Irrational Obstinancy

I love how Marin County house sellers are being used in this New York Times article to epitomize irrational obstinacy (be aware: R.H., who is prominently mentioned in this article, is a housing blogger of some note):

In 2005, Randolph Harrison and his wife, Pamela, decided to move north from Silicon Valley, over the Golden Gate Bridge into wooded Marin County to be closer to her new job. They found a six-bedroom house that seemed ideal except for the price, $1.875 million. The current owner, they knew, had bought the house a year earlier for $1.475 million.

So the couple, who both have finance jobs in the technology industry, told their real estate agent that they wanted to offer $1.575 million. He told them that the owner wouldn’t even listen to such a low bid. The owner’s attitude was “we’ll just stay here until we sell it for 1.875,” the agent said, “even if it takes years.”

In most other areas of the economy, this combination of plummeting sales and stable prices would not happen. When demand for airline tickets drops, the airlines cut their prices until they have sold their seats. When stocks become less appealing, share prices fall, sometimes sharply.

Real estate, though, is different. For both economic and psychological reasons, there is no asset more conducive to hopeful overvaluation. That means real estate slumps tend to grind on for years, until sellers submit to reality and reduce their prices.

In many ways, it would be better if the housing correction would happen more swiftly and sharply. The pain might be worse, but it would be over quickly. We seem to understand this principle when we’re removing a bandage. Why, then, is it so much harder with housing?

For starters, people have an obvious emotional connection to their house. After you have raised a family or enjoyed long meals with friends there, you are naturally going to place a higher value on it than a dispassionate buyer would. It’s your home.

“People say, ‘I don’t care about the market — my home is still worth what I paid for it in 2006,’ ” Mr. Glinert [a real estate agent] told me. “And I say, ‘To you. Only to you.’ ”

Doing what Mr. Glinert is asking sellers to do — dropping the asking price below their purchase price — is especially difficult. It’s tantamount to admitting defeat.

David Laibson, a leading behavioral economist, categorizes this sort of behavior under the heading of “the principle of the matter.” His point is that people often go to great lengths to avoid taking a loss — or simply having to acknowledge one. “Even a small loss evokes a sense of frustration,” said Mr. Laibson, a professor at Harvard. “There’s something magical about ‘at least breaking even.’ ”

Often, this hurts no one so much as it hurts the would-be sellers. They stay in homes where they no longer want to live, rather than accepting their loss and moving on. Or they move but endure the hassle of renting out their old home, waiting, usually in vain, for the mythical buyer who understands its charms. All the while, their money is tied up in the house, and inflation is eating away at its real value.

So are we Marinites especially prone to hurt egos? Do we take "people often go to great lengths to avoid taking a loss — or simply having to acknowledge one" to the next level?

And you gotta love the comments about stubborn sellers made by the blogger who runs The Mess Greenspan Made blog:

That fact is clear to see in many neighborhoods as sellers sit and wait, either not knowing or not caring that they have little chance of getting anywhere close to what they're asking unless that one, dumb home buyer shows up who knows less about real estate market conditions than they do.

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And please participate in the Marin Bubble Blog forums. As this blog winds down, the forums are where the action can be, but only if you make it happen.