Sin is in part self-deception.  People think “since I haven’t sold at a loss I do not have a loss.”  This is true in areas other than housing as well.

There are, perhaps, other factors at work.

Real estate is generally an “illiquid” market, meaning it’s not easy to buy (or sell), and the assets don’t turn over very quickly. The assets are also highly non-standard, all of which means that the process of price-discovery is hindered substantially. The same could be said of shares in privately-held companies, or even very thinly-traded public corporations.

In such environments it isn’t surprising that people will hold out for “their” price, and they sometimes get it if patient enough.

An additional factor at play in many American real estate markets is that if people are underwater on their mortgage they may simply be unable to write out a $60,000 check to sell their house.

Kendall - The field of behavioral finance is fascinating. During graduate business school, we studied cases/examples in which individuals would turn down options with identical expected values because of “irrational” factors such as fearing potential loss more than valuing potential gain. Visibility is another factor: selling a house at loss is very visible, measurable, etc; whereas holding it means a loss isn’t realized, even if the real test of value (what you can sell for) says it has lost value.  And in this situation, the owner is ignoring a host of other factors: prices may drop further; it’s not free to continuing owning a particular house (interest, taxes, etc); exogenous factors shift such as new construction, school zones, etc. Another example is people driving out of their way to buy cheaper gas. Say you have an SUV that has a 15 gallon tank and gets 20 miles to the gallon.  Station A sells for $3.30, Station B sells for $3.10, a whopping 6% cheaper. Filling up at Station A costs 49.50, at Station B it’s 46.50, so you save $3. But every mile you drive out of the way to Station B costs you just over $0.15. Even so, I know people who invest time in (a) finding cheaper gas and (b) going to get it. But many of these same people have no problem spending $3 on coffee at Starbucks and wouldn’t hesitate to spend an extra $3 in the afternoon if their energy was low. In one setting, saving $3 feels like a visible victory. In other, it’s not meaningful.

I suspect some of it is ego, or sin; some of it is hardwiring. Threats and pleasures trigger different areas of the brain. Fascinating stuff.

This problem also has a wider and deeper dimension with significant political implications.

Nasty financial industry surprises—meaning humongous writedowns—will continue for some time because there’s little if any market for all the third-order real estate paper they once thought was a good leveraged “investment.”

Until all that toxic waste can be “marked to market” (realistically repriced) financial institutions’ earnings and balance sheets are nearly meaningless and banks will understandably remain reluctant to lend even to each other because nobody knows which ones might blow up in their faces.

The risk of a devastating credit freeze-up remains substantial—check out the LIBOR spread—and the real risk is to small businesses such as ours ... on many levels.

Thus government and central bank intervention is really a means of protecting small businesses and families, but it is already being demagogued by certain politicians wishing to parlay class envy and fear into their personal political success.

Therein lies the most egregious sin.

Sorry, it’s not the “defeat” that will bruise my ego.  it’s the $15,000 I’ll be out of pocket, that will bruise my summer vacations for the next 3 years.

Bart, although I do blieve that resentment is a normal part of politics, I think that what we are seeing are lots of banks who are going to be taught that greed doesn’t have consequences, and that they don’t need to play by the same rules.  Banks may insist that they regulate themselves (for they do not really sin), but what we have found is that people see easy profit and get greedy.  I think citizens have the duty to tax greed - as a disincentive.  We want an economy that rewards industry, but does not reward bad behavior. 

Today there was an article in Slate, about the culture of the rich, questioning most of the assumptions that we have about their work ethic and adherence toward normative values.

John Wilkins, you hit the nail on the head.  But we need to include the highly UNregulated ‘banks’ which have sprung up in the past 20 years, e.g., hedge funds, and the ‘investment bank’ industry.  They all acted like banks, but were not under regulation.  Result:  Love of money took over, and now the US taxpayers will pick up the smelly pieces.

Love of money + instant gratification = bruised ego and an unpleasant dose of reality.

There are a lot of pieces to this dilemma. One is that only a few years ago Democrats (and in this case it was only one party) were making a huge fuss about banks’ unwillingness to lend money to borderline borrowers who “deserve a chance.”

Their refusal to write mortgages in neighborhoods with known high default rates was branded as “racist,” and they were accused of greed for NOT lending.

Now they’re being accused of greed because after yielding to that pressure and lending to unworthy borrowers they actually expect them to make their payments on a more or less regular basis.

If there’s a greed problem in this all it’s at least partly structural. Banks, quasi-banks and all manner of bucket-shops happily pocketed their loan origination fees and then dumped the paper off into the secondary market, ditching all risk.

Another part of the greed is that plenty of borrowers out-and-out lied about their income. I also fault the banks (see above) for not requiring three years of income tax returns, plus a Form 4509 requesting the IRS to send a copy of those returns directly to the bank.

But that’s what got them accused of greed and racism in the first place. Long-story-short: certain vociferous politicians will, for their own purposes, always accuse banks and other corporations of “greed.” See Psalm 146:2

RE: “One is that only a few years ago Democrats (and in this case it was only one party) were making a huge fuss about banks’ unwillingness to lend money to borderline borrowers who “deserve a chance.”

Oh you got that right, Bart Hall.  Thanks for saying that.

True, Bart.  And people will always assume the poor are responsible for their own poverty.  Most of the poor people I know aren’t resentful.  They just want an opportunity and wonder where all the opportunities are.

But if we must make a choice between the tenant and landlord, it may be just to choose the tenant.

A similar effect exists in the market for love.  Too many people spend too much time dating the wrong person and later marry them because quitting after a long relationship requires admitting error and taking a loss.  Most people have a hard time with that.

I am very much in favor of holding the sub rate lenders at fault in this mess as I sadly hold the ones who borrowed the money unwisely.  I know of one young couple who can’t sell their house because the current market price of the dwelling is so low that over $6,000 will still have to be paid by the owners before they even reach a break-even status if and when they do sell the house.