Why Some Home Sellers Are More Delusional Than Others

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Everybody knows that homes on the market are not all priced the same way. Some buyers want to sell in a hurry, so they set their price aggressively low. Others focus on maximizing the return on their housing investment, so they price high and settle in to wait for a buyer who loves the home enough to pay up.

As a buyer, of course, you’d love to know which kind of seller you’re dealing with, right? Well, it turns out you can make a fairly good guess based on when the seller bought the house.

We analyzed over a million homes currently for sale on Zillow, compared the listing price to an estimate of the current market value, and examined how the difference between those two numbers relates to when each home was purchased. We found that homes that had been last purchased prior to 2005 are now listed about 10% higher than their estimated market value. Homes last purchased between 2005 and mid-2007 – the period right around the national peak in home values – are priced lower, just 6.4% above their estimated market value.

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Strikingly, however, homes last purchased after 2007 are priced much higher relative to market value than homes bought previously. And the premium of listing price relative to market value reaches its maximum – 22.7% – for homes bought in 2009.

How to explain this pattern? We suspect that homeowners who bought around the market peak are painfully aware of having bought at the height of the market and have no real hope of getting back what they paid upon re-sale. Homeowners who bought after the market peak, on the other hand, may be patting themselves on the back a bit too much for having bought after prices began to correct — not realizing just how much prices have continued to fall even after their purchase.

To test this hypothesis, we surveyed sellers about the factors they considered when setting their sale price. Possible responses included comparable home sale prices, the amount owed on their mortgages, and consultation with a real estate agent. While only 4% of sellers who bought their home before 2002 indicated that their primary factor in pricing their house was their original purchase price, fully 17% of sellers who purchased after 2006 identified this as a primary factor.

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Two underlying impulses appear to lead sellers who purchased after 2006 to over-price their homes. First, there’s classic loss aversion: Sellers who purchased more recently are loath to sell for a loss. Second, they may be unaware that home values have declined further since their home purchase – a mistake that leads them to view their purchase price as a useful criterion in setting their selling price.

The bottom line for sellers is that the market doesn’t care when you bought your home or what you paid for it. Buyers, on the other hand – at least those adept at the psychology of negotiations — can probably use this information to their advantage.

Dr. Stan Humphries is Chief Economist of Zillow where he is responsible for economic analysis and consumer-facing analytics. He helped create the algorithms for the Zestimate home value and the Zillow Home Value Index (ZHVI) and oversees the production of Zillow housing market metrics and economic research into current market conditions.