Where Fantasy Meets Reality

By Ylan Q. Mui
Washington Post Staff Writer
Saturday, October 11, 2008

There is a reason that every fairy tale involves a castle. The dream home plays a central role in our fantasies of finding true love and living happily ever after. Maybe that's one reason reality has become so disappointing.

Home prices continue to plummet and wipe out thousands of dollars in equity. Lenders are freezing up and locking out potential buyers. The government is spending $700 billion to bail out the nation's economy -- and there is no guarantee that it will work. This is not exactly the stuff of Disney movies.

The current crisis is a rude awakening after years of charmed prices and quick sales.

Sellers become depressed as their homes stagnate on the market. They get insulted when they receive lowball offers. Buyers feel entitled to a deal and fret about finding the bottom of the curve. The process has become so emotional on both sides that psychologists rank it on par with divorce and even death.

"In this particular climate, I think emotions are the key factor," said David Eigen, a California psychologist who has studied the housing market. "And the emotions are capital F-E-A-R."

I am scared. Over the six months that my husband and I have been house hunting, we have watched home values stumble more than the drunken frat boys outside his Adams Morgan condo. I am too chicken to even open my 401(k) statement. Questions that we thought we had answered -- like, how much we can really afford -- now seem up for grabs.

The problem with fear is that it makes us act irrationally, setting the stage for potentially explosive situations. For sellers, the first and often largest stumbling block is the price at which they list the house. Many recall what their homes could have fetched just three years ago. Even worse, some bought at that price and now face selling at a loss.

That's when what behavioral economist Rom Brafman calls "loss aversion" begins to kick in. Brafman, a co-author of "Sway: The Irresistible Pull of Irrational Behavior," explains the loss-aversion theory like this: The pain associated with a loss is greater in intensity than the joy derived from an equivalent gain.

For example, he said, if the price of eggs were to drop a bit, people would probably make a few more omelets. However, if the price of eggs increased by the same amount, shoppers would cut back their egg consumption more drastically.

In a 2001 study of the Boston housing market, economists David Genesove and Christopher Mayer found that sellers who expected a loss on their condominiums set asking prices higher than did their competitors. They were willing to let their homes languish on the market for longer in hopes of mitigating their losses. That created a stagnant supply of homes that only perpetuated the downturn -- and frustrated buyers.

Alicia Caine of Hyattsville discovered that phenomenon the hard way recently. She moved to the Washington area about 10 months ago and has been hunting for a home in the $300,000 range in Prince George's County.

About two months ago, Caine found a promising prospect in Riverdale. It had been on the market for a while, and the price had dropped accordingly. She bid $5,000 below the list price and asked for help with closing costs. She was soundly rebuffed. Caine then upped the ante to $1,000 above asking, though she still requested some closing help.

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