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Putting Home Sellers on the Couch: The Psychology of why Sellers Refuse to Lower Prices

Housing-Market / US Housing Aug 01, 2007 - 12:56 PM GMT

By: Dr_Housing_Bubble

Housing-Market Driving to a meeting, I tuned into a show called House Calls on a local FM talk radio station. The show centers on real estate investing and taking calls (massively prescreened) from the public. Whenever I'm in the car on a Saturday morning driving with the gorgeous California sun, I usually tune into this station to see what the media and the public are saying about the housing market. I've listened to this show for a very long time. And I can tell you that last year they were cheerleading Southern California housing like you wouldn't believe. Any caller mentioning the word “bubble” was painted as a tinfoil hat wearing bubblelista. Fast forward one year to summer 2007 and they are giving the advice of investing out of state for cash flow properties. Sounds like the strategy I've been purporting since the beginning but why mince words, these are the experts.


One call however summed up the psychology of current sellers.

A woman called up and the conversation went as follows:

“We purchased a wonderful condo in Orange County in 2001. Last year, homes in the same area were selling for $749,000 and quickly. These were horrible condos in bad condition. We have our place on the market for $779,000 since November and we've had no visitors. What gives? We have granite countertops and removed the popcorn on the ceiling. We were wondering what we could do. It seems the days on market (DOM) is hurting our negotiations and giving buyers the upper-hand. We were thinking of taking the home off the market for a few months and relisting it. What do you suggest?”

I'll get to the advice offered to this women later but let us analyze what is going on here. First, we have the belief that peak prices will come back. Her belief that somehow her home is worth what a buyer was willing to pay last year is massively incorrect. The actual value of the home is whatever a buyer is willing to pay, today. And buyers aren't willing to pay Pollyanna prices simply because she removed remnant 70s popcorn from her ceiling. You would think that this Trump wannabe would quickly take a survey of the market and ask herself the following questions:

1. Am I not marketing the property correctly?
2. Could it be that the price is too high for the current market?
3. What can I do to make it sell given the current market sentiment?

These questions don't matter because the ultimate answer is something she does not want to hear. Lower the damn price! It isn't the granite tops or the green Behr paint you added, it is the fact that the market has drastically changed. Sellers are no longer in the bargaining chair. In addition, many sellers last year were able to squeeze into the party by buying with risky subprime loans. The subprime market is now toast. Banks are becoming stricter on their lending standards. Need we point out that inventory is growing therefore giving buyers more choice?

The second point of contention is overvaluing basic remodeling jobs. It is the case in other states that sellers actually need to replace a roof/carpet, install ceramic tiling, and work on the garden simply to move the home. Not only that, the seller usually under prices these updates so the house can sell. In California, as demonstrated by this seller, they believe that adding granite countertops and doing a basic cosmetic update has made their home worth hundreds of thousand more. Can we say delusional? The great thing about the market once fraudulent credit is removed, no one will buy this place and that will be her outcome. The home will not sell until she reconciles her cognitive dissonance regarding missing the bus in selling the home. Sorry, the lights are out on this party.

Then we get shady tactics that once worked before. She is obviously on the up about relisting her home. Somehow, these yesteryear tactics are pointless in a market brimming with REOs and soon to be added foreclosures. The bank won't hesitate to cut prices. To them the home is a liability on their accounting books. They will drop prices until market interest is stirred up. This seller? Well they are pining for the days of 2006 as if it were a lost high school love interest. Keep in mind for the last 7 years, sellers only competed with themselves. They had a monopoly on the market. Now REOs and foreclosures are rapidly growing and their market share is increasing. Result? A competitive market driving prices down.

Equity Out of Your Bubble Home to Other States

So what was the advice given to this aspiring seller? Get this. Tap out your equity and invest elsewhere! So let me get this straight, we are in a national housing bubble and you want this person to lock in her overpriced asset and invest elsewhere? In effect, this will make her the buyer of her own home. Say she taps out $100,000 in equity from her house, she has essentially created a pseudo American Express agreement with her home for 10 years. And get this, she will need to pay that $100,000 completely back. It amazes me how so many people in the mainstream media see HELOC or home loans as your money. All you are doing is creating a relatively affordable loan against your biggest asset. Financially retarded in a declining real estate market.

I'm all for investing in real estate. But not at the cost of locking you into an overpriced asset and pulling a 2nd for leverage. Doesn't make sense. Equity is only yours when escrow closes and you have a cashier's check in your hand. Maybe they should wait for a year and save up to see how things are in 2008 and try to sell their home again. At that point, they'll realize that they should have cut and sold in 2007 because some greater fool is still out there. I'm not sure about next year.

The advice is typical for those in the real estate industry. Keep doing things that churn commission cuts. You refinance, the broker gets a cut. You sell, an agent makes money. You buy out of state, you make a loan executive and an agent money. But wait out the market. Ahhh, the silver lining. If you wait, which in investing is prudent at times, you will make yourself money but others may suffer. If you want to buy, go ahead. No one is stopping you. Heck we have enablers everywhere. Give this seller a call for her $779,000 condo. You might be able to get her to chip in a few bucks for closing cost.

Horrible financial advice under the guise of investing. Sorry folks, if you want true investing knowledge purchase a few books and educate yourself. It'll cost you $30 bucks on Amazon or even free at your local library but you'll save tens of thousands in the long run. Don't fall for the mainstream debt trap. Debt is not wealth. Slavery is not freedom. And removing popcorn does not cost $779,000.

By Dr. Housing Bubble

Author of Real Homes of Genius and How I Learned to Love Southern California and Forget the Housing Bubble
http://drhousingbubble.blogspot.com

Dr. Housing Bubble Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

subprimemeltdown
01 Aug 07, 14:20
Housing Denial is a river in Orange County

Great article doc but I have another approach. I agree that the very BEST thing to do would be to sell the house and get that real estate monkey off her back. But, if prices have declined to the point where she is "locked in" and can't sell without losing a lot of principal than an alternate strategy is needed.

Here's what I would do. I'd apply for a cash out second for however much the stupid banks were willing to loan me on the house. Say it's $100-200k. Then I'd take that money and make leveraged puts against the housing and financial markets. At least then you cover your equity losses in the house. Risky but it's the least worst option.

The best thing though would have been not to buy into the phoney real estate flipping scam in the first place.

What we're seeing is just the tip of the iceberg. It's going to get a lot worse.


dawn
06 Aug 07, 12:41
real estate market meltdown

Get ready for the core meltdown. Back in 1983 I contacted an old established Fijian real estate agency to send me their real estate listings. The prices asked were in the $6,000 range for hundreds of yards of oceanfront. Interestingly enough within that same time frame there happened to be an ad in the Los Angles Times offering the same type of real estate in the same general area for $1,000.000. My point is that there have been "pickers" working for private investors all over the world buying up tracts of land with the intention of flipping for huge profits.


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