[quote=briansd1][quote=AN] if price rises in nominal term but decrease in real term, why should home owners care? If anything, in that scenario, it would be a no brainer to stay in the place. Especially if you’re locked in for 30 years years.[/quote]
They do care because they want to move, but they are “locked in.” They are less likely to sell because, as you explained, the cost of ownership gets easier over time.
Government intervention works because of that effect. By putting a floor on housing, government intervention encourages people to stay put. The “clearing” of the market is lengthened over a period of years, perhaps decades.
As sdrealtor mentioned before, low interest rates make it attractive to buy now… but negative equity makes it less desirable to sell. So we have opposing effects on the market right now.
Behavioral economists rely on prospect theory’s claim that reference points are important,
and that individuals will react differently to a housing bust based on their degree of loss aversion. In this framework, a household without any financial constraint can become less mobile if nominal loss aversion leads it not to sell the home after its price has fallen.
I think that loss aversion is still high because peak prices are still fairly fresh in people’s minds. After a decade, things will look different.[/quote]
No, they don’t care. If nominal price goes up, then they’ll be able to sell at a higher price than what they paid for nominally, even if in real term, it’s not. So, they’re not “locked in”. The only time they’re locked in is if the nominal price is below what they paid for it.
Government intervention doesn’t encourage people to stay put. It encourage people to move. If price keep on going up nominally, then people can sell, make a nominal profit (not needing to save for additional down payment) and buy the next house.
I understand what sdr said, but if nominal price goes up, then you would have less people with negative equity. Equity is in term of nominal price, not real price.
