaign

    “Over the past 30 years, the median price of existing homes has increased an average of more than 6 percent every year, and home values nearly double every 10 years, according to historical data from NAR’s existing home-sales series. Thanks to the power of leverage, a homeowner’s return on investment is even more impressive over time.”

  7. Matt M. commented on Mar 27

    I don’t know if many people continue to play the short side in builders and REIT’s, but that will be an awfully tricky trade here. It was a nice trade, but be careful here….stocks don’t read economic reports.

  8. michael schumacher commented on Mar 27

    i agree with the Citigroup post on his site but wholly disagree with his stance on the Fed NOT printing money…….

    Is it not creating value when near worthless securities are exchanged for cash and then said cash is lobbed at the market (or bank balance sheet) inducing “up”. In both cases (where the money is going)value is being created where it did not previously exist.

    Without the operation(s) the value would not exist so the Fed may not be openly printing money to satisfy the “auction” process BUT the result of handing over the money creates value because it is placed either in the market (open purchases of whatever they decide) or directly on the balance sheet of the banks who were supposed to be lending it out-which they are not doing at present.

    How is that not printing money??????

    Mish’s argument falls short because he fails to distinguish between real printed money and actual values that are measured in dollars in the same way he tries to argue that money is not being printed……but creating it out of thin air is just fine…..

    Nice try Mish…….


  9. BelowTheCrowd commented on Mar 27

    My real estate agent here in LA has been regularly delivering ultimatums to some of her more reluctant clients: Drop your price 10%, or I’ll drop you.

    She’s been in the business for a long time and has seen her share of downturns. She knows she’d be wasting her time. Her feeling is that if her clients want the services of somebody who can get the place sold, they need to listen. Otherwise, they’re welcome to go with somebody who has never seen a soft market, let alone a declining one, and get caught hanging in the wind.

    She says the better and more established brokers are doing this all over the country.


  10. Steve commented on Mar 27

    Here are datapoints I’d like to see – Real Estate Broker Employment numbers, and licensing exam applications. When both are down 50% nationwide I will believe housing is at fair value.

  11. Prophet of Profit commented on Mar 27

    As Diogenes pointed out, prices are sticky downwards and the spin coming out from NAR and FAR only makes prices even stickier! So while home prices remain sticky and above the market clearing equilibrium price, the inventory of unsold homes will remain and transaction volume will remain suppressed, hurting all the real estate agents out there. So in fact, the spin coming out from NAR and FAR is actually hurting the business of all the real estate agents!

  12. portland Refugee commented on Mar 27


    I love it! TV spot is playing here……..

  13. Bob A commented on Mar 27

    Lotta prices here (Microsoft, WA) last week dropped 10% after Bear Stearns. These were high end new houses and original pricing woulda been 10% higher than anyone had ever got before in the neighborhood for a similar house, so it’s not like historical prices really dropped. Although the builders may still take a bath because they’re holding much longer than they expected, and the might have spent too much on land and construction.

  14. Brendan commented on Mar 27

    I think you have to be careful about comparing new home sales to existing home sales. The new homes were particularly inflated toward the top of the bubble because they were asking the same price for them as existing homes, and people were paying it. A lot of people’s intentions were either to buy it as a second house and flip it for an instant profit, or to live in it because they felt they had to buy something, anything, right now or else, with prices skyrocketing, they would never be able to afford to own a home. But now that their investment is upside down, they can’t afford to lower the price. And now that there is other inventory available, it turns out no one really wants to live 50 miles from city center when you can buy a similar house 15 miles from the center for the same price (adjust mileage to your locale). Further, the used home sales are of course skewed higher because they are, on average, in a much better loction than the new homes. And with gas prices inflating, and traffic only getting worse in most locals, the value of living in town only gets further exaggerated.

    The homebuilders themselves were part of this same hysteria, and bought home lots for way more than they were worth. The difference is that the homebuilders, for the most part, can afford to lose a little on some bad investments, as long as they have some good ones in their portfolio to keep themselves afloat long enough to ride it out. But for the homeowner, this is their only (or one of only two) big investments, so they’re stuck hoping they can break even before they go bankrupt because their arm resets and they can’t refinance like they expected to be able to. I don’t think it’s that irrational on the part of the homeowner to put a house on the market for a price they only have a 1% chance of getting, if their only other option is to have their home foreclosed upon anyway. Having a 1% of selling it and finding a nice apartment in town is better than holding onto it with a 0 percent chance of selling it and being stuck in the roach infested complex because their credit is ruined! On the micro level, it’s really not that irrational what’s going on right now. I’m just glad I bought in town before the bubble and didn’t buy new cars and HDTVs with my “supposed” equity. I’m doing OK, but I can see why, if I were in the shoes of some others, I’d be trying to sell for more than the house is worth!

    Personally, I think the powers that be will try to inflate our way out of this mess. It’s best for our corporate masters if they can keep only giving “cost of living” wage increases based on bogus low numbers, double the price of everything, and have collateral in absolute dollars that is worth much more than it would otherwise be (i.e. having collateral that is actually worth as much as the loan, unlike it is now). It’s going to be a rough ride, though.

  15. Lord commented on Mar 27

    Those most needing to lower the price are not in a position to do so because the loans outstanding equal or exceed prices. Most other sellers are housing neutral; they are both sellers and buyers. Whatever they give up on the sale they must make up for on the purchase so it becomes a game of chicken to see which sellers go first. Nothing really irrational about that. Meanwhile buyers will avoid buying unless it is discounted to the level they expect prices to eventually reach. Nothing irrational about that. Realtors taking listings on property they know they can’t sell – now that is irrational, but desperation also instills hope.

  16. Estragon commented on Mar 27


    Agreed. Also, everybody knows the gubmint’s going to fix it. Nobody wants to be the last casualty in the war.

  17. Francois commented on Mar 27

    When the market’s Pope
    Pull out his rope
    Just to make you choke

    When the market’s Pope
    Reaches for his stoke
    So he can poke

    Abandon all hope
    Cause he’s gotcha ya on dope
    Ready to slide the slope
    To where there’s no hope

  18. Pat G. commented on Mar 27

    What about illogical home builders? How many new homes come on the market each month? If these homes aren’t tied contractually to a buyer why build them? In order to get rid of the glut you must first stop the “new” supply.

  19. brian commented on Mar 27

    I was just in Miami and I was stunned by the amount of construction still going on. I guess once you’ve started a 35 story condo building you kind of have to finish it.

    The Miami Hearld published this data for Dade county on Tuesday….

    Home Sales – 244(down 41% yoy)
    Median price – $306k (down 20% yoy)
    Inventory – 16,361 (up 32% yoy)

    Condo Sales – 235 (down 46% yoy)
    Price – $293k (actually UP 5% yoy – huh?)
    Inventory – 25,533 (up 16% yoy)

    100+ mths of condo inventory at February’s sales rate…….

  20. ron commented on Mar 27

    Owners of REO also can be very sticky about prices. Most put up the house near or above the current loan amount which has nothing to do with its market value.

  21. glenn_in_MA commented on Mar 27

    MS says,

    “Mish’s argument falls short because he fails to distinguish between real printed money and actual values that are measured in dollars in the same way he tries to argue that money is not being printed……but creating it out of thin air is just fine…..”

    “Nice try Mish”

    I agree

    I find that a lot of Mish’s arguments fall short AND that he is also a little too loosey-goosey with his so called “facts” for my liking. For example, he has repeatedly stated that the Fed’s TSLF has been a failure even though the FIRST auction under TSLF was held today. How can something be a failure when it hasn’t happened yet!?!?

  22. Pat G. commented on Mar 27

    Maybe Mish is psychic. Today’s TSLF was a failure which begs the question why, if everyone is so liquidity challenged? Gives some creedence to the notion that “the FED is pushing on a string”. I also heard that in the latest auction of treasuries, the South Korean’s were cool to additional purchases preferring instead “ to diversify their holdings of debt in other countries”. What happens when the rest of the world begins thinking like that?

  23. DonKei commented on Mar 27

    “What happens when the rest of the world starts thinking like that?”

    We’re doomed. As PrudentBear said today in the WSJ, standard of living must decline, the dollar must decline, and we must start actually saving and investing instead of trying to consume our way to riches.

  24. Mike H commented on Mar 27

    Surely a random coincidence, but “NAR” in the Danish language translates into “fool”…

  25. Muckdog commented on Mar 27

    Just anecdotal, but in my neighborhood in Sacramento homes have been selling like crazy the past few weekends. Prices have dropped significantly since 2005. Combine the lower prices with full employment and lower interest rates, and buyers are showing up.

    I don’t think this will translate into higher home prices until the inventory comes down. But it’s good to see the activity.

  26. VennData commented on Mar 27

    The TSFL lends Treasuries, not cash.

    If you exchange those Treasuries for cash, then someone has to buy them with cash they no longer have.

    No cash in “printed” or as in the real world, no Fed held bonds are bought with Federal Reserve notes (a.k.a. cash.)

  27. whipsaw commented on Mar 27

    @Pat G.:
    “What about illogical home builders? How many new homes come on the market each month? If these homes aren’t tied contractually to a buyer why build them?”

    I can think of a couple of reasons. First, builders either build more houses or they have no cash flow at all when homes are not selling. A better question might be why do lenders continue to provide construction financing and I don’t have an answer for that except if lenders don’t lend, they can’t service their own obligations.

    Second, the builders are currently in a position to really jam subcontractors who have no work while also buying materials cheaper than they will probably be a year from now. Again, this goes back to the availability of construction financing.

    I don’t know it for a fact, but something tells me that the lenders were just as crazy in making construction loan commitments (typically for a whole subdivision at a time) as they were about providing purchase financing. So maybe a year ago, First SharkBank, N.A., entered into some objectively stupid commitment to fund construction of 45 McMansions over the course of three years without specifying how many had to be sold before another could be started?

    That’s the only way I can see that a viable lender would continue to fund more inventory in a failing market and there’s probably some guy, somewhere who got a big bonus for getting them into it. My point is that there is no mystery why the builders keep building, they are bankrupt otherwise; the mystery is how the banks could be so stupid.

    Or maybe not so much of a mystery… every time they are given a few years to screw themselves they will meet the challenge and take everybody else down with them. That’s why they have to be regulated in the first place.


  28. blam commented on Mar 27

    They’re not irrational, just marking to model so they can get that HELOC on their equity.

  29. Ant commented on Mar 28


    “double the price of everything, and have collateral in absolute dollars that is worth much more than it would otherwise be”

    I think I understand what you’re saying, but I believe the assumption that general price inflation automatically translates into higher home prices is flawed.

    Ultimately, the collateral is worth what someone will pay for it.

    Unless price inflation works its way through to wage inflation, how do houses become any more affordable to buyers in your scenario than they are right now?

    As a thought experiment, let’s double the price of everything, except real estate, overnight. Houses immediately become, relatively speaking, a bargain – but unless my salary has also doubled, I still can’t afford to pay 700k for a starter home for my family. In fact, I’m less able to do it than I was yesterday, since in this scenario I’m now paying $7/gallon for gas and my disposable income is toast.

    Am I misunderstanding?

  30. arch commented on Mar 28

    a rise in the general price of goods, combined with no rise in wages, means less disposable income.

    It’s important to distinguish between tradable goods and non-tradable goods. tradable goods are things which can be transported across currency zones (commodities, cars, and basically anything that is import/exportable). non-tradable goods are those things not import/exportable either because of laws or because of physics (homes, haircuts, most perishable food).
    If you have a general price increase in tradable goods, and unless you also have a rise in wages, you will necessisarily have a decrease in the price of non-tradable goods. there is only so much disposible income to spend. So unless wages somehow rise, there is simply no way that the government can stop the decline in prices of non-tradable goods such as houses.

    If you think about the past 10 years in the US, we have seen a biforcation of price changes. In non-tradables (education, healthcare and housing) we have seen very large price increases. in tradables (such as electronics, and everything else that is manufactured in China) we have seen huge price declines. So even in the absense of all the extra credit US consumers were given, the price of non-tradables would ahve gone up.

    Today it is a different story. Tradable prices are rising sharply, so no surprise to see non-tradables declining. Throw in the removal of the credit bubble, and non-tradables will decline even further.

    if the US was huge export nation then the fall in the USD would follow through to higher revenues for exporter, and hopefully, higher wages for the people in those industries. It is hard to see this being a large factor though on a general increase in wages.

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