Homeowner denial: My home is gaining value

updated 4:46 p.m. ET Nov. 10, 2008

The housing market may have gone bust, but many homeowners are still living in a bubble.

Despite dismal housing headlines and reports showing falling prices nationwide, owners in some once-hot areas still believe their home is gaining value or at least holding its own. And by hanging onto too-high expectations, sellers are unwittingly keeping the market from finding a bottom.

Real estate professionals across the country are reporting difficulty convincing sellers the true market value of their homes.

"It's like pulling teeth in this market," said Twyla Rist of Reece & Nichols Realtors in Kansas City, where prices are off between 7 percent and 15 percent. "Even with everything being said, you still have people that think my house is better than everybody else's."

A recent Coldwell Banker report showed that more than three-quarters of its real estate agents surveyed said most sellers have unrealistic initial listing prices for their homes.

Likewise, an unscientific study released last week by real-estate Web site Zillow.com found that half of homeowners polled think their home's price has increased or stayed the same in the past year.

"We expected people to get a little more in touch with reality especially over the summer, because you couldn't turn on the TV or read the newspapers without seeing that home prices are falling," said Amy Bohutinsky, a spokeswoman for Zillow.com. "It was very surprising to see this kind of disconnect."

In fact, the median sales price of an existing home dropped 9 percent to $191,600 in September from a year ago, according to the National Association of Realtors.

It took John Cicero and his wife an appraisal, some convincing by their real estate agent and some hard-to-swallow facts to get them to lower the $525,000 listing price on their five-bedroom home in Valrico, Fla. They closed two weeks ago for about $380,000.

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"We didn't really understand the severity of the market," Cicero said. "We lost close to $100,000 in equity so we were walking away from real money."

They built the stucco home four years ago for $380,000 and poured more than $80,000 into it, putting in hardwood floors, granite countertops, ceiling fans, blinds, drapes and a built-in surround-sound stereo system. They also expanded the deck by the pool, turning it into what Cicero called an "executive entertainment area."

"You think you have this wonderful home and people will want to buy it," he said, "but you're wrong."

Dan Ariely, a behavioral Economics professor at Duke University's Fuqua School of Business and author of "Predictably Irrational," said the "better-than-average" effect is at play. And knowing your next-door neighbors sold their house for $500,000 makes it even more imperative for a homeowner to top that price.

"We feel that we're better than other people. We're unique. We're special," he said. "It stands to reason that our houses are also special."

The attachment to a house only intensifies the more a homeowner personalizes it, creating an extension of themselves.

"The moment we invest in something, we fall in love with it," Ariely said, which applies to something as sentimental as children or as trivial as origami.

That puts real estate agents in a precarious position of pricing a house to sell, but not insulting the homeowner by recommending a lower asking price. To a homeowner, a low, but realistic, listing price is "like someone calling your kids ugly," Ariely said with a laugh.

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