The Five Stages of Grief - in Real Estate
by Richard
You may wonder why residential real estate prices have not reached bottom yet.
For the time being, set aside all the analytical tools at your disposal, and curl up with a classic book describing human behavior….”On Death and Dying
I know. Not much merriment in store…but worth the effort nonetheless.
Realize that the insights are pertinent to any form of catastrophic personal loss. Death is obvious, but also the loss of a job or investment.
The classic five stages would play out something like this.
1: Denial
Despite all the evidence to the contrary, stubborn sellers think it does not apply to them. Rather than admit that they bought property at the height of the bubble, they retreat into an alternate universe where their house has maintained its value, while all the others have tanked.
This is why it will take another twelve-to-eighteen months to bring the market back into balance. Many sellers refuse to accept the dictate of the market.
2: Anger
By holding their house off the market, friction erodes the code of civility. Rather than blame ourselves for plunging in at the top, we direct anger towards all the other facilitators. The real estate and mortgage brokers. The lenders. The market. Anything and everyone except the guy in the mirror.
3: Bargaining
Reality increasingly focuses the seller’s attention on the limited options available. For many owners, this entails trying to get the lender to cooperate in a “short sale.” This is a sale that not only wipes out any lingering owner equity, but also requires the lender to accept less than the balance owed.
It also carries over to family dynamics, as career options and mobility are parsed and compromised to the overarching necessity to get out from under an upside-down house.
4: Depression
This is reflected in the pessimism that permeates consumer sentiment surveys, now at record lows. It also is an inevitable progression that results from the failure of the first three stages to ameliorate the underlying problem.
Since there is little hope of selling at anything approaching the purchase price, sellers become resigned to the inevitability of loss. Loss of capital, loss of choice, loss of credit.
5: Acceptance
You will now take whatever you can get. There are a great many high end properties now being sold at auction without reserve. The high bid, no matter how low it is, walks away with the prize.
It is only at this final stage when the market will finally clear.
As plotted on a timeline…
2006 and 2007 were the Denial years. All the furious government intervention and lender concessions that began in the fourth quarter of 2007 are evidence of both Anger and Bargaining.
Depression would cover the harrowing free fall of market losses that began with the Lehman bankruptcy on September 15th, and bottoming out (hopefully) on November 20th.
Acceptance is just around the corner, almost in sight now. We managed to survive the holidays without binging out on bling. We’ve had a decent bounce back from the November 20th low water mark.
We will know we have traversed the range of grief if we model the actions taken two decades ago, when the Resolution Trust Corp sold off loans and properties at whatever price they would fetch.
The danger is that the government will continue to jury-rig dubious schemes to postpone clearing prices and support zombie type ownership.
Then we are smack dab back into stage 3, Bargaining, with miles of hard road yet to travel.
January 22nd, 2009 at 7:47 pm
This is an interesting article, Richard. The five stages are grief are a fascinating study in human behavior, but I would have never thought to apply it to real estate or the credit crisis in general. I think my dad is still stuck in anger. He’s had his house on the market for almost a year now and not one person is willing to pay the price he’s asking. During the best of times it was worth a little over $200k, but now it’s only worth maybe $160k. Of course, he added an in-ground pool and a hot tub, so the value is probably a little more with a full-blown appraisal. But, he refuses to take anything lower than $190k, and he recently fired the first real estate agent that he was working with. I’ve tried to tell him that there’s nothing she can do about it, but it goes in one ear and out the other. I think I’ll forward this to him!
January 23rd, 2009 at 10:00 am
Kristy,
You might ask your dad to consider an auction if he is pressured to sell. Buyers are starting to slowly return to the market, and sometimes enter bidding wars on attractive properties.
If he’s not forced to sell, best strategy is to wait out the market until the bulk of inventory is cleared out.
No market stays out of balance forever.
January 27th, 2009 at 3:22 pm
This is a good analysis, especially the dates you are citing.
Your outline reminded me that I did a post when I first started my blog of Five Stages of a Job Loss. When I hit my archives, I realized, gee whiz, that post is even more relevant now than when I wrote it two years ago.
http://www.blogsmonroe.com/budget/2007/02/the-five-stages-of-a-job-loss/
January 27th, 2009 at 3:48 pm
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