Why sellers won’t take a loss

This article was originally on a blog post platform and may be missing photos, graphics or links. See About archive blog posts.

Interesting commentary over the weekend in The New York Times: Economist Austan Goolsbee explores the unwillingness of home sellers to accept the reality of falling prices and sell their homes at a loss: ‘Classical economics can’t explain this behavior. That’s because people who refuse to sell their houses for less than they paid for them are violating a cardinal rule of the market: stuff is worth what it’s worth. It doesn’t matter what you paid for it.’

Goolsbee, an advisor to the Obama campaign, cites a little history -- the unwillingness of Boston condo owners to sell at a loss in the big real estate slump of the early ‘90s: ‘... much of the market went into a deep freeze as many people held out for market prices that no one would reasonably pay.’

Our take: Goolsbee attributes this economically foolish behavior to an irrational hatred of losing money. We have a different take on this: We believe sellers in the current market who are at risk of selling at a loss are operating on a razor’s edge of solvency: they can’t afford to lower their price -- they bought with little or no money down, they’re now upside down, and selling at current market prices won’t pay off their mortgage. It’s not that they’re too proud to take a lower price; it’s that they can’t afford it. We believe this is one of many factors that makes the current slump different from the last one, at least in bubble-inflated markets like Southern California.

Your thoughts? Insights? Email story tips to lalandblog@yahoo.com.