The Volokh Conspiracy - Housing Market "Stickiness":

I've continued to follow the Northern Virginia real estate market, as my wife an I are moving back to the area in January after spending two semesters visiting at University of Michigan Law School, and one at Brooklyn Law School. At this point, we're hoping to rent a house or townhouse near the metro in the Ballston/Clarendon area (leads would be welcome!), but I've been watching the sale market as well. Some observations:

(1) Townhouses are coming down in price much faster than are single family houses. A few months ago I mentioned in a blog post about a townhouse community in Alexandria in which houses were selling for almost 600K in late Summer '05, and by Summer '06 were selling in the low 500s. Now, there are three houses for sale in that community between $480 and $490 (e.g., AX6226738, if you are interested) and they are just sitting there. These houses were bought at a previous market trough around 1992 for the low $200s, and the appreciation over fourteen years is starting to look much more reasonable.

(2) Owners of single-family houses seem especially reluctant to reduce their prices. Before we accepted the Brooklyn visit last Spring, we started looking for rentals. There was very little available. Now, there are many, many houses available, as sellers refuse to drop their prices to the going market rate and instead decide to rent them out. Many houses are renting for sums well below the carrying costs for a new owner (not taking appreciation or depreciation of value into account). For example, there is one house that is for sale on Old Dominion Road in Arlington for $750,000, but isfor rent for $2,800 a month. It strikes me that from a purely economic point of view it would pay the owners to drop their price by even $100K and sell the place, rather than get $2,800 a month in rent, but

(3) owners seem to have certain "red lines" that they won't cross as far as pricing goes. One red line is that owners are extremely reluctant to sell their houses for below the property tax assessment. The areas we are interested in do "full value" assessments. These are traditionally a bit below market value, especially in a rising market, and 2006 assessments are based primarily on prices from the Summer of 2005. The Summer of 2005 was the peak of the market, so even with conservative assessments houses many houses should be selling for somewhat below those assessments; and some of them are. But for the most part, if you follow "reduced price" listings, the reductions tend to stop when the price is selling just above the county assessed value. This happens so often that I can't believe it's a mere coincidence, but more likely reflects an emotional judgment by the sellers that they are not going to sell the house for less than it's "worth," as proven by the county assessment. Another red line is that sellers who bought in 2005 will, with rare exceptions, refuse to list the house for less than the price they paid plus about 6%, ensuring that they will more or less break even on the deal. Of course, this only works if the price will actually sell at that price, and it's a rare house in No. Va. (that hasn't been renovated in the meantime) that is worth 6% more than it was in '05. In sum, consistent with the economic literature, loss aversion is quite strong, even when the "loss" is solely on paper, as with long time owners who would rather rent for relative peanuts than sell their house for "only" 2+ times what it was worth six years ago.

	[David Bernstein, November 15, 2006 at 2:45pm] Trackbacks Housing Market "Stickiness": I've continued to follow the Northern Virginia real estate market, as my wife an I are moving back to the area in January after spending two semesters visiting at University of Michigan Law School, and one at Brooklyn Law School. At this point, we're hoping to rent a house or townhouse near the metro in the Ballston/Clarendon area (leads would be welcome!), but I've been watching the sale market as well. Some observations: (1) Townhouses are coming down in price much faster than are single family houses. A few months ago I mentioned in a blog post about a townhouse community in Alexandria in which houses were selling for almost 600K in late Summer '05, and by Summer '06 were selling in the low 500s. Now, there are three houses for sale in that community between $480 and $490 (e.g., AX6226738, if you are interested) and they are just sitting there. These houses were bought at a previous market trough around 1992 for the low $200s, and the appreciation over fourteen years is starting to look much more reasonable. (2) Owners of single-family houses seem especially reluctant to reduce their prices. Before we accepted the Brooklyn visit last Spring, we started looking for rentals. There was very little available. Now, there are many, many houses available, as sellers refuse to drop their prices to the going market rate and instead decide to rent them out. Many houses are renting for sums well below the carrying costs for a new owner (not taking appreciation or depreciation of value into account). For example, there is one house that is for sale on Old Dominion Road in Arlington for $750,000, but isfor rent for $2,800 a month. It strikes me that from a purely economic point of view it would pay the owners to drop their price by even $100K and sell the place, rather than get $2,800 a month in rent, but (3) owners seem to have certain "red lines" that they won't cross as far as pricing goes. One red line is that owners are extremely reluctant to sell their houses for below the property tax assessment. The areas we are interested in do "full value" assessments. These are traditionally a bit below market value, especially in a rising market, and 2006 assessments are based primarily on prices from the Summer of 2005. The Summer of 2005 was the peak of the market, so even with conservative assessments houses many houses should be selling for somewhat below those assessments; and some of them are. But for the most part, if you follow "reduced price" listings, the reductions tend to stop when the price is selling just above the county assessed value. This happens so often that I can't believe it's a mere coincidence, but more likely reflects an emotional judgment by the sellers that they are not going to sell the house for less than it's "worth," as proven by the county assessment. Another red line is that sellers who bought in 2005 will, with rare exceptions, refuse to list the house for less than the price they paid plus about 6%, ensuring that they will more or less break even on the deal. Of course, this only works if the price will actually sell at that price, and it's a rare house in No. Va. (that hasn't been renovated in the meantime) that is worth 6% more than it was in '05. In sum, consistent with the economic literature, loss aversion is quite strong, even when the "loss" is solely on paper, as with long time owners who would rather rent for relative peanuts than sell their house for "only" 2+ times what it was worth six years ago.