You know the saying…Can’t live with ’em, can’t live without them.

…when the masses believe something is a good idea, it takes a sturdy soul to resist the trends. We just saw this in the recent housing boom. Buyers are more closely associated with this group behavior and sellers are happy to oblige. The flock or herd mentality reigns.

The same is true in the opposite scenario. Buyers have been quick to react to weaker market conditions, but as evidenced by their pile-on behavior a few years ago, then tend to overreact and expect a large discount on their purchase. Sellers are the “other” half of the buyer-seller equation and they are creating havoc by their unwillingness to realign with current market conditions.

My old rule of thumb: sellers take about 3 quarters to readjust to weaker market conditions. Thats been thrown out the window since its been 5 quarters since the end of the housing boom (mid-2005) and seller resolve remains relatively strong.

This has been one of the reasons that certain vulnerable real estate markets haven’t seen a significant price correction. Although buyers don’t have a sense of urgency, sellers are in denial about weaker market conditions. The result? Sales activity drops sharply until someone or both budge for their position. Brokers are frustrated because they have limited flexibility with today’s sellers [Realty Times]. They gear up for the sale with advertising, open houses and other marketing strategies but if a seller isn’t ready to enter the market realistically with the right price, the effort is largely a waste of time and money.

Why is the seller so firm in their resolve to remain firm on price?

  • Sellers are used to being in charge – The economy is slowly weakening as evidenced by the erosion of GDP but its still relatively solid. Sellers have enjoyed a dominating postion for much of the past nine years, not quite as long as the Republicans have controlled Congress (sorry, but election day is still ringing in my head). Perhaps thats the reason for the seller’s delay in adjusting to the market (not the shift in power to Democrats). They are simply used to the way things have been.

  • Its about ego, not greed (buyers don’t understand this) – Ego is a big part of setting real estate prices for listings, not greed [WaPo]. Generally speaking, according to the evolving body of neuroeconomic research, people logically make rather simple dollars-and-cents analyses when they buy small items, but become more emotional around large decisions, particularly those that affect their futures.

  • Sellers don’t underestimate the power of “denial” – The word “denial” must have been created for them, psychiatrist Peterson said. As applied to real estate, denial is a condition in which sellers cannot bear to part with their homes for less than what they believe they’re worth.

The solution? Brokers need to continue to educate the sellers on the accurate value of their property and simply don’t take the listing if its not priced within the realm of reasonableness. The other solution is simply to wait for sellers to adjust. But be patient, it may take a while.

Update: Here is an additional link on the seller disconnect with the housing market: In Face of Housing Slowdown, Homeowners Remain Optimistic [REJ]

13 Responses to “Tearing Down A Brick Wall: The Problem With Sellers”

  1. UrbanDigs says:

    good piece. right on Jonathan. Denial is the key word as unless there is a time pressure, sellers are just not willing to HEAR what their house is probably worth on the open market.

    I’ve lost 2 exclusives already because of my honesty in telling clients what I think their home is worth; its a time thing for me and I dont feel like wasting mine.

    The best phrase a seller told me when I went on a sales pitch was last year, …”well Noah, either you are the most pessimistic broker of the 7 I interviewed or the most honest because your estimate of what my home will sell for is the lowest of all…”

    I didnt get the listing but it did sell for my ballpark #! So, the broker who lied and promised more money to the seller got the listing, and moved it AFTER numerous price cuts. I guess I should polish up my sales pitches and start telling people what they want to hear rather than the truth. But I just dont want to!

  2. maria says:

    I have the opposite experience, I was trying to buy the past season and I have been loughed at by my brokers and seller’s broker for my low offers which was price for which houses in the same comps have been sold the previuos year, but 10% below what the seller was asking after the property had been on the market for 7 months. The house still has not sold, I am not sure I will use the same broker to look for a house next year. I am in the meanwhile renting and enjoy the peace of mind of renting. Buyer’s broker should at least be nice with whom want to buy and not lough at them…..maria

  3. Yup, many sellers are in denial about the market and many agents join them up that river (though not Mr. Digs).

    I am curious about the how to reconcile the general feeling that sellers-don’t-get-it (i.e., their apartments are still over-priced) and the number of transactions reported. The MS Q3 06 report shows 2,113 transactions last quarter, up over the prior quarter and over the same quarter in 2005. If that is a legitimate number, then there are (more or less) the same number of “willing” (realistic) sellers this year than last, or more. There are just lots more owners listing their apartments for sale currently than last year.

    But Jonathan suggests in the Q3 06 Report that the “transactions” number is overstated that quarter – and will be in Q4 again – because of the newly public coop sales information from the City. Why is that JM? Is it because we are – for recording purposes only – ‘stealing’ sales that would usually be reported in the next quarter? If so, won’t that flatten out soon?

    My general point is that there seem to be about as many successful sellers this year as last. The other alleged “sellers” won’t sell until they change their price or the market catches up to them.

    The ones in denial will stay up the river until the rising river saves them.

  4. Evan Gould says:

    I’ve been advising buyers that the list prices we see are “asking prices”. I encourage them to go ahead and write an offer at a 10% discount (or more, why not?). Basically, erase the year over year appreciation, and reset the price to 2005 prices. Alot of escrows are being opened with 5%-10% discounted from the original list price.

  5. Jonathan J. Miller says:

    Sandy – next year apples and apples. Public record simply means that if the sale closed on 9/27 for the third quarter, we are not more likely to get it time for reporting so hence a bump up in the number of sales will artifically occur. Before coops were in public we would not have got that sale in time for the 3Q report. It wouldn’t appear in the 4Q report because it still closed on 9/27 and wouldn’t qualify.

  6. skep-tic says:

    you forgot to mention that people in the real estate industry have been insisting every step of the way down, and continuing to do so today, that this is just a “pause,” that the market is just “returning to normal,” that “we are at the bottom,” that RE will be better in a few months, etc.

    Sellers are irrational and are emotionally attached to the wild appreciation they have built up in their minds. They are going to cling to any hope you give them, and people in the RE industry have not failed so far to give them this hope.

    I applaud those of you who are being honest, but so far you are in the minority

  7. Hope this not too much ‘inside baseball’ here JM, but are you saying that in the past, the “late reporting” transactions in a quarter were invisible in the quarterly reports? (I use your data a lot, and I deal with a lot of people who are very detail-oriented, so I like to be able to explain what I rely upon.) If so, I would expect the year-end total in past years to be higher than the sum of the quarterly totals. Yes/no?

    Great that this is not going to be an issue in 2007.

  8. Brad R says:

    Jonathan this is a great article. I am going to add part of this to my website because it explains the reasoning behind the psychology of the mental market right now.

    Great job!


  9. More on seller psychology from WSJ on-line:

    “Homeowners are either remarkably stable people with their financial houses in order or they’ve got their heads in the sand. Despite news of late that the housing market is slipping, just 6% of homeowners in a survey in August said they think their home’s value will decline in the next 12 months.”

    Nationally, I think it fair to say that the sellers’ expectations do not match the “experts’” expectations. And 53% expect their homes to increase in value in twelve months “a little”, while 10% expect a larger increase. Is Dr. Pangloss in the house?

    THX to for pointing out the link.

  10. skep-tic says:

    for a further example of the RE industry giving sellers false hope, check out NAR Pres. David Liareah’s comments today… predicts house prices will appreciate in 2007

    so just hold tight sellers. don’t lower your prices. everything is gonna be alright

  11. I think you are dead on with this post. I just want to add that buyers are developing a “tude”, they get it alright. Here is what I mean, the seller reduces the price to where it sould be, after the home has been on the market for months. The buyer comes along with a super low ball offer, the seller says no way. This happened to me with two sets of buyers on two different houses in one week.

  12. skep-tic says:

    I just want to say upfront that I am trying to comment in good faith to give the audience of this board (which I assume is mostly brokers) the perspective of one potential buyer who has many friends who are also potential buyers (all late 20s high income professionals).

    Small price cuts are not enough. I know that prices were half what they are today 4-5 yrs ago. It is hard for me to feel good about buying with such a small cut given how much and how fast prices rose recently.

    I know that prices can fall just as quickly as they went up, and I see nothing in recent data to suggest that this won’t happen. So the only way that buying could make sense right now to me is if there was a big discount (at least 20%) from peak price. That way I have something of a cushion if the market continues to drop.

    People who only know recent history are in denial in thinking that big declines can’t happen. And people who have owned for a long time I think don’t really understand what a massive financial commitment it is to buy for the first time today.

    I don’t hold out much hope that people will begin to discount aggressively overnight. Either economic reality will force it upon them or maybe I am just wrong. But I prefer to wait and see if I am wrong rather than jumping in right now, unless someone presents a very big incentive to take on this risk

  13. Me says:

    “And people who have owned for a long time I think don’t really understand what a massive financial commitment it is to buy for the first time today.”

    Amen, skep-tic. My parents (thanks to equity withdrawal – I know, stupid of them) pay about 5K a month for their updated, 3500 sq. ft. 4 bed/2.5 bath home on one of the best blocks in their upscale town (purchased 30 yrs ago). For the same mortgage payment, I could buy a place about half that size in their town, in crappy shape, that I would quickly outgrow.

    Also, theresa, as for buyers’ attitude, sure, we have it. It’s a result of the attitude that sellers have developed over the past few years. We have been treated like a pretty young boy on his first day in prison. Why shouldn’t we give some of the same?