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Facing Losses

By JLP | January 21, 2011

My last post brought a passage from Meir Statman’s What Investors Really Want: Know What Drives Investor Behavior and Make Smarter Financial Decisions* to mind regarding the housing market. The passage comes from Chapter 10 – We Want to Face No Losses:

Houses sell quickly in boom times at prices that exceed list prices. Yet in bust times, houses sit on the market for months and years at list prices higher than they could possibly fetch. Many sellers withdraw their houses from the market rather than sell them at prices lower than the prices they have set in their minds. Homeowners say the market is slow, we’ll just hold on and wait. In truth, it is homeowners who are slow. They are slow to reconcile themselves to the fact that today’s reasonable prices are lower than the prices they have set in their minds. Realtors often refuse to represent such reluctant homeowners, knowing that they are not likely to persuade them to reduce their prices and realize their losses.

I think what sets selling a house at a loss apart from selling stocks at a loss is that usually there’s a mortgage involved with a house. If you have a house with a $100,000 mortgage, it would be tough to sell it for $90,000 unless you had $10,000 cash to pay off the rest of the mortgage. My point being that I don’t think people have prices set in their minds but have a “balance sheet” set in their mind and know how much they need to sell their house for in order to make themselves whole.

Taking a house off the market because you can’t get what you want for it, is perfectly reasonable in my mind.

*Affiliate Link

Topics: Books, Housing Market, Mortgages | 15 Comments »


15 Responses to “Facing Losses”

  1. Stacey Says:
    January 21st, 2011 at 3:03 pm

    Also, selling a house at a loss nets no tax value, whereas selling a stock at a loss does (or if not immediate, it can be carried forward.)

  2. JLP Says:
    January 21st, 2011 at 3:17 pm

    Very good point, Stacey.

  3. Ron Says:
    January 21st, 2011 at 3:33 pm

    Behavioral psychologists say that the fear of a loss is much more powerful than the anticipation of a gain, thus the Chapter 10 title!

  4. Kirk Kinder Says:
    January 21st, 2011 at 5:18 pm

    JLP,

    Your point is well taken, but anchoring is a behavioral trait for humans that is very strong. People are still anchored to the 2005 or 2006 price. While those who owe more than the house is worth may not sell due to the loss, many still talk about sales prices compared to the peak.

    This happens for stocks as well. You know we have forged past the anchor when people no longer talk about the peak price of their home. I don’t think we are there yet.

  5. BG Says:
    January 21st, 2011 at 6:04 pm

    “Realtors often refuse to represent such reluctant homeowners”

    Realtors have no incentive to get that extra $10k in selling price, which is huge difference for the homeowner, but only an extra $300 for the realtor.

    I think houses should sell in about 3-6 months — any longer and the price is too high. Any less, and the price was too low.

  6. Stacey Says:
    January 21st, 2011 at 7:57 pm

    My anchor is any price above my basis :)
    I have a long way to go according to that dastardly Zillow email I periodically receive on our house…

  7. Courtney Says:
    January 21st, 2011 at 8:21 pm

    Stacey – I hate zillow with the passion of a thousand suns. We have a condo (that we are putting on the market in a few months). The identical unit to ours in the building next door sold last year. I saw the interior photos when it was for sale; they had hardwood floors but we have newer cabinets and appliances. Nevertheless, zillow has zestimated their place at 10-15% higher than ours for over a year.

    It’s frustrating because the hypothetical difference between the two zestimates ranges from being able to sell for enough to cover our current mortgage + closing costs, to having to pay closing out of pocket plus writing an $8000 check to our mortgage company.

  8. Jon Says:
    January 22nd, 2011 at 12:57 am

    You also have to factor in all the energy (your time) and money you would have to keep up the house. Whatever savings you get from holding on a little longer (which might be meager or not) might not be worth the effort. Personally, I would take the loss because quality of life would be more important (even if it meant having more debt). Of course, that’s a completely superficial look since I don’t know the person nor the exact circumstances. Different people value different things more and for myself I value my time with my family much more than gaining extra income.

  9. BG Says:
    January 23rd, 2011 at 8:51 am

    Just looked up my Zillow estimate — looks like they are just pulling the county appraisal records and using that number.

    Hence both are too high, IMO. I wouldn’t pay that much for my house, maybe some other sucker would though. A 16% increase in appraised value since 2005.

  10. Stacey Says:
    January 24th, 2011 at 5:31 pm

    Good for you, BG, ours is $200K too low :(

  11. BG Says:
    January 25th, 2011 at 12:13 pm

    Stacey) Curious, do you have high property-tax rates? Ours is around 3% — which kept property values from bubbling too high around here. Places like California and Arizona have tax rates around 1%.

    Hopefully you saw a $200k gain before the $200k loss, keeping you flat :/

  12. Stacey Says:
    January 26th, 2011 at 1:16 am

    Yes, BG, I think we have high property taxes in the suburbs of Chicago. In 2010 we paid $9,300+ for our residence/lot (a 6.254245 tax rate; $149,022 net taxable value and a $465,066 fair cash value) and $2,100+ for our adjoining lot. We were recently reassessed and I expect taxes will decrease by $1,000, which will now easily be eaten up by our new, superb 5% income tax rate. GRRRROWL…So I guess I should be rejoicing that the “fair cash value” is “low,” right?!

    Zillow (IMHO) is a piece of crap. We bought our house a few years ago for $540K (including the extra lot). At the time one of the closing agents couldn’t believe the great deal we got b/c both parcels and home appraised over $600K (BEFORE remodeling our stuck-in-the-’70s house!) We have spent over $130K on remodeling, mainly b/c in the kitchen and baths, but also b/c of new carpet throughout and hardwood floors on the main level. When we refinanced in 2010, we still had one bathroom under contruction, so we got docked a bit on the appraisal, which came in at $500K (not including the extra lot which we own free and clear.) Comps are hard to come by on larger homes in our subdivision, so that was a factor, too.

    So how can Zillow come up with a $331,500 est of our home value? Is it b/c of short sales and foreclosures in our area? How can it be so much below a thorough appraisal performed by a qualified appraiser?

  13. BG Says:
    January 26th, 2011 at 8:41 am

    Stacey) We are taxed right at 3% on the true value of the house, I guess what you are calling the ‘fair-cash value’. Looks like you are around 2% (9300 / 465k).

    I don’t know how zillow is coming up with numbers in your area, but around here, it looks like a straight copy of the property tax records (which are public). Hopefully people aren’t relying on zillow (for buy/sell decisions), and just use it for amusement purposes.

    BTW: I bet your place is nice after putting so much into remodelling!

  14. Stacey Says:
    January 26th, 2011 at 11:09 am

    It surely is! But a lot to clean, esp w/ a beagle whose hair isn’t glued to her body! The best part is that it’s surrounded by mature trees (and my neighborhood pals!)

    We had 4 deer in our front yard Monday at 4pm; we have owls, coyotes, an occasional raccoon, tons of geese and water birds around the slough in the back woods…it’s a lot of fun! A great home for the boys…

  15. Courtney Says:
    January 26th, 2011 at 4:29 pm

    BG – I know zillow isn’t relying (entirely) on our property tax records in MD. Our last tax assessment (which I thought was entirely reasonable) was $36K higher than our zestimate.

    There was a WSJ article in 2007 about zillow’s accuracy. They self report a margin of error of about 7.5%. WSJ found that, after examining 1000 values versus sales prices, “Zillow came within 5% of the price in a third of the transactions studied by The Journal. It was more than 25% off target on 11% of them. In 34 of the 1,000 transactions, Zillow was off by more than 50%.”

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