I talk to 7-10 different real estate professionals every week about the real estate market in southern New England, and over the last few months, I've started to see some patterns in what I'm hearing. 

• Sellers don't want to consider their home when compared to the market
• Listings are expiring with very little traffic
• Sellers want to price their homes a little high so that they can "come down" to market
• Open houses are happening with only 2 or 3 visitors
• Potential sellers are declining to list altogether because of prices

Clearly, homeowners are fearful of what is going on the market, a condition that is likely exacerbated by all the Chicken Little stories making front-page news.  It is more than the market that is instilling fear though.  One of our strongest fears is fear of loss.  According to a study by 2002 Nobel Prize winner in Economics Daniel Kahneman, people feel equally as bad about losing $100 as they feel good about gaining $250.  This imbalance is called loss aversion. 

While the original study was conducted in a wagering context, economics professor Burton Malkiel noted the following in his 2007 edition of his book A Random Walk Down Wall Street:

"A similar reluctance to take losses appears to be evident in the residential housing market.  When house prices are rising, the volume of sales rises and houses tend to sell quickly at asking prices or higher.  During periods of falling prices, however, sales volumes decline and individuals let their homes sit on the market for long periosd of time with asking prices well above market prices.  Extreme loss aversion helps explain sellers' reluctance to sell their properties at a loss."

Basically, people don't want to recognize when they've taken a loss, and as a result, they are reluctant to price their homes in a way that acknowledges that loss.  This causes inventory to become stale as listings become clogged with homes that have little chance of selling anywhere near their listed prices, and that condition can fuel the doom and gloom articles that appear more an more frequently in the news, articles that likely further exacerbate the problem.

Fortunately, sales volume here is still quite strong.  For example, In spite of the psychology of loss, 5283 homes have sold in Rhode Island since the beginning of 2007, only slightly behind the 5592 homes sold in 2006, according to the Providence Business News.  Condo sales are actually higher so far.  While prices are falling, it appears that there is no shortage of home buyers here to take advantage of the price improvements. 

The best thing that we can do as real estate professionals to help clients to sell their homes is to keep them focused on the gains they have made on their homes.  Don't let sellers consider their homes in comparisson to peak market prices; rather, find out when they purchased their homes, what they paid, and how much profit they will make at a reasonable market price.  Selling a home for $250,000 today that you purchased for $120,000 12 years ago sounds a lot better than not selling it for $280,000 2 years ago.  By focusing on the gains, we can avert loss aversion.