Homeowners still in denial

People looking to sell their homes evidently don’t read the papers. The Case-Shiller home price index for April fell nearly 4% from a year ago, and, “Six of the 20 MSAs showed new index lows in April – Charlotte, Chicago, Detroit, Las Vegas, Miami and Tampa.” And the pain is likely not over. Robert Shiller said last month, “A 10 to 25 percent further decline in real home prices over the next five years would not surprise me at all.”

Meanwhile, homeowners are in denial. “Current sellers who bought their homes in 2007 or later, an analysis of the site’s home listings shows, are overpricing their properties by an average of 14 percent,” writes Ann Carrns for The New York Times.

Instead of pricing their homes to the market, sellers consistently make the mistake of basing their sales price on what they paid for the home. “People tend to experience losses even more acutely when they feel responsible for the decision that led to the loss; this sense of responsibility leads to regret,” explains Hersh Shefrin in Beyond Greed and Fear: Understanding Behavioral Finance and the Psychology of Investing.

Stan Humphries, chief economist for real estate research firm Zillow, says this bias “leads to conclusions that are divorced from the outside market.” The market determines whether a buyer is interested in your house: “The buyer doesn’t care what you paid or what your mortgage is,” says Humphries.

Sellers,

"are simply faced with a reluctance — understandable, to be sure — to sell the house for less than they paid. “They could price more aggressively, but there’s a psychological hurdle,” [Humphries] says. “They don’t want to realize a loss.”

Zillow’s economist, like Shiller, believes home prices will continue to fall.

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