The Boom Is—Is Not!—Over: The Great Real Estate Debate

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If you live in Bubbleopolis, things certainly look scary. In Miami there's a 17-month supply of single-family homes for sale, according to the NAR. Some 75,000 condos are coming on the market in Miami--Dade County, many purchased by speculators with no plans to live in them. "There will be lots of foreclosures, lots of auctions," predicts real estate agent Rose.

The mood isn't any brighter in San Diego, another overheated market. In June the city's median home price fell 1% from a year earlier. That's the first decline in a decade. "$579,000--Getting Desperate!" reads an ad posted on Craigslist in the metro area. "There are three times as many houses on the market as there were a year ago," says Vikki Kuick, a broker who placed the ad.

Buyers are taking their time, leery of overpaying and taking on too much debt in a rising-interest-rate environment. Some sellers figure they're lucky to be getting out. Hewitt Hymas, a Navy commander reassigned from San Diego to Annapolis, Md., just sold his four-bedroom home for $476,000 (which he bought for $280,000 in 2002). It wasn't easy. Hymas relandscaped the yard, spent $7,000 on kitchen upgrades and eventually dropped the price by $18,000. "People around us still live with a heyday mentality," he says. "They got used to the boom and were asking ridiculous prices." He made a command decision not to be greedy and moved on.

Experts in market psychology say stubborn sellers have a classic case of denial. Richard Peterson, a San Francisco psychiatrist who specializes in financial decision-making behavior, points out that "people would rather gamble and hope prices come back. They ignore information suggesting that prices are dropping." It's the same mentality that leads blackjack players to double down in a losing streak.

Conversely, when investors see prices rising, they get overconfident--the hot-hand bias that leads folks to think a basketball player will sink his fourth shot after making the prior three, even though probability says the odds are the same for every shot. That explains sellers' reluctance to cut prices, Peterson says. Academic studies also suggest that frustrated sellers take their homes off the market rather than accept lowball offers. It happened in Boston in 1991, when condo prices tanked and two-thirds of the inventory was withdrawn for sale, says Chris Mayer, a Columbia Business School professor. Sellers then had to wait up to six years for prices to hit their previous peak. Robert Shiller, a Yale economist who has long warned of a bubble, thinks price stagnation (or worse) is here to stay but that Americans don't want to believe it. "People still expect double-digit gains," he says, citing surveys of homeowners.