Housing Tanks, Ctd

by Patrick Appel

Jonah Lehrer thinks our collective cognitive bias is part of the problem:

Between 1989 and 1992, Boston condo prices fell by nearly 40 percent. This meant that, for the vast majority of condo owners, they could only sell their home at a steep loss.

Classical economics assumes that people will adjust to the new reality. They’ll realize that the market has changed, and that they made a costly mistake. But that’s not what happened. In their paper, “Loss Aversion and Seller Behavior: Evidence From the Housing Market,” Mayer and Genesove found that, for essentially identical condos, people who had bought at the peak of the market (between 1989-1992) listed their properties for nearly 35 percent more than those who had bought after the collapse. Why? Because they couldn’t bear to take a loss.

The end result, of course, is that these overpriced properties just sat there, piling up like unwanted inventory. According to the economists, less than 25 percent of the properties bought during the condo bubble sold in less than 180 days.

I’d argue that the same thing is happening right now, except on a nationwide scale.