This blog contains posts and comments written by students in Dr. Tufte's economics classes at Southern Utah University.
3/26/2008
Another Housing Issue
According to this article, the nationwide prices of homes are about 10 percent to high. Why are they so high amid plummeting home sales a falling home values? In Economics we know that if there is a decrease in demand, the demand curve shifts to the left resulting in a lower price supplied. Knowing this, why are housing prices remaining stable? It seems as though people are putting too much value in their home. Overvaluing their home because of the emotional connection they link to their home. This, along with hopeful outcomes that this housing slump will end, could also be contributing to the problem. I believe people need to be realistic to what is happening. Either drop your price and sell or continue to reside in your home.
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5 comments:
I have to give the housing market a pat on the back for staying so positive during such a dreadful time. I believe they are keeping their prices up because they’re optimistic that the housing market will swing back in their favor. What needs to take place is they need to base their price on the fact that prices are too high instead of wishful thinking.
Homes are an emotional investment and its no wonder that people do not want to part with them for a loss. I think that those who are real homeowners, not speculators or sub-prime borrowers, realize that homes are a long-term investment and should be treated accordingly. Homes are not likely to perish or go out of style, so what is the rush?
I think Gavin captures the situation accurately, "What is the rush?" The answer to that question would probably give a good indication of when the housing market becomes reasonable again. If there is a "rush", such as an unmanageable mortgage, or other financial strain it SHOULD induce lower asking prices. This is assuming rational decision making though which, as this article points out, isn't always happening. In fact, during this unfolding drama there have been some indications that people are choosing to make payments to their credit cards rather than their mortgages as has historically been the case. All of this would really be no skin off my nose though, since rising foreclosures and fire-sales would put downward pressure on the housing market, unless of course some well-meaning organization steps in and provides a way to escape those consequences. This could allow housing prices to stabilize at a level higher than is justified by current wage and economic conditions, and I have to believe that would ultimately be much more harmful. After all home equity, whether due to contractually obligated payments or to rising property values, is the only saving mechanism many Americans are familiar with.
I think that this post was well written. I completely agree with the argument that homeowners over value their homes. Everybody believes that the good that they own is worth more that a comparable good someone else owns. It is human nature to believe that what you have is of greater worth than what someone else has.
I agree that people are too attached to their homes.
Having said that, I have real trouble with estimates showing that home prices are consistently too high.
If people do get emotional value out of their homes, and estimates consistently undervalue homes, then the estimates are probably missing something.
There are quite a few things that owners overestimate the value of: the music they own, the movies they own, the recipes they like, and so on.
It seems to me that this emotional overvaluation is actually understudied.
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