I recently calculated that 25% of the current homeowners in my Scottsdale AZ community of McCormick Ranch paid more for their homes than their homes are currently worth, even after the large price increases we’ve seen since 2011. They bought during the boom years of 2004 through 2008.
Now, some of these homeowners are under water, meaning they owe more on their homes than their homes are worth.
And some of these homeowners have equity because they put a lot of money down when they bought their homes or they paid all cash. They have equity but their homes are worth less than they paid for them.
Under Water Homeowners
Many in the first group could do a short sale if they wanted to but since we’re 5 years beyond the bust, I assume this group, for whatever reason, does not want to do short sales. Without doing a short sale, however, it would be tough for this group to sell their homes.
Depressed with Equity
The equity group, however, could sell their homes in the normal way but emotionally I think it’s difficult to sell for less than you paid.
Which brings me to this article I read this morning in The Atlantic online.
‘How to Walk Away; The psychology of lost causes’
As studies by behavioral economists like Daniel Kahnemen and Dan Ariely show, people are generally loss-averse. Putting in a lot, only to end up with nothing to show for it, is just too awful for most of us to seriously consider. The problem is one of focus. We worry far too much about what we’ll lose if we just move on, instead of focusing on the costs of not moving on: more wasted time and effort, more unhappiness, and more missed opportunities.
Recent research by Northwestern University psychologists Daniel Molden and Chin Ming Hui demonstrates an effective way to be sure you are making the best decisions when things go awry: focus on what you have to gain by moving on, rather than what you have to lose. When people think about goals in terms of potential gain, that’s a “promotion focus,” which makes them more comfortable making mistakes and accepting losses. When people adopt a “prevention focus,” they think about goals in terms of what they could lose if they don’t succeed, so they become more sensitive to sunk costs. This is the focus people usually adopt, if unconsciously, when deciding whether or not to walk away. It usually tells us not to walk away, even when we should.
Don’t put your life on hold
If you have equity, don’t put your life on hold waiting for your home to appreciate to what you paid for it.
It will likely be several years before prices increase to what you paid. And if you’re talking about inflation-adjusted prices, they’ll probably never rebound to 2004-2008 levels.
If you’re asking yourself, ‘Should I sell my house and move?’ but you’re of two minds about it, you’ll make a better decision if you focus on what your life will be like after the move, not on what you have to lose.