My home's value has increased ... right?
TEXT OF COMMENTARY
KAI RYSSDAL: A truism in economics is anything is worth only what someone else is willing to pay for it. A lot of the pain on Wall Street this week is because banks are finally slashing prices on their assets -- and still potential investors aren't sure the price is low enough. The same kind of freeze-up is going on in the housing market.
As commentator and behavioral economist Dan Ariely says, in a falling market your house is almost always worth more to you than anyone else.
DANIEL ARIELY: A recent study conducted by Zillow finds a "Not My House! Sentiment." What does that mean?
Well, despite the evidence that 77 percent of U.S. homes actually declined in value in the past year, 62 percent of homeowners believe that the value of their own home has increased or stayed the same. How can that be?
I think part of the story has to do with the changes and tinkering we do to our homes. When someone moves to a new house they often make changes to their home. They break a wall, maybe they change the tile, fix a bathroom or add a porch. The house is now tailored to its particular owner's unique taste: Perfect for that person.
There's also our inability to understand that the changes we've made to fit our own individual taste might be ones that others don't see or don't value.
So what happens when a homeowner compares their own house to a house that was sold for a lower amount down the street? Simple explanation: That other house was just not nearly as nice. There was something just not quite right about it. Something a little bit "off." That must be the reason it didn't sell for more. Right?
Can we get over our egocentric bias of looking at our own homes from the perspective of our own preferences? I suspect it's very hard. Maybe the only people who can do it are those who are unable or uninspired to remodel their homes. These people are going to be less susceptible to the "Not My House! Sentiment." They're also going to be more likely to understand that the values of their homes are going down.
They might be depressed thinking about it. But they might also be able to make better decisions about their homes.
RYSSDAL: Dan Ariely is the James B. Duke Professor of Behavioral Economics at Duke University, and the author of "Predictably Irrational."