"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.”
Three years ago, when the real estate bubble was still inflating, this sort of standoff was the exception. It’s the norm today. Overall home sales have fallen a remarkable 33 percent since the summer of 2005. Home prices, on the other hand, continued to rise until 2006 and are now only 5 to 10 percent below where they were in mid-2005, according to various measures."
“That means real estate slumps tend to grind on for years, until sellers submit to reality and reduce their prices.”
Now, I’m not an expert on the housing market, but this seems insane. Prices stay high because people refuse to drop their prices? That seems to bypass every incentive to sell a house in the first place, with the expection of those trying to flip it.
You’re quite right. The article isn’t distinguishing asking prices from selling prices, which is what makes it confusing. Asking prices can stay high, just like the article says, but average selling prices are dropping in most markets.
The other factor to keep in mind is that subjective value scales change over time. Someone who just bought a house will value it at least as highly as the purchase price they paid. They may value it much more for some reason–and one reason could be the belief that he can sell it at a profit. And they can lower their subjective valuation for some reason. One reason could be a conviction that nobody will ever pay more than $X for the house. When the owner’s subjective value comes into line with some buyer’s subjective value for the house, he’ll sell it.
Unfortunately, at times like these people’s subjective value scales can fluctuate a lot in a short time. Austrians can handle that naturally, while more mainstream economists are stuck talking aggregates and averages. But neither approach actually tells an individual seller or buyer what to do: for now it’s a big game of chicken. Some marginal buyers of a year ago are ready to buy now, because they’re finding houses whose price agrees with their subjective valuations. Some sub-marginal buyers are hoping prices will fall just a little bit more, and that they’ll find houses. I value money high and real-estate low, so I’m happy with my house in Pittsburgh, but hoping the market completely tanks and I can finally buy a place in Connecticut (where I grew up). Probably won’t happen, though, because I’m quite a cheapskate.
I was amazed when I was house-shopping a few months ago how people who had their house on the market for nearly a year were unwilling to move even three percent on the price. There’s a huge emotional factor people put in their houses, and they think it’s personally insulting if they can’t sell to meet their price expectations.
Yes, but I don’t see how that could be widespread. People sell because they need a larger home, or because they afford the existing one, etc. Very few people have the luxury to just let their house sit on the market. So I think the conclusions drawn in the article are quite misleading, though there obviously are emotional issues involved.