2008-2012 Answer: Because it will compete with distressed properties which are offered "as is" at much bigger discounts. Buyers will deduct value at a much higher number than the actual cost of repairs, but most likely, they will not even bother with the math and instead will go on to purchase another home that is move-in ready.
To compete on the market, a house has to be prepared to look "like new". Yes, it is stressful and an imposition, but remember that you are selling a large and expensive asset.
There is too much competition out there, including new homes. Serious competitors have spent a lot of time and money preparing their homes for sale. Skipping this important step puts a house in a "fixer upper" category to compete with distressed properties at a huge discount.
Buyers will also avoid going through the emotional and costly process of making an offer, tying up their money in deposit funds and pay fees for inspections/loan applications if they are not comfortable that the house will be move-in ready or even "fixable".
In addition, buyers do not want to waste time and risk missing out on another more desirable house, even if the other house is priced higher. Often, the additional monthly mortgage cost of a "perfect house" is much more affordable for a buyer than having to finance repairs, after closing, on a fixer upper.
When a seller is upside down with their mortgage, they feel that spending more money to fix the house is a waste of money. That would be true if they were going into foreclosure. However, the fact remains that if they want or need to sell their home in the current market the money spent fixing a house will still bring in a better and faster net sale. If a seller does not have the funds to repair and prepare, then they must accept deep discounts and a longer sale time.
Or worse, no sale at all.