Housing Market Psychology

“Can’t Sell” vs. “Won’t Sell”

Much attention has been paid to all the homeowners who want to sell now but literally can’t afford to, because they owe more on their mortgage than their home is worth (in Realtor’s parlance, they’re “underwater”).

Unless they can get the bank(s) to reduce their principal or simply default, they would need to write a check at closing for thousands or even tens of thousands of dollars.

However, anecdotally, I’m seeing more instances where Sellers are declining to sell for psychological rather than purely economic reasons.

Specifically, they’re not willing to sell until they can break even (because they still have equity in their home, they would still receive money at closing rather than have to pay it).

Latent Supply

This isn’t surprising to behavioral psychologists, who’ve long noted that loss aversion is a more powerful incentive than scoring gains.

However, Sellers’ “need” to break even suggests that there is at least some latent supply that improving conditions will unlock.

That, in turn, will act to keep the recovery subdued.

Of course, there is also “latent demand” waiting for signs that housing prices have finally stabilized.

At least in the short run, the direction of housing prices may depend on which of these two groups — “latent buyers” or “latent sellers” — is larger.