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I was listening to All Things Considered on March 30, 2008 and I heard an interesting exchange. The usual economic truism — as demand goes down, the prices go down— doesn't seem to apply in the current troubled housing market. Many homeowners prefer not to sell their home than to take a penny less than their inflated asking price.

Hersh Shefrin, professor of behavioral finance at Santa Clara University, breaks down the economic conundrum for Andrea Seabrook.

You can listen for yourselves on the National Public Radio website by clicking on the link above, or get the gist of the conversation from my paraphrase: Behavioral Finance is the study of how psychology impacts financial decision making. For instance, pricing their home in a declining market. When a homeowner thinks they are going to take a loss if they sell their house, they are inclined, instead, to gamble by setting a much higher asking price, hoping that they can beat the odds and a magic buyer will appear willing to pay at least what they originally paid for it so that they can feel they haven't taken a loss on their investment. That is called the psychological aversion to a sure loss. The psychological pain is something that is difficult for most people to accept, so the pain is deferred.

In normal times sellers ask for 12% more than they think is reasonable, and it takes an average of 6 months to sell. In a down market sellers ask for 33% more, not 12%, a third more, and it might take 2 years to sell, if they manage to sell it at all.

Sellers who look like they won't negotiate and have priced their houses too high are one of the main reason that transactions don't happen. There are still buyers out there, but they won't buy at the price the sellers are asking. The buyers are also fearful that if they do buy, the prices will decline even more, and they will also face the pain of having made a bad investment. The turn-over rate goes way down. Prices may continue to go down, and as they decline there will be more pain. Some investors will start buying the houses when they can be turned into profitable rentals. Others are waiting for the prices to come down so they can afford them. There will be buyers, there will be bargains, and finally the excess inventory will be sold, and the market will return to normal.

Getting back to Bakersfield Real Estate, here are some specific examples and other observations relating to Professor Shefrin's findings: Apart from the psychological reasons, there is also a purely financial reason. If the price drops below the amount still owed, then the house is upside-down, under water, and would be termed a short sale and require bank approval for it to be sold for less than the amount of the loan.

Banks don't seem to be doing this as much as just waiting for it to go into foreclosure, and then selling it--even if they have to drop the price to get it to move. Perhaps they have less of a psychological barrier to overcome and are just trying to cut their losses and move on. The Asset Managers at the bank aren't the ones who issued the mortgages, and their feelings aren't as wrapped up in the deal. It doesn't hurt their feelings if they are taking a loss. This gives the REO listings an advantage. They are just trying to find the price at which the house will sell, the timber point, if you will. They chop and chop at the price until the house sells, like chopping down a tree. Timber!

To illustrate, our office recently sold a house in the Fox Run subdivision on Timberpointe. It was an REO, bank owned foreclosure property. Most of the houses on that street and in the Fox Run subdivision were much larger. It was just a medium sized 3 bedroom. But at $174,900, it enlisted a flurry of offers, and the price was bid up to well over $200,000 when the dust finally settled. There were at least 15 offers, and more people who would have made offers if they thought they had a chance. When I hear that the market is slow, I am reminded of the man who said, "No one goes downtown anymore. It's too crowded!" So, if a house is priced right, it could get multiple offers. It might even go for more than the listing price.

www.ChrisCraddockRealtor.com