Home seller denial means protracted slump: James Saft

By James Saft

LONDON (Reuters) - Denial ain't just a river in Egypt, it's the state many from California to Florida are in about the dwindling value of their most important asset: their homes.

The old adage is that markets are driven by greed and fear, but in real estate, with its central place in people's psyches, the transition from one to the other includes a period where many refuse to accept the new reality.

The implication is that we are facing a protracted period of weakness in housing and associated economic activity, rather than a quick purge followed by a return to normality.

Like their kids, homeowners love their houses, and like their kids every home is above average in the eyes of its owner.

But unlike with their children, when the market is going up, homeowners are happy to sell, taking the increase as their due, while buyers are eager to get in before prices get dearer still.

However, when the cycle reverses, as we are now seeing in the United States, sellers tend to wait a long time, sometimes until their hands are forced. Buyers, for their part, figure waiting makes good sense if prices are falling.

So, while prices are slow to fall, transactions slow sharply, as we have seen.

Average U.S. house prices rose 3.2 percent in the second quarter from a year ago, according to the Office of Federal Housing Enterprise Oversight, the slowest rate of gain in a decade. The S&P/Case-Shiller index of national home prices showed a fall of 3.2 percent in the period.