The Two-Tier Housing Market

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So since we became homeowners, I've become more interested in HGTV.  Not obsessively so, but I have more interested in watching programs about renovations and such.


One of the shows I've watched is called "Property Virgins".  The plot is about like it sounds: first time homebuyers try to find a place.

What's interesting is how many of the homeowners have trouble getting their offers accepted.  The shows filmed post-crash, and while it's by no means universal, a number of the couples on the show put in an offer only to lose the house . . . and a substantial minority put in offer after offer, only to lose again and again.  And what's really interesting is that this happens in places like Florida and California, where you would think it would be easy to find a house.

I wonder if they aren't experiencing something like I described when we were hunting for a house.  In the neighborhoods we wanted to buy in here, there was a lot of inventory--homes that were wildly overpriced.  Those homes sat on the market for months, even years.  Meanwhile, anything that came on at a reasonable price went to contract within a week, and usually within a couple of days--we made an offer on the house we now own the day it came on the market, and this was far from unusual.  Bidding wars on these properties were frequent--universal, in the months before the first-time homebuyer tax credit expired.

This sort of rapid-fire bidding is bubble behavior; it's not supposed to characterize a normal market. While well-priced houses always sell faster, this level of bifurcation is extreme (or so my real-estate agent mother assures me).  She also assures me that putting things on the market high, and then lowering your price if it doesn't sell, is lousy strategy--once something's been on the market for a while, it's damaged goods.  Price reductions don't get the same enthusiasm as new listings, so if your house is wildly overpriced, you're going to end up selling it for less, not more.

But this bifurcated market makes sense in the context of the housing crash.  It even makes sense that I'm noticing the phenomenon in places where housing prices have fallen the furthest: states like California and Florida, and beginning-to-gentrify neighborhoods like mine, which got bid up at the height of the bubble, and then fell by around a third.

Those are, of course, the places where homeowners are most likely to be upside down on their mortgages.  But that doesn't really explain the phenomenon--if you need to sell, then arrange for a short sale or give it back to the bank, while if you don't, why put it on the market at a price that no one will take?  And why do a surprising number of the homes that come on the market languish for so long without a price reduction?

Because prices are sticky, and they are stickiest where the needed reduction is largest.  The owners of these houses simply cannot bring themselves to believe that they took a loss.  They will instead drop their house on the market 20-30% too high, or more.  Even when it's obvious that no one is going to buy at their price, loss aversion prevents them from admitting that it isn't going to happen--either by dropping the price, or taking the thing off the market.  The result is that a normally-sized population of buyers gets compressed into the relatively small number of houses that are a) coming on the market at b) a price that recognizes that it's no longer 2006.

This suggests that even as housing demand recovers, it's going to take a while for the markets to follow suit.  A lot of the stock isn't even coming on the market; a lot more isn't priced to sell.  Until circumstances force a sale--or the buyers bid up that limited turnover to 2006 prices--those houses will sit there.  Meanwhile, frustrated buyers will feel like it is 2006--as they lose house after house until they manage to make the first offer.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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