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October 24, 2006

On the Psychology of Sellers

thinker The LA Times had an interesting article last week about the psychology of selling your home. Assume, the article says, that you bought your house for $250,000 ten years ago. You put it on the market now at $600,000; after a few weeks with no bites, you lower the asking price to $575,000, and then $550,000. Then an offer comes in at $520,000 and you pull the house off the market. Rational? Perhaps not. Common? For sure. The explanation, according to the article, comes down to "anchors". If the seller's anchor is the $600,000 asking price, he's going to be disappointed and dissatisfied with $520,000. If his anchor is $250,000, he should be very pleased. The same psychology explains why people are more likely to sell winner stocks than losers when they need to raise cash, despite the fact that there's often a good reason the losers are down. This way of thinking surely goes a long way to explaining why real estate markets take a long time to correct. In addition to buyers not wanting to catch a falling knife, sellers have a hard time coming to terms with the fact that their house is worth less than it was on paper a few months earlier.
The Pain of Selling Your House [LA Times]

Comments

The psychology on the way down is more fascinating to me than on the way up - herd mentality is obvious, but greed - that which would make someone think that 520 is a "bad" offer on something they paid 250 for - is a much more personal and individual thing.

Posted by: Anonymous at October 24, 2006 9:32 AM

You can call a seller greedy and foolish if everyone is lowering prices, but if he/she needs to purchase a replacement property (as most sellers do), the cost of the replacement property relative to the property sold is really what is most often driving the "anchor" 520 on 250 is not really a good offer, if you couldn't turn around and use the 520 to purchase a similar property.

Posted by: anon at October 24, 2006 9:43 AM

Exactly, since very few homes are bought as real investments in same sense as stocks, bonds selling at lower price may make no economic sense.
Still need to live somewhere - and lifestyle, quality of life may be better staying put rather than selling.
Home purchase/sale/move is 'quality of life decision' not investment decision.

Posted by: Anonymous at October 24, 2006 9:51 AM

But if you do need to sell in a soft market, perhaps it would be wise NOT to purchase a new property before selling the old one, so that you are not banking on getting a certain amount and therefore putting yourself into a bind. People need to think a little more rationally.

Posted by: Anonymous at October 24, 2006 10:11 AM

Sellers (just like buyers) are rational creatures. In the long run, they make decisions which are in their best interest. Just like buyers who refuse to pay top dollar for properties because they fear that the market may slide down, sellers don't want to lower prices because they fear that prices will trend higher.

The key to their analysis is supply and demand. If enough properties out there are bigger and better, then they will lower their price if they really want to sell. However, if their property is fairly priced to the other properties that are for sale, then the seller may decide to hold firm. The fact that the demand has not increased enough to buy properties won't adjust prices much. What we will see is that the number of properties sold drop dramatically. According to realtors, this is the situation that we are in. We are in a stare-down. Sellers are waiting for buyers to increase their bids and buyers are waiting for sellers to lower their prices.

Let's not put all of the behavioral issues on sellers. They are doing just what the buyers are doing. They are acting in their best interest.

Posted by: Anonymous at October 24, 2006 10:16 AM

Amen

Posted by: Anonymous at October 24, 2006 10:37 AM

Actually, 10:16, the point of the article is that people are NOT rational in some respects. Which is one of the hot points in economic (not business, but economic) research: that of bounded rationality. Which is to what extent people act rationally and to what extent people act irrationally.

An example given in the article is they asked a group of college students if textbooks were more or less than $1,000. They all said less. Then they asked a second random group of college students if a book was worth more or less than $12. They said more. And then they asked the students how much books did sell for. And the first group systematically estimated about double of the second. Another example is if you ask people to estimate the product of 1 x 2 x 3 x 4 x 5 x 6 x 7 x 8 they estimate systematically lower than people who ask to estimate 8 x 7 x 6 x 5 x 4 x 3 x 2 x 1.

So no, supply and demand are not the absolute key to the analysis.

Also, granted that you have to live somewhere. But if you do think the market is going to continue to decline, you could sell for your $520k, less than what you wanted but more than you paid, rent a year, and then buy at a lower level.

p.s. you're welcome for the link, Mr. B. ;)

Posted by: Mateo at October 24, 2006 11:19 AM

Anon 10:16, sellers and buyers are rational creatures who do not always make rational decisions. Buyers were irrational on the way up. Now sellers are irrational on the way down.

We are not in a stare-down. Sellers are simply delusional.

YOY sales prices are flat to slightly down, YOY sales volume is down, YOY inventory is up and time on market is increasing.

This is what happens when the demand curve shifts left while the supply curve shifts rights. Decreased demand and increased supply result in lower prices when all participants act rationally.

Posted by: ItsAWrap at October 24, 2006 11:36 AM

Easy credit and no downs are what drove home prices to sky-high levels. Any jerk who makes only 35,000 a year can now get into a $875,000 home.
AND THEY DID.

Meanwhile, rational Joe-Blows like me will sit on the sidelines with our cash supplies steadily building up until this whole house of cards collapses and comes down and I hope it comes down HARD.

Posted by: john at October 24, 2006 12:06 PM

"Meanwhile, rational Joe-Blows like me will sit on the sidelines with our cash supplies steadily building up until this whole house of cards collapses and comes down and I hope it comes down HARD."

Um, that is a very foolish way of thinking! If the "house of cards" comes down HARD, what makes you think your job won't be threatened? Would you be able to buy then? Probably not. And even if your job and your salary remain intact, don't you think the heavy loss of other's jobs will further erode the RE market, lowering prices even more?

Which leads to an even more important question you should ask yourself - why would you invest your sidelined cash supply in RE when the market is down HARD? And when will you know that it has reached the very bottom? You simply can't.

Furthermore, if someone making $35k a year has somehow found their way into owning an $875k home, they might be a jerk, but they're certainly not a stupid jerk.

You should hope for stability and move somewhere where you can afford to purchase.

Posted by: Anonymous at October 24, 2006 1:08 PM

1:08 is about as vapid as 10:16. No wonder they stay anonymous.

Why should his job be threatened if the RE market crashes? Unless he's a realtor or a RE speculator, it shouldn't be.

Why would john hope for a RE crash? So he could invest at what he feels are appropriate prices.

How is someone who would make $35K a year and in a $875K house not stupid? Trust fund. Otherwise they've overextended themselves and are on a fast track to foreclosure. I don't know if that's stupid, but it certainly isn't wise.

You should hope to listen to a little bit of common sense instead of screaming them down.

Posted by: Mateo at October 24, 2006 1:33 PM

Well, Mateo, there already has been extensive national discussion about the possibility of a recession if the housing market comes down "HARD" like John hopes.

It does appear that John is rooting for a major collapse.

Taking that into consideration, I don't think you can completely dismiss the previous point made about how this collapse could personally effect John's personal financial situation.

I don't think a real estate collapse on the level that John is hoping for would only affect those directly employed in the real estate business.

Oh, and by the way, your point about anonymous posting is a bit ridiculous.

You're supposed to get more validity points because you're "Mateo"? How is "Mateo" any more specific than "Anonymous"?

It's not as though you're providing anymore personal information than others here.

Posted by: eric at October 24, 2006 2:04 PM

According to the most recent census data 40% of Americans economy is driven by real estate. Construction, Management, Manufacturing all the things they build those houses with, Sales, Finance, Photographers, All the grad students that are paid to draw the floorplans, Architects, Publications (hey.. bloggers too), Advertising, Marketing, Web sites… Classified ads in newspapers… Apartment Stagers, Real Estate Lawyers, Building Department Inspectors and all the people who gets paid at the AG’s office to review all those luxury plans… You better believe if the market goes down HARD as you call it… your economic well being will absolutely be affected.

Great post Mateo about irrational choices! My experience it that fairly often (not always) .. buyers and sellers make irrational choices. We call them “emotional” decisions.

Posted by: brk2 at October 24, 2006 2:08 PM

Real estate prices are not going to crash unless employment crashes or interest rates soar. When real estate prices tanked in the late 80s/early 90s it was because the stock market had crashed, Wall Street was canning people and interest rates were high. City unemployment is lower now than at any time since before 2001, interest rates are still low by historical standards and Wall Street is about to distrubute an enormous bonus pool. If you're on the sidelines waiting to low ball, you'll be there a long time.

Posted by: Anonymous at October 24, 2006 2:51 PM

Why does this always come down to Wall St.? That is the BIGGEST cop out "I don't have a real basis for my argument" argument in the world. Wall St. is a minor portion of the NY housing market - seriously, there are how many people in NY? Do they ALL work on Wall St.? No. They are a fraction, and only account for a fraction of the market - in addition, that fraction spreads out to the suburbs. Enough with the "nothing will fall unless Wall St. does" stuff.

Posted by: Anonymous at October 24, 2006 3:25 PM

Amen. Also, as an employee at an investment bank and will add that not all the people that work on "wall street" are bankers and only a small percentage of bankers get the multi-million dollar bonuses.

Posted by: Anonymous at October 24, 2006 3:47 PM

Wall street generates 25%+ of the City's disposable income and is responsible for more than 50% of the job growth in the past 5 years. If you did a regression analysis comparing wall street employment and nyc housing prices you'd have an almost perfect correlation.

Posted by: Anonymous at October 24, 2006 4:00 PM

"Wall street generates 25%+ of the City's disposable income and is responsible for more than 50% of the job growth in the past 5 years."

If that is indeed true (where does this info come from?) - scary. Where is the balance? One hiccup on Wall St. = finanical death for the city? It's not something I would be bragging on, but something I'd be worried about fixing, and fast. There is nothing so volatile as Wall St.

Posted by: Anonymous at October 24, 2006 4:35 PM

In NYC, prices have been flat for over a year. That's about to change!

Prices are beginning to trend higher. Spurred by higher rents and an uneasy feeling that those choice properties are not showing up on the firesale lists. Buyers (in NYC) are out there. For every choice property out there are a number of buyers.

In the next 3 to 6 months the sellers will be back in charge!

Posted by: Anonymous at October 24, 2006 5:17 PM

Blah blah blah blah..... Six months ago it was things aren't that bad and it's all doom and gloom. Now it's that things aren't as bad as people think and it'll get better. Blah blah blah.

In any case, I thought it was an interesting article, both for its relevance to the housing market and generally.

Posted by: Mateo at October 24, 2006 6:21 PM

Most indicators in the economy are strong. A strong economy in all sectors is good for everyone!

Its completely mind bogglingto me that anyone would actually wish for a downturn in the economy and connected markets purely b/c you want to buy a home at a discounted price. Do you guys get what a real recession means for the general public - particularily the poor and lower middle class? How can anyone wish for that? I know everyone here wants to own a perfectly restored brownstone for $1/day but wishing for a serious crash in the economy to get it is like wishing for another terrorist attack b/c you own stock in a military supplier firm. In the long run, a bad ecomony is bad for just about everyone - including the real estate sideliners here.

Posted by: Anonymous at October 24, 2006 7:17 PM

What's the point of this thread? That article is from L.A., from a newspaper nobody reads (its owners are selling, the circulation is so low) in a region where the real estate market is completely, utterly different from NYC and Brooklyn.

In general about this whole topic, why is anyone so baffled or outraged at the cost of buying in NYC? Have you seen what apartments sell for in London, Paris or Tokyo? We're a relative bargain here. Get a grip. It's the reality of the global economy, and the price to live in the big global cities. NYC will not be getting cheaper to live in. Dream on.

Posted by: Anonymous at October 24, 2006 7:18 PM

7:18, it's obvious that you didn't read the article. It's not about real estate values as much as it is about how people think about real estate. Which is applicable on both coasts. Because, yes, even brownstone Brooklyn has been in a housing downturn, or at least a stangnant period. And so the question is, why aren't people selling? And one answer could be provided by the article (if you bothered to read it) that people become attached to points and irrationally adjust their assumptions based off of them. This whole tangential discussion on Wall Street and NYC housing market is really misplaced.

Also, housing values are influenced by the economy, but when the average NYC real estate appreciated 40% from 2001 to 2005 (and in some areas, much more) then at a certain point, real estate has its own independent life which can go down even in an up economy. It's called a market correction.

Posted by: Mateo at October 24, 2006 8:07 PM

the point of this thread is to make me realize how hot it is for someone to use the term "regression analysis."

Posted by: Anonymous at October 24, 2006 8:14 PM

Oh say can you see?,
by the dawn's early light,
how those prices they fail,
while the buyers are beaming,
whose broad wallets shut tight,
thru the perilous night,
over ramparts we watched,
as the sellers were reaming.

Now foreclosures are there,
ARMs bursting in air,
give proof thru the night,
that this market's a bear.

Oh say does that For Sale sign yet wave
over the land of the flippin' spree
and the home of the mortgage-slave?

Posted by: Francis Scott at October 24, 2006 9:14 PM

francis scott. wow.

ok, so if 40% of the economy is driven by real estate and 50% by wall street, who's driving the other 10%? walmart? (i'm having trouble with this math.)

also, if someone who makes 30K can get a $875K mortgage, how come no-one's handing me a brownstone in north slope on a silver platter with a welcome-to-the-hood note from maggie gylenhaal?

Posted by: sylvia at October 24, 2006 9:28 PM

7:18

I think you hit it on the head. NYC is a different market from Los Angeles.

I think the article is too simplistic and blames the stagnation in the market on sellers.

Sellers don't want to lower prices because history tells them that they would be stupid to do so. History tells them that housing prices don't decline when the economy is booming.

Lets analyze why buyers sit on the sidelines and pray for the worst. What's wrong with them? How many years, decades, generations do they have to see before they realize that real estate is one of the best investments one can make. How many more immigrants do they have to see come into the country before they realize that housing will always be sought after. How many middle and upper middle class baby boomers do they have to see purchase a second home before they jump in and try to get theirs.

I think that the behavioral quirks are with certain buyers. They will always be on the sidelines praying for the worst. And the funny thing is, if the worst ever did somehow happen, they would still be on the sidelines because they would be too nervous to act.

History is full of wealthy people who bought real estate. How many wealthy people do we know who refrained from owning and chose instead to rent?

Posted by: Torch at October 25, 2006 1:21 AM

Torch,

Talk about simplistic. History is full of wealthy people who bought stocks. That does not mean that buying Enron stock in November 2001 was wise or was the purchase of Amazon stock in November 2000. The question is not whether acquiring assets is good: the question is whether it is good to acquire an overvalued one.

I bet you 20-to-1 that you didn't read the article in its entirety and 3-to-1 that you didn't even read the full except that Brownstoner pulled out. Because it has nothing to do with the LA vs. Brooklyn market.

Posted by: Mateo at October 25, 2006 1:38 AM

Mateo

I read the section that Brownstoner highlighted and my comments stand.

I have studied behavioral issues as they relate to finance for over 15 years. The major analysis is always why do people act irrationally. ie. why do people sell great stocks when they have a little profit in it and why do people hold on to terrible stocks when they have a loss in it.

The article attempts to investigate why sellers are slow to lower prices. The very question assumes that not lowering prices is irrational and not in the best interest of sellers.

I challenge that assertion. Not lowering prices in NYC is smart because the economy is booming. Sellers don't lower prices because they feel that prices will eventually go higher. That's not irrational; that's smart.

The fact that L.A. is different than Brooklyn is also relevant because Brownstoner is not about L.A.; it's about Brooklyn and NY. Perhaps sellers in L.A. have to deal with an economic downturn, but sellers in NYC sure don't.

Posted by: Torch at October 25, 2006 2:07 AM

"Not lowering prices in NYC is smart because the economy is booming. Sellers don't lower prices because they feel that prices will eventually go higher. That's not irrational; that's smart."
Firs
t, to deny that there could be a correction in the real estate market in a booming economy is just illogical - it's clearly happening right now (although "booming economy" is a rather bullish statement on your part - we're stagnant at best, and it's looking more like it's going to remain that way everyday, if not get worse - after all, what is it that we have for an economy? Real estate? Consumer spending?).

Sellers are not being smart. They are being illogical. If you need to sell now, you price your home for conditions NOW - not what they could be in 1, 2 or 10 years, and certainly not what you want them to be.

And by the way, Wall St. and real estate are not always connected - after all, the stock market tanked in 2000 just as the real estate market took off.

Posted by: Anonymous at October 25, 2006 9:40 AM

Hang it up, Mateo. You're beating a dead horse. If sellers have to/need to sell, they will lower their prices, eventually. If not, they will take the property off the market when buyers low-ball their offers. If buyers need to buy right away they will raise their offer or adjust their expectations.

I'm not sure what's being argued here other than the fact that the Brooklyn market remains strong, for reasons unknown. Sure the psychology of buyers and sellers is important but this is nothing new. Rationality is often a missing component of a free market.

The article seemed short-sighted in my opinion. If you want to question the psychology of buyers and sellers why stop at real estate. Why not take a broader scope and examine the rampant consumerism within our society. These type of behaviors will not change until the leaders and experts become advocates of consumers spending wisely, and saving their money. We know that will never happen because the economy relies on people spending and spending and spending.

And as one poster suggested, prices here are a bargain in comparison to other cities like 'London, Paris or Tokyo'. So even if American buyers hold back the reins and become wiser shoppers, there's no telling whether their international counterparts will do the same.

Posted by: Anonymous at October 25, 2006 11:34 AM

New York Magazine's recent article on who is buying new condos in Manhattan stated a certain amount of those buyers keeping that market healthy are people coming from those other International cities who see NYC as a relative bargain. Europe is learning more and more about Brooklyn, as news of Brooklyn real estate booms get headlines. So it will be interesting to see what happens. They're certainly heading over the bridge to check Brooklyn out. We've had 4 European couples come see our Brooklyn condo that's on the market.

Posted by: Anonymous at October 25, 2006 4:58 PM

How come when housing prices are falling in other parts of the country, "The rest of the country has nothing to do with Brooklyn" but when you want to say that NYC prices are cheap relative to Tokyo, London, etc., all of a sudden the comparison becomes apt? Hmmmmm?

Posted by: Anonymous at October 25, 2006 6:18 PM

Huh?

Posted by: Anonymous at October 25, 2006 8:31 PM

Here’s my irrational story. I have a building and the developers sold the 4 bunk crap-o units to insiders. They were the worst units. All the other units were great and really well priced. The great units were priced the same as the crap units.

Guess what units all the buyers REALLY wanted? You got it! Those crap units. Seriously they went through the building and would always determine that THE BEST units were the ones under contract and they would be all a little heartbroken-ish about it. Like there is this magical word you can write next to a listing (“contract”) that effectively transforms the physical space from dark and awkward to unique and intimate.

Somebody else having something irrationally makes it more beautiful.. like your best friends girlfriend syndrome or something.

Posted by: brooklynfive at October 26, 2006 7:57 AM

by the way, apartments in Paris are relatively cheap by NYC standards... do your research!

Posted by: Anonymous at October 26, 2006 4:23 PM

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October 24, 2006

On the Psychology of Sellers

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