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.