Here’s an interesting economic phenomenon. I wouldn’t have expected the difference to be so large.
“More than two-thirds (69 percent) of home sellers purchased a home after selling their previous residence, up from nearly half (47 percent) in 2012, and from only 12 percent in 2011.” CAR.org.
A psychological fact that helps explain a lot of weird economic behavior is that losing $1 hurts people a lot more emotionally than the pleasure of gaining $1. Fear of loss is twice (or more) the motivator than the opportunity for gain.
You can see that effect in the quote above very clearly.
It’s a Wash
Home prices were much lower in 2011 in California. So many people who sold their homes in California in 2011 must have been bummed by the financial lose but at the same times the prices of homes they could purchase was also very low. It would have been a GREAT time to buy but only 12% of home sellers bought another home after selling in 2011.
On the other hand, home prices were much higher in 2013 than in 2011 but 69% of those who sold a home 2013 bought another home despite the higher prices.
Whether you bought AND sold in 2011 or 2013, it was pretty much a wash. You made more money on your home in 2013 but you also had to pay more for your next home as well. It’s pretty much a wash no matter where prices are when you buy and sell at the same time.
I think selling for so little money in 2011 was emotionally draining and depressing for sellers and that led to inaction – not buying another home even though California home prices were great.
Selling, however, in 2013 when prices were much higher made sellers feel upbeat and hopeful so 69% bought another home.
By not buying again in 2011, those home sellers kinda lock-in their loss.
3 Responses to Why didn’t more home sellers buy another home when prices were great in 2011?
Doesn’t it make sense that most of the people that “sold” in 2011 were in a situation that forced them to sell. Not many people would sell at the bottom if they didn’t have to. A lot of those people that sold in 2011 were in distress, so they probably had late payments or a short sale on their credit, therefore, they couldn’t qualify for new financing. That would make more sense than the fear notion.
Jon, That makes total sense. I thought about that after I did the post.
Many (most?) people who had a choice decided not to sell because prices were so low.
Of those who did sell, an unusually large percentage did NOT have a choice, they were foreclosed on or were did short sales. They were not able to buy another home then even if they wanted.
That’s got to have been a very large effect.
Although, I think the “lose aversion” effect was a big factor too.
Okay Jon, I looked into the numbers a bit more. I couldn’t find the percentage distressed sales for the whole years quickly but I found it for January and used January as a proxy for the whole year.
• January 2011 about 70% of home sales were distressed in metro Phoenix.
• January 2012 about 57% of home sales were distressed in metro Phoenix.
Those numbers support your idea.
Loss aversion would have been a secondary factor… but it still helps me explain some weird behavior in the market. :)
Jon, thanks for the comment!
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