Monday, September 03, 2007

More Leamer

by Tanta on 9/03/2007 12:50:00 PM

This is another snippet from the Leamer paper CR discusses below, in which Dr. Leamer argues that if we had nothing but economists on our side, we'd never get rid of Voldemort:

We love our homes. We don’t love our investments in General Motors or IBM, and when the stock market sends us the daily message that share prices have plummeted, we reluctantly accept that unwelcome reality. Homes are different. We have a close personal relationship with our homes. When the market is hot, buyers stream by our front doors proclaiming that they love our homes even more than we do by offering prices beyond our wildest dreams. Charmed by that flattery, many of us sell our loved ones, confidant that we have turned our homes over to people who will treat them well. Thus rising prices and high sales volumes. When the market cools, however, only a few prospective buyers come to our front doors, and those prospective buyers bring a most unsettling message: “We know you love your home, but it isn’t worth nearly as much as you think.” That can be a deal-breaker for female owners, but the clincher for males is the fact that their idiot neighbor sold his home for $1 million just last year, and the male owner is not going to take a penny less than that. It doesn’t matter what the market thinks. This house is worth $1million. Period.

Housing hormones, both estrogen and testosterone, make owners very unwilling to sell into a weak market and that unwillingness tends to keep the prices of homes actually sold high while greatly reducing the volumes of homes sold. What we observe are not market prices but sellers’ prices.

If you don’t like this love story, another good one is that sellers look backward, remembering what they or their neighbors paid, but buyers look forward, wondering what the house might be worth in a couple of years. Positioned in time looking in different directions, when the market is rising, owners estimate the value less than prospective buyers, and a sale occurs, but when the market is falling, the owners remember the good old days of high prices, and the buyers are thinking about a better deal in a couple of months. Then there is no transaction, unless it is at the high sellers prices. A third story comes from the behavioral economics: It’s loss aversion.7 As long as I don’t sell my home, I can comfortably maintain that it is worth what I paid for it.

Of course, economists have no room in their models for love, hope, or the psychology of loss. . . .
No, I'm not here to point out that Leamer seems to have attended the Larry Summers School of Unwise Rhetoric About Genderalizations.

I was actually going to observe that economists spend some time hanging out in a mortgage shop. You will learn everything you need to know about the effects of love, hope, and the psychology of loss on economic decisions.