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One reason the housing market has been slow to recover is the massive glut of houses still available on the market. One reason there is a glut is because asking prices haven’t dropped as quickly as market values.
The excellent Planet Money blog explored this phenomenon recently, and learned a few things about the psychology of purchase and investment risk:
As it turns out, our brains feel losses and gains unevenly: Losing feels worse than winning feels good. In a down [housing] market, people really don’t want to sell, because selling feels like losing.
For example, [a study] compared two basically identical condos. The owners of both had paid off their mortgages. But one had bought at the peak of the market. That person, he found, would stubbornly ask for a higher price, and keep his condo on the market longer than the other person, who had bought at a lower price.
“The overall magnitude of this effect is very big,” Mayer told me. “This is an important factor in how housing markets operate.”
But this psychological quirk is also slowing the healing process. It makes people reluctant to lower the asking price on their homes, which in turn contributes to the glut of houses on the market. It’s unclear why our brains are wired this way — why we overemphasize losses.
Interesting stuff. The report didn’t attempt to answer why the brain overemphasizes losses, but it seems pretty obvious: Winning $100,000 at a casino would be nice. Losing $100,000 would for most people likely be devastating. Earning a 10 percent return on an investment of your life savings would be nice. Losing your life savings can be ruinous.
In other words, while it’s nice to have more, loss can be devastating. Holding onto what we have is more important than gaining more. That fear of loss trumps desire for gain seems like a built-in survival instinct.
This applies to the housing market as well. On the buyer’s side, it’s understandable that some families might not be in the mood to jump right back in to the market after the last collapse (burn me once, fool on me; burn me twice…), or at least not make as big of a splash. The extra $50,000 worth of house you could get by splurging just a little bit more might seem nice (and could pay off big in the long-run), but not if there’s a decent chance that you’ll be underwater in three or four years. Betting big may be thrilling at the casino or dog track, but not when what you lose is where your wife, kids and dog call home. On the selling side, people might simply believe that time will heal old wounds, and if they wait long enough, eventually they’ll get their asking price.
Here at Texas Lending, we’re eager to help ease any fears that potential homebuyers in Texas might have. We’ve got a slew of affordable Dallas home loan, Houston home loan, and Austin home loan products — including home equity loans and home refinance loans.
About Kevin Miller
Kevin Miller, Owner & CEO of TexasLending.com. TexasLending.com provides expert service in the field of residential mortgages.
