Real Estate Dealing during the Spring Nesting Season

Today, you hear stories about sellers slashing listing prices to attract buyers, but home prices nationally have risen more than 10% over the past year.  Inventories of unsold homes are on the rise, yet homebuilder Lennar Corp. just reported a 34% jump in earnings.

In this muddled situation, what should you do if you are ready to buy or sell a house?

No matter how smart you are, it's easy to fall into certain mental traps that can cost big bucks.  Instead of concentrating on the fundamentals, people tend to be ruled by their feelings and the compulsion to compare themselves with their neighbors.  "So much of what drives the housing market is human interpersonal dynamics," says Yale University economist Robert J. Shiller.

The following three suggestions come from behavioral economists, who study the kinds of erroneous decisions people tend to make repeatedly, as well as from hands-on real estate experts.

Herd Behavior:  A first rule of thumb is to avoid herd behavior, which is what lured a lot of people into overpriced houses in the first place.

Loss Aversion:  In a softening real estate market, one of the most dangerous mental mistakes is what behvioral economists call "loss aversion," which is the tendency to do dumb things to avoid, at all costs, recording a loss.

Keeping up with the Joneses:  Obsession with status causes buyers to overspend on conspicuous displays---and nothing is more conspicuous than your house.

Source: Buyer and Seller Beware, BusinessWeek, April 10, 2006