Home sales can be as emotional as divorce

WASHINGTON — There is a reason that so many fairy tales involve 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 plummet and wipe out thousands of dollars in equity. Lenders freeze up and lock 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."

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, Md., discovered that phenomenon the hard way recently. She has been hunting for a home in the $300,000 range and found a promising prospect. 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.

Still no deal.

"If you're not willing to take the asking price, then you shouldn't have dropped it that low," Caine said. "I felt like I was being jerked around."

She checked on the house later and found the seller had raised the asking price. The house has since gone off the market, and Caine has become so worried about the state of the economy that she is no longer looking to move.

Kathryn Higgins, a New York real-estate agent who has a master's degree in psychology, said sellers who insist on higher prices for their homes generally take a month to shed the rose-colored glasses.

They start wondering why more people haven't stopped by their open houses and why the home is still sitting on the market. That's when Higgins sits them down for a reality check.

"They tend to live in the past, not in the moment," she said. "You can talk until you're blue in the face. ... They filter the information, and you have to also be able to confront that."

But sellers are not the only ones with outsize expectations. Higgins said buyers have become self-righteous during economic doldrums.

Those who have the cash for down payments and are preapproved for loans feel that they are "part of a privileged class," she said. She cautioned buyers against becoming too demanding.

Sometimes, buyers can become so intent on getting a deal that they lose sight of the true goal: finding a home.

Instead, house hunting becomes more like gambling, Brafman said. Agents tell him that their clients are giddy with delight, looking at the falling home prices as a chance to make up for all the missed opportunities of the past.

They begin to dismiss important questions such as how much house they can afford and whether the investment makes sense. Rather, they wonder: How do I know this is really the bottom? What if this is not the absolute lowest price? Will my house be worth more money six months from now than it is today?

"The adrenaline is flowing; the hunt is on," Brafman said.

"Buyers should take a long-term view and not think of the housing market as a casino."

And it's not always a lot of fun, either.

"People have a preconceived notion that it's like walking into a store and you're going to see something and pick it out. ... Those are expectations that are generally not realistic," said Ruth Peters, a psychologist who has worked with the brokerage firm Coldwell Banker. "It's going to take emotional work and physical work."

The good news is that people have another irrational expectation: that a bad decision will make us unhappy.

The truth is, according to Harvard University psychologist Daniel Gilbert, that we often believe the consequences will be worse than they are. We underestimate our ability to adapt.

Maybe we can even get used to letting go of our castles and just living in a home.