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Are Homes the New Emotional Baggage? The San Francisco Home Sellers Dilemma.

March 26, 2008

In today’s NY Times, there is an article entitled, “Be It Ever So Illogical: Homeowners Who Won’t Cut the Price.”

It is very interesting. For example, take the description of how the real estate market compares to other markets…

“In most other areas of the economy, this combination of plummeting sales and stable prices would not happen. When demand for airline tickets drops, the airlines cut their prices until they have sold their seats. When stocks become less appealing, share prices fall, sometimes sharply.

Just try to imagine stock prices staying roughly flat over a three-year period while sales volumes sank because investors considered the market overvalued. Bear Stearns is still worth $150 a share, and I’m not selling until someone pays me $150!

Real estate, though, is different. For both economic and psychological reasons, there is no asset more conducive to hopeful overvaluation.”

Typically, we buy and sell our homes based on personal needs and decisions. Most of us don’t sell when the market’s hot just because it’s hot.

Rather, we sell because we have a new job in a new city, just got a raise and want a nicer pad, our kids left home and we’re ready for easier living, we are starting a family and don’t want to raise kids in a rental, etc etc.

Real estate is meant to appreciate slowly, over time. Certainly, here in San Francisco, we have benefited from spurts of outrageous appreciation. For now, those days are gone. Some homes are correcting in price b/c they became overvalued in the past 3–5 years, while others are staying stable. We are likely to see stable prices with moderate appreciation for the next long while.

Nevertheless, if you have owned your home in San Francisco for at least 3 years, you are likely to have done very, very well. It’s leveraged, tax-free money AND you got to live in it!! Please someone tell me what is a better investment than that.

Yet, as they article states, the valuing of one’s home for sale becomes personal rather than pragmatic.

Consider this:

“In the wake of the biggest housing boom on record, it’s understandably hard to accept a new reality. Robert Glinert, a real estate agent in the Los Angeles area, said he has recently been saying no to almost half the sellers who have asked him to represent them. Their initial asking price is just too unrealistic.

“People say, ‘I don’t care about the market — my home is still worth what I paid for it in 2006,’ ” Mr. Glinert told me. “And I say, ‘To you. Only to you.’ ”

Doing what Mr. Glinert is asking sellers to do — dropping the asking price below their purchase price — is especially difficult. It’s tantamount to admitting defeat.

David Laibson, a leading behavioral economist, categorizes this sort of behavior under the heading of “the principle of the matter.” His point is that people often go to great lengths to avoid taking a loss — or simply having to acknowledge one. “Even a small loss evokes a sense of frustration,” said Mr. Laibson, a professor at Harvard. “There’s something magical about ‘at least breaking even.’ ”

Often, this hurts no one so much as it hurts the would-be sellers. They stay in homes where they no longer want to live, rather than accepting their loss and moving on. Or they move but endure the hassle of renting out their old home, waiting, usually in vain, for the mythical buyer who understands its charms. All the while, their money is tied up in the house, and inflation is eating away at its real value.”

From personal experience, I know this is hard. Let me tell you a story.

My first home was a sunny condo in the Inner Mission. It was a great starter home & I had a great time living there. I could walk to my favorite bars and restaurants and it was a fun place to entertain. But then, I got a little doggie named Frances and my priorities shifted. I wanted to feel more comfortable walking her around the neighborhood. I wanted her to have a back yard. I wanted her NOT to live in the company of the many BIG dogs in my building. In essence, I wanted a single family home.

I decided to sell my condo and buy a little home for me and my dog. I know it’s crazy but hell, it’s true!  The problem was that the market had already turned. Selling my condo was not nearly as easy as I would have liked it to be. And, of course, you better believe it had the best marketing! Just like all of my listings do!  

I eventually sold it but not for as much as I wanted. I made a little money but not much. I longed for the experience many of my clients had where they made a killing in just 2 years! But alas, that was no longer the reality.

But you know what? I did good. I had a home. I got tax benefits. I even made some money tax-free in a short amount of time. As my CPA told me, I am lucky to live and own in San Francisco.

The best part? My little Frances has the most adorable home & backyard in a darling neighborhood. We got the house at a good price and I just love it. Lucky for me, Frances allows me to stay there with her. But that’s probably b/c I buy the dog food!

Consider your life in the BIG PICTURE. Go for what you want. Accept reality and move on so you can get what you want in the long run.

Check out the entire article here: http://www.nytimes.com/2008/03/26/business/26leonhardt.html?ex=1364270400&en=0b14a88f5032e300&ei=5124&partner=permalink&exprod=permalink

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