Mental Barrier to Price Drops?

Senna

Just looking for opinions, is there a mental barrier that many seller will reach, price wise, leading to seller dropping their prices till that mental barrier price is reached, possible staying at that price for longer and then continuing to decrease.
For example, a house that was selling for 350k, their mental barrier will be 200k.
A house that was selling for 200k, their barrier is 100k.

In my own area i've seen many houses drop, and drop quite quickly, but their seems to be a stumbling block once they get to a milestone. (100k,200k,300k,400k) Not saying these prices wont be reduced further, they will, as no one is buying, but it seems like many seller that were dropping and dropping regularly are sticking (temporarily) just above these milestones.

A couple of houses in particular near me were steadily reducing to around 210-220k in Jan/feb but haven't dropped any further. Are they waiting for one to make the drop below 200k and then they wait and see if it sells?

astrofool

Depends if the house is vacant, or if the seller is selling to move.

If moving, then the barrier will be what they are moving to.

If vacant, then the barrier is the minimum price that the owner(s) are willing to accept. In the case of inheritance of a property, this limit can also be set by the tax implications, or the cost to buy each other out.

For builders, it will be the minimum they need to stave off bankrupcy if they do sell it, for the bank that takes possession, they might be happy to sit on it for a few years and see what the market does, rather than have a fire sale, and reduce the value of their other secured assets.

Victor

Many people find it difficult to sell for less than the amount they bought the property for.

If, say, 5 years ago 100 properties were all bought by separate buyers for the same price in a then new development, you will find that as property prices drop, there will be a steady sale are each level until near the original purchase price. Then sales will stagnate and then once the first person sells for well under the original purchase price, you will have a flood. then there will be a certain core who will never sell until prices recover.

amacca

OP, Ive been reading a random walk down wall street and your post sort of reminds me of two opposing methods of predicting accurately the future courses of share prices and thus when to buy and sell, Technical and fundamental analysis.

Roughly speaking, in technical analysis people referred to as chartists study the movement and volume of trading for a clue to the future direction of a shares price. They believe that the market is 90% psychological and only 10% logical (based on the actual value, income earning capacity of the share/asset) Whereas in fundamental analysis, its practitioners believe the market is 90% logical and only 10% psychological.

Anyway, when the chartist studies his or her chart one of the things they believe is that joe public has a nasty habit of remembering what they paid for a share, eg: suppose a share sold for €10 for a long period of time during which a number of investors bought in and then suppose that share price drops to say €8, the chartist will then claim that joe public will be anxious to sell out their position in those shares when their price rises to €10 again and thus break even on the trade. This means that the price of €10 at which the shares sold initially becomes a resistance level, ie: a price above which the shares hover around but it takes a good bit of bullish momemntum to break through. A similar idea lies behind the notion of support levels, many investors that feel they missed the boat when the market fluctuated around a relatively low price will feel they missed the boat when prices rise and will buy in when the share price drops to original low level creating a level through which prices will not drop unless there is significant bearish momentum.

Now while a house for many people is not an investment and therefore the ideas above are not directly applicable I think there are similar forces at work when houses in a certain area all drop but only to a certain level. As previous poster said, I think its related to what they paid for it, almost everyone (except a lot of succesful investors) are loss averse and the fact that they get much more unhappy when they make a 10% loss than the happiness they experience when they make a 10% gain means that there is a natural support level around the price they paid for the house originally.

Having said that however I believe there is a significant amount of bearish momentum around at the moment and barring some sort of intervention its only a matter of time until these price levels are breached and just as psychological factors (confidence, fear of missing opportunity etc ect) caused the market to soar to ridiculous levels (houses priced a 50 times earnings etc) during the bubble years they will cause them to plummet to new lows over the coming years, (factors such as fear of the house value decreasing another 20% of its value next year, spouse losing their job, mortage papyments becoming unsustainable due to spectre of rising interest rates over the next 5 years, falling wages etc)

And when this is over (will take ages imo unless some sharp shock,imf intervention etc) I expect houses to reflect at least to a certain degree the value of the cash flow it is able to earn for the benfit of an investor. in otherwords, though it may take time I think true value or fundamentals will win out in the end over the psychological factors that ruled the market on the upswing and are ruling the market now on the downswing.

And before I get an avalanche of criticism I do realise that houses are not just pure investment vehicles and very different from equities but I still think that they have to reflect at least in part the cash flow they can generate meaning a house in a fantastic area in city with all mod cons close to amenities commanding a monthly rent of €2000 pm will be worth roughly 4 times more than a house in some provincial town commanding a rent of €500pm in the long run meaning that 3 bed semi ds dropping from €330k to €280k and remaining there (house im looking into at the moment) are not even close to their true value and despite what aversions or psychological factors may be at work at the moment will drop lower when other more powerful psychological factors come in to play (like panic) or when the market as a whole keeps sinking and the sellers are forced to sell for whatever reason.

Then after this probably slow, painful process during which ill continue to rent perhaps sensible prices and a certain amount of stabilityand a normal volume of trade will resume. (before we get bored/greedy and the next wave of irrationality begins)

mathie

I think the mental value in our estate is pretty much what was paid.

It's a new estate (4 years old) and most people would have paid 390K for 3-bed mid-terrace 4 years agoi.

Most are on the market for between 380K and 450K. Total delusion.

So what happens to estates like this where people can't take the negative equity hit?

No house get sold?

And will this be the case for most new estates? And by new I mean 5+ years old now. Basically wherever a sale results in negative equity.

The_Conductor

In financial markets (and in the housing market) there are what are known as support and resistance levels. When a price hits a resistance level (it can a psychological EUR100k (or whatever))- its sticky at or above this level- until events eventually drive it below this level to a pysychological support level (where buyers are happier to buy) (in this case below EUR100k).

Its all mind games of course- but there is a psychology involved. Why do you imagine someone will sell over 10 times more product to impulse purchasers at 99c a unit- that they will at EUR1.05 a unit- pure psychology- nothing else.....

Victor

mathie wrote: »

So what happens to estates like this where people can't take the negative equity hit?

No house get sold?

Yes, the problem with situations like this is that people are unwilling to sell below their price and volumes drop. Eventually someone sells for well below what everyone else wants, forming a new precedent, there will then be a flood of sales as people try to get (more than) the new price. Those that didn't sell are now stuck at the new price and may be even more unwilling to sell until it becomes a real crisis for them (the bank forces them to sell).

The_Conductor

mathie wrote: »

So what happens to estates like this where people can't take the negative equity hit?

They need to ask themselves- can they afford to *not* take the negative equity hit.

Lets face it- before we hit the bottom of this burst- there will be well over 500,000 dwellings in negative equity nationwide. Our housing market was considered to by overpriced by 20% in 2001 (by the OECD). Its entirely possible that a low point may very well be considerably below 2001 prices.....

MG

There are definitely mental stumbling blocks and as other posters have said, there seems to be a few of them
- purchase price/loan outstanding
- round numbers
- last selling price in the area
- irrationality
- seasonal/timing (i.e. drop just before the "selling season"

seem to be the main ones, seems to depend on the sellers circumstances.

The_Conductor

I actually snorted out loud- when I saw the "selling season" bit...... estate agents have been trotting this out every summer for the past 2 years- hoping that September heralds a whole new flock of sheep for them to fleece. I really don't know......

MG

smccarrick wrote: »

I actually snorted out loud- when I saw the "selling season" bit...... estate agents have been trotting this out every summer for the past 2 years- hoping that September heralds a whole new flock of sheep for them to fleece. I really don't know......

Yeah, estate agents are straw clutchers alright. However, I have noticed more price drops at certain times of the year in anticipation of the fabled selling season when buyers descend on estate agents and we read that "Viewings have definitely picked up inn the past week" so I do think it is one of the psychological barriers to price drops.

bobbiw

People will only sell for less than they paid if

a) They are being forclosed on
b) They are moving to a property that has had a similar drop and they are getting a "bargain"

If they dont have to sell then they can ride it out, despite their neighbours house selling they still dont have to move.

Rates are at an all time low and people can lock in a decent rate for 15 years.

People who bought in the last 5 years mostly fall into this bracket.

People who bought a place in 1980 for 25k are in a different boat and have more flexibility about what they can choose to do.

Thats why I have said all along, for widespread drops of 50% Ireland has got to go back to mega unemployment and most of the people who would be in the position to purchase based on the drop need to be out of work.

So its a catch 22 situation.

Senna

bobbiw wrote: »

Thats why I have said all along, for widespread drops of 50% Ireland has got to go back to mega unemployment and most of the people who would be in the position to purchase based on the drop need to be out of work.

So its a catch 22 situation.

I dont know what you class as mega unemployment, but whatever your definition of it is, its not far off if you think widespread 50% drops wont be achieve till it happens.


Just on this point, it seems to me like a lot of people think the market is dropping because of the recession or credit crunch. They may have sped it up a bit but the market stalled (and began to drop) in 2006, the recession was just a by-product make by the market stalling, not the other way around.
Its all tied together, but if today we had low unemployment and banks still giving 100% mortgages to whom ever wanted one, we would still have a falling market, all-be-it slower.

bobbiw

There are only two ways you are going to get a bargain.

1) The person bought a long time ago and hence has significant equity and has the desire to move to another property that has had a similar drop in price.

2) The home is repossesed by the lender and they are trying to get it off their books. (This can be a very long process, even when the home is vacant)

People are not going to sell their house for less than they paid for it. Pure and simple, not unless they have to.

If they have to through loss of work, it does not mean that their neigbours house is worth that amount.

Your property is worth what you can sell it for, nothing else matters.

So the guy who lost his job, sells for 300k when he paid 320k. That doesnt mean the neighbour has to accept 300k unless they have to.


So for there to widespread falls in prices well you need an economic mess where people en masse can not afford their homes.




The ironic thing is, the majority of people who could not afford to buy because prices were too high, are most likely the people on lower incomes who are more likely to loose their jobs in the scenario that would cause this crash.

So its not going to be Mr 30k a year swooping in a getting a 3bed, he will be a long time on the dole before that becomes a reality.

Senna

bobbiw wrote: »

There are only two ways you are going to get a bargain.

Well, you also have to include developers, investors, speculators too.

But i agree what your saying, if you want a bargain now, you'll be hard pushed. But people cant just sit on houses forever, whither they paid more or not, some will and some will sit with their house on daft at the 2006 price till 2020 if need be, but with a huge over supply and huge outside forces like rising unemployment, increased interest rates, property tax, income tax increases etc, the more people that can afford to sit and wait grows smaller and smaller.

I would say if we take out all the people that can wait it out and all the people that are way behind the price drop curve, then there will still be more than enough houses on sale in Ireland to service a stable property market (whenever that begins) for maybe 5+ years. Investor holdings are huge and as prices continue to drop, so does rents, i dont think we've seen even the beginning for large investors selling up as, soon enough, better returns can be got elsewhere.

mathie

bobbiw wrote: »

People are not going to sell their house for less than they paid for it. Pure and simple, not unless they have to.

It's not that 'pure and simple'.

What about the FTB who bought with the knowledge that they'd trade up in a few years?
They could sell now and take a negative equity hit but be happy knowing that their 'dream house' that once cost 800K is now 500K.

ionapaul

bobbiw - Prices are set at the margin; do you know what this means? If my neighbour sells his home for €250k, and I've an identical home I paid €350k for, what is the current market value of my home? I can say it's worth €350k as much as I want, feck it, I can advertise it for sales on Daft at €350k - what is its market value do you think, closer to €350k or €250k?

My friend bought BOI shares at €12 a few years ago - he's laughing at all these people selling for sub €2 - he doesn't need the money, if you ask him, his shares are worth €12...at least!

P.S. Some sectors of the residential housing market are closing in on 50% falls from peak already - you may need to move your doomsday % out to 75% or 80%!

pisslips

What I really want to know is will the banks repossess houses(even more property and sell them) or will the market be even more of a sham with banks and the govenrment colluding to support reasonable prices.

Realistically if the above was not a possibility, the shrewd home owner would sell their house now for less than what they paid, rent for a year or two and then buy again. Anticipating the market is only possible if the participants are rational. Trying to predict irrational behaviour is almost impossible.
But how can you be sure the government isn't going to try and influence the market more, preventing or slowing it from reaching equilibrium?

If the government promised NOT to help people who can't afford their morgage repayments, it would be a healthier situation imo.

I think people almost expect to be saved if the worst happens. The don't accept the reality and use it as an opportunity to make money.

bobbiw

Just to help the misinformed among you.

NE is when you owe more on the house than you could sell it for.

It is not selling for less than you paid.

When you sell the house, the entire loan needs to be repaid, you cant take the loan with you to you new house that is somewhat reduced in price.

As for the person who said that if the neighbour sells for 250 then your house is 250 that is crap.

A house is worth what someone will pay. Not what someone has paid.

It is not like shares, which have a defined worth.

Seriously there are points of stupidity, but if you are in a home you can say I am only going to sell for 250 when others are selling for 230, because there is the possibility that people will just want your place.

Location is a big part of it, its not like someone in jobstown is going to get 500k for their 1 bed.

But someone in a decent part of (not overdeveloped) south dublin could say they wanted 10% more or they are not selling.

But you all know this already.

geem

If your neighbour sells their 400k house which is identical to yours for 300k it makes it much harder for you to achieve 400k. I'm not saying impossible - you might find an idiot who doesn't search asking prices before making an offer however it is more likely that you won't get your 400k.
A house is worth what buyers think it is worth. You can ask for whatever you want but that will affect your chances of selling.
All it takes is for a couple of your neighbours to lose their jobs, be unable to afford their mortgage and decide to sell. Depending on how desperately they need to sell they will chase the market down until they find buyers - if the only offers they get are 400k that will devalue all the similar houses on the estate.

professore

bobbiw wrote: »

It is not like shares, which have a defined worth.

???? No they don't. They have some notional value at the start and then are worth what people are prepared to pay for them just like houses.

ntlbell

bobbiw wrote: »

Just to help the misinformed among you.

NE is when you owe more on the house than you could sell it for.

It is not selling for less than you paid.

When you sell the house, the entire loan needs to be repaid, you cant take the loan with you to you new house that is somewhat reduced in price.

As for the person who said that if the neighbour sells for 250 then your house is 250 that is crap.

A house is worth what someone will pay. Not what someone has paid.

It is not like shares, which have a defined worth.

Seriously there are points of stupidity, but if you are in a home you can say I am only going to sell for 250 when others are selling for 230, because there is the possibility that people will just want your place.

Location is a big part of it, its not like someone in jobstown is going to get 500k for their 1 bed.

But someone in a decent part of (not overdeveloped) south dublin could say they wanted 10% more or they are not selling.

But you all know this already.

If houses are selling in an area for 250k you go into the market while they're still selling at 250k can you explain how your house is worth 350k? can you explain how you will get 300 never mind 350 if a simialr house in a simlar location can be bought for 250k?

I'm starting to get tired of your complete and utter nonsensical attitude.

You get pulled up in every thread, you go missing for a week don't answer anyone who pulls you up, into a new thread and get pulled up again.

your talking via the bum hole.

bobbiw

ntlbell wrote: »

If houses are selling in an area for 250k you go into the market while they're still selling at 250k can you explain how your house is worth 350k? can you explain how you will get 300 never mind 350 if a simialr house in a simlar location can be bought for 250k?

I'm starting to get tired of your complete and utter nonsensical attitude.

You get pulled up in every thread, you go missing for a week don't answer anyone who pulls you up, into a new thread and get pulled up again.

your talking via the bum hole.

Well Mr NTL, I am actually quite busy so I can go missing for a week. Also I dont get emails every time someone replies to a post so I have to have little concentrated moments of activity.

I am not saying that if the house next door is 250 and I am selling for 350 that I will get that.

I am saying that in desireable areas with low density housing that you are not limited for the lower price.

So if someone who has recently become unemployed sells for 250, and I want to sell for 300.

Some guy comes buy and says I will offer 250, I can say no.

Now he can either be on his way.

Or he can up the offer.

He cant say, wait a minute thats not fair I want this house, the other guy got one for 250, thats not fair.

It is all about density.

If you have a nice apartment on northumberland road, you are likely to be in a better position to defend you price than is you are in a complex in stepaside.

ntlbell

bobbiw wrote: »

Well Mr NTL, I am actually quite busy so I can go missing for a week. Also I dont get emails every time someone replies to a post so I have to have little concentrated moments of activity.

I am not saying that if the house next door is 250 and I am selling for 350 that I will get that.

I am saying that in desireable areas with low density housing that you are not limited for the lower price.

So if someone who has recently become unemployed sells for 250, and I want to sell for 300.

Some guy comes buy and says I will offer 250, I can say no.

Now he can either be on his way.

Or he can up the offer.

He cant say, wait a minute thats not fair I want this house, the other guy got one for 250, thats not fair.

It is all about density.

If you have a nice apartment on northumberland road, you are likely to be in a better position to defend you price than is you are in a complex in stepaside.

you can't "defend" the worth of the house you have NO control over it at all.

you have control over selling it or not but not the price/worth.

the price/worth is set by the market no one else.

but saying "no i'm not selling at 250k" doesn't change the fact that's what it's worth to the market.

by saying "no" doesn't make the house suddenly worth 350k

bobbiw

ntlbell wrote: »

you can't "defend" the worth of the house you have NO control over it at all.

you have control over selling it or not but not the price/worth.

the price/worth is set by the market no one else.

but saying "no i'm not selling at 250k" doesn't change the fact that's what it's worth to the market.

by saying "no" doesn't make the house suddenly worth 350k

I will have to stop waseing my time, but, a home is worth what someone will pay for it.

That is the only factor that matters.

I see duplex home in West dublin selling for 310, when there are townhomes with a garden for 240 in the same estate.

ntlbell

bobbiw wrote: »

I will have to stop waseing my time, but, a home is worth what someone will pay for it.

That is the only factor that matters.

I see duplex home in West dublin selling for 310, when there are townhomes with a garden for 240 in the same estate.

how do you know what they're selling for?

do you have some sale figures we can look at?

if not, what makes you think they're selling at 310?

in fact if you're saying "no" in the current market your not defending anything you're more than likely losing a lot of money as the market drops by x% a month.

geem

bobbiw wrote: »

I will have to stop waseing my time, but, a home is worth what someone will pay for it.

That is the only factor that matters.

I see duplex home in West dublin selling for 310, when there are townhomes with a garden for 240 in the same estate.

Selling is not the same as sold.

bobbiw

ntlbell wrote: »

how do you know what they're selling for?

do you have some sale figures we can look at?

if not, what makes you think they're selling at 310?

in fact if you're saying "no" in the current market your not defending anything you're more than likely losing a lot of money as the market drops by x% a month.

Well its easy to see the sales price, right?

And you dont loose anything unless you sell.

Its only mental, my home could be worth 2m but it means nothing because its just a home, it could be 500k but it means nothing.

It only means something when I sell it.

You can look at it and say, dear me I bought this place for 350k and now its worth 250k but it is irelevant unless you are trying to sell.

Sure in hindsight you can say that you could of got it cheaper but it was the same when prices are going up.

ntlbell

bobbiw wrote: »

Well its easy to see the sales price, right?

And you dont loose anything unless you sell.

Its only mental, my home could be worth 2m but it means nothing because its just a home, it could be 500k but it means nothing.

It only means something when I sell it.

You can look at it and say, dear me I bought this place for 350k and now its worth 250k but it is irelevant unless you are trying to sell.

Sure in hindsight you can say that you could of got it cheaper but it was the same when prices are going up.

asking prices != sold

what good is a house you need to be sold at x on the market at x if no one will buy it at x?

again your talking through your arse.

you don't know what they're being "sold" at you have no idea of what the sale agreed prices were on above

I saw a house last week it was on at 370k

before the EA opened the door he was talking about 320

by the time were leaving he was mentioning figures like 290 and I hadn't even started haggling yet.

right the owner didn't lose 80k by the EA talking, but a house you want to sell is no good "for sale" you want it sold.

stop talking utter rubbish.

The_Conductor

It is relevant- if there is a cost associated with owning it- like

1. Mortgage interest cost
2. Annual management charge
3. Ongoing maintenance and insurance
4. PRTB registration and other fees

etc.

Ongoing ownership costs north of 10k per annum- are actually far from unusual. This has to be a factor- particularly in the current climate.

bobbiw

ntlbell wrote: »

asking prices != sold

what good is a house you need to be sold at x on the market at x if no one will buy it at x?

again your talking through your arse.

you don't know what they're being "sold" at you have no idea of what the sale agreed prices were on above

I saw a house last week it was on at 370k

before the EA opened the door he was talking about 320

by the time were leaving he was mentioning figures like 290 and I hadn't even started haggling yet.

right the owner didn't lose 80k by the EA talking, but a house you want to sell is no good "for sale" you want it sold.

stop talking utter rubbish.

Well the estate agent shouldnt have done that. I guess they are looking for an offer. Most are trying to keep their Jobs.

I might sell my home, I am going to put it up for 20% more than one estate agent said I would get and I will see what happens.

If it sells, so be it, if not I will stay.

We will see.