For Sale, By the Owner's Ego

Little of this research has been applied directly to real estate, but neuroeconomists say the principles would logically apply to housing, too. For example, much work has been done on the concept of "loss aversion," which shows that people tend to deny reality when something they own, such as stock, declines in value. They will keep holding that stock, confident the price will rise again if they wait long enough.

They do the same with their homes, maintaining the asking price even at a level that makes no sense, economists said. Similarly, home sellers become attached to the prices their neighbors received at the top of the market rather than current prices, and they become reluctant to sell unless they get that higher price.

"It's classic loss aversion," said Christopher J. Mayer, director of the Paul Milstein Center for Real Estate at Columbia Business School in New York. "You could do it, but you don't want to. You don't want to realize the loss. It leads to housing markets that don't function very well. You've got a lot of houses on the market and they aren't selling."

Mayer said that people allow their wishful thinking to overcome realistic perceptions because they don't want to view themselves as having made a mistake.

"People should recognize that what they do won't change the housing market," he said. "They could wish their house could sell for more money but it doesn't mean it will do so."

David Laibson, who teaches psychology and economics at Harvard University, said a common error people make is believing that homes can't drop in value below what they paid for them, and, in particular, that they can't fall below their mortgage amounts.

"There seems to be a psychological resistance to taking losses on the sale of a house," Laibson said. "People think they'll make money on it. . . . That logic worked for a long time, and now anyone who bet on that logic is being burned."

Generally speaking, according to the evolving body of neuroeconomic research, people logically make rather simple dollars-and-cents analyses when they buy small items, but become more emotional around large decisions, particularly those that affect their futures.

"For decisions we make frequently, like buying eggs or which route to take driving to work, we're pretty rational," Laibson said. In areas that involve choices people make rarely, they have to extrapolate based on what they have heard or rely on limited previous experience. When people sell a house, they may have done so only once or twice before, he said. That means they may experience anguish similar to what people feel when they decide whom to marry or whether and when to retire.

Some sellers are able to be more dispassionate. Six months ago, mortgage broker Steven Waller of Stephens City, Va., bought three dilapidated townhouses in nearby Front Royal for about $100,000 each. They had been used as rentals; he spent about $20,000 refurbishing each. Other similar units are for sale by their owners, who live in them, for $165,000 to $200,000, but Waller is flipping his properties by pricing them at $149,000 each. He said they have been appraised at about $180,000.

"I'm making a profit, that's all that matters," Waller said. "I have no emotional attachment to it. You can stay ahead of the game if you price at where they will sell rather than sit on them for a year."

Fairfax resident Sharon Stapleton, in contrast, knew she had a "major ego involvement" when her family set out to sell their vacation home on Lake George in upstate New York. They held out for nine months, and three years ago, they finally got their price. Recently, however, she sought to do the same with the home she owns in Fairfax County. Stapleton has wondered if it is overpriced, but she believes the house, on a forested lot, is unique in a highly urbanized area, and so she has kept the price at $795,000. She's wondering now if she has been wise.