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Greed, denial and the housing bubble

Sat 23 Sep 2006, 10:21 AM

by Ben Langhinrichs
Having bought one house and sold the previous this year, I have been particularly watching the inevitable bursting of the housing bubble.  In Cleveland, there was never much bubble, and not a heck of a lot to burst, so it has been a less dramatic event than elsewhere, but I still know people who have had their houses on the market for a year or more without much interest.  While I have no great insight into the rise or fall of the housing market, I have noticed two aspects which are difficult to ignore, the role greed and denial seem to play in warping people's impressions.

Now, greed and denial are a strong words perhaps, but my Dad is a minister, and you learn all kinds of good, moralistic, guilt-inducing ways of describing things from ministers.  So, it has been interesting to watch a series of articles that have shown up on CNN Money, because while the authors never say anything about greed or denial explicitly, it is easy to read between the lines in these stories.  In this latest article, Les Christie, writes about a family in Orlando who have been trying with no success to sell their home so they can buy a bigger one with a pool.

The stage is set describing the possibly bubbling market, and the attitude of the couple described:
"It was a foregone conclusion that we would sell it very quickly," says Young. "There were still bidding wars going on around Orlando."

After all, home prices were supposedly growing in the neighborhood of 20 percent a year. But what the top-line statistics masked was that a slowdown was already underway - from the fourth quarter of 2005 to the first quarter of 2006, the median home price in Orlando fell 0.5 percent...
Now is where I find the story interesting.  Here are the details summarized from the story:

1) The couple bought the house on the last day of 2002 for $167,000.
2) They made a number of internal improvements, but no major kitchen renovation or anything, plus added a Koi pond in the backyard.
3) They put the house on sale in March for $402,000 using a flat rate $99 listing service and for sale by owner, but nobody showed any interest.

Now, before I go on, can you immediately see a couple of problems here?  First, even if they believed that "neighborhood of 20 percent", they had had the house for three years and three months and put it on the market for almost two and a half times what they paid for it.  Even a generous acceptance of the 20% would make it a stretch at $300,000.  A sure hint of greed there, even if one were completely oblivious to the warning signs in the market.  Second, the couple trying to sell a house for almost two and a half times what they bought it less than four years later, and they want to do it "on the cheap", thinking it would practically sell itself and they wouldn't even have to pay a realtor fee.  Anyway, to go on...

4) After "weeks of no action", they hired a realtor, who re-priced the house at $369,000, then later to $349,000.
5) Since March, six months now, they have had two people look at the house.  Two people in total through several open houses.
6) The house they want to buy is supposed to close in October for $562,000.
7) They want to move to a bigger house because "We're planning on starting a family someday" and "We wanted a bigger home - with a pool." 

OK, so here is a bit more information.  Six months into trying to sell a house, they have come down to only making 25% markup per year, despite the growth market in its heyday being in "the neighborhood of 20 percent" and despite having had only two people look at the house.  Wouldn't it make more sense to at least price it where the market might have given them if the bubble were still unburst, at say $288,000?  That would still give them 20% growth for three years, which is pretty darn good returns for a house you have lived in all that time.  On top of that, if we want to be a bit moralistic, how about settling in and enjoying a nice house for a bit longer and not moving to a McMansion when you don't even have kids?  How about putting a small pool into the backyard with, or instead of, a Koi pond that nobody else might want?

Was the article written by an author who truly felt sorry for these people?  It is, after all, called "Help! Home for sale - Young and Ballanco".  On the other hand, it is hard to not look at the numbers and wonder if the author wasn't poking fun at the couple, whose greed and denial (yup, there are those judgemental terms again) seem to prevent them from looking at reality and admitting they got carried away.  It seems likely that they are about to learn a hard financial lesson and take the loss of the $28,000 deposit on the new house... but don't count on it.  My bet is they go ahead and close on the new house, probably not considering that it, too, is way overpriced, and go head over heels in debt with an expectation that somebody has to buy their old house because, well, because they want it to happen.  Running into a brick wall doesn't always teach people anything, even if we wish it would.

Copyright 2006 Genii Software Ltd.

What has been said:

494.1. Duffbert
(09/23/2006 08:41 AM)

Very nice analysis, Ben...

494.2. Ben Langhinrichs
(09/23/2006 09:29 AM)

Thanks, Tom. You, more than most, have experienced the fantasy of "paper profits" in the wake of Enron. The one part I didn't really include was how badly overpriced the new house they were buying probably is, as I don't have any facts to back it up.

494.3. Duffbert
(09/23/2006 07:33 PM)

I can imagine that most readers of that story would simply say "oh no, the bubble's bursting" without doing the simple math to see that it's the seller who's bursting, not the market...