The Reluctance to Lower the Price
The New York Times published a story on its Web site on the inherent reluctance of owners to lower their selling prices. The story notes that no other segment of the economy is so resistant to the laws of supply and demand.
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.
Of course, one reason folks aren’t lowering prices in this market is that they can’t. They owe more than their house is worth, so lowering the price means they’ll have to write a check to escrow, which hardly anyone has the money to do. So they hold on, hoping for a miracle. Meanwhile, monthly payments and expenses pile up, until pretty soon you have a short sale or a default.
Robert Glinert, a real estate agent in the Los Angeles area, said he has recently been saying no to almost half the sellers who have asked him to represent them. Their initial asking price is just too unrealistic. “People say, ‘I don’t care about the market — my home is still worth what I paid for it in 2006,’ ” Mr. Glinert told me. “And I say, ‘To you. Only to you.’”
The Times story highlights a couple who tried to buy a home in Marin County, California, for $1.575 million, but the owners, who had purchased the house a year earlier for $1,475,000, were unwilling to lower their $1,875,000 asking price:
Back in 2005, after Mr. Harrison and his wife couldn’t find a house they considered fairly valued, they opted to rent instead. They pay $3,250 a month for a four-bedroom home, which is a bargain relative to what their mortgage payments would have been. And that six-bedroom house listed for $1.875 million? The last Mr. Harrison checked, it still hadn’t sold.
The Harrisons’ story encapsulates what’s wrong with the market. First, they were willing to shell out $1.6 million for a home, even though buying would cost them far more than renting. That doesn’t make sense. Second, the sellers were unwilling to part with their house, even though it was drastically overpriced. Can you say “stalemate”?
Whatever happened to “buy low; sell high”? Until mortgage payments become competitive with rent payments, buying simply isn’t sensible. The people who “bought high” have to accept reality before the market can begin to return to normal.
