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Originally published April 5, 2008 at 12:00 AM | Page modified April 5, 2008 at 6:25 PM

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Home sales dive in King County, but prices don't

With buyers edgy and more homes for sale, why aren't prices dropping more?

Seattle Times business reporter

As he tries to sell the luxury home he built in one of Seattle's most sought-after neighborhoods, Trevor Jones realizes the latest real-estate news isn't hopeful for him.

Last month King County saw 37 percent fewer houses sell and prices fall 3.3 percent compared to March a year earlier. The real-estate market was no stronger in surrounding counties, the March sales-activity report released Friday by the Northwest Multiple Listing Service shows.

But here's the riddle: With buyers edgy and more homes for sale, why aren't prices dropping more? In fact, after being essentially flat since November, King County's house prices actually ticked up $10,000 from February to $439,900.

The reason for the relatively modest year-over-year price decrease, real-estate economists say, is sellers' unwillingness to cut prices. Economists call it "stickiness."

Last month King County had 14,260 houses and condominiums for sale -- a 64 percent increase from a year earlier. But transactions were down 39 percent as buyers, spooked by news of a possible recession, played the wait-and-see game.

"People are afraid to pull the trigger, thinking prices are going to come down," acknowledges Jones, a Vancouver B.C.-based builder, who has been trying to sell a home for $1.9 million since last summer.

Here's how stickiness is playing out in the sought-after Seattle neighborhoods of Ballard and Green Lake. Last month, they had 82 percent more homes available than a year earlier, sales dropped 18 percent, and it's taking many months to sell higher-priced homes.

Yet Ballard and Greenlake prices were down just 4 percent year over year. (In several nearby neighborhoods, prices didn't drop. They rose.)

Stickiness both gums up sales and runs counter to typical rules of consumerism.

For example, consumers have been conditioned to expect stores with overstocks to drop prices until they reflect a deal. Then buyers come running.

But individual home sellers have reasons for not operating that way, and their reasons, taken cumulatively, can keep home prices propped up for some time.

According to the stickiness theory, prices reflect sellers' emotional connection to their homes. That's where they've enjoyed holidays, where they've invested money, perhaps where they've raised kids.

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Psychologically all that's worth something to them, and they think others will appreciate that worth. But buyers don't so they won't pay for it.

Also causing stickiness is the specter of "losing."

Thanks to home-valuation Web sites such as Seattle-based Zillow, owners know the high point of their home's worth. Psychologically many cling to that as its "true worth" long after prices begin to soften.

They also know what homes around them have sold for, and to sell for less -- never mind that it's many months later and market conditions have changed -- would mean they lost something.

Jones has his own reason for sticking with his price. The house was appraised last summer for more than $2.5 million, and it would cost at least that much to buy a similar lot and replicate the house, Jones says.

"I know it's the best deal in Washington Park by far," he says.

So instead of price cutting, he's offering to "buy down" a purchaser's mortgage interest rate to 5.25 percent. That would cost him about $45,000 in points and lower the buyer's payments by roughly $1,000 a month.

A study by economists Karl Case and Robert Shiller, who also author the S&P/Case-Shiller Home Price Indices, reveals just how strong the reluctance to discount is.

It asked sellers: "If you had been unable to sell your home for the price that you received, what would you have done?"

• 37 percent said they would have "left the price the same and waited for a buyer."

• 28 percent said they would have turned their home into a rental rather than sell for less.

• Fewer than 5 percent said they would have "lowered the price until they found a buyer."

Realistically, however, some sellers cannot lower their price, observes John Kilpatrick, president of Greenfield Advisors, a Seattle economic-analysis firm.

They're the ones who bought recently with little or no money down or the ones who refinanced the equity out of their homes just as prices slumped.

"The price is sticky because oftentimes they owe more than they could sell the house for," Kilpatrick says.

These sellers feel they must hold firm -- or take their home off the market and wait for conditions to improve.

"There's an old saying, 'Price drives everything.' But I'm not of the opinion that sellers are at that point yet. They're resistant," says Paula Fortier, the broker in Coldwell Banker Bain's Bellevue office.

Adds Mike Skahen, owner/broker of the Seattle real-estate firm Lake & Co., "Sellers are kind of stubborn, but the ones who are realistic are getting their homes sold."

He cites the recent sale of a North Seattle house originally listed for about $695,000. It sold three price drops later for $578,000.

Then there's the seller who thinks the condo he bought last year is worth 10 percent more. Not only will buyers not bite, but Skahen says agents may not either. "We've been known many times not to take listings where the sellers won't be realistic," he says.

While this many seem bleak to sellers, Kilpatrick, who holds a doctorate in real-estate economics, senses the situation is only temporary.

"The good news is homes are still valuable commodities," he says. "Prices are depressed, but I suspect as this shakes out -- and I suspect it will shake out in 2008 -- you'll see the market rebound."

Elizabeth Rhodes: erhodes@seattletimes.com

Copyright © 2008 The Seattle Times Company

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