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Few homeowners look beyond money’s face value

 

NEW YORK – April 11, 2014 – "Money illusion" is a real issue in real estate, as sellers focus on the face value of money instead of its true purchasing power.

A study by Lucy Ackert, finance professor at Kennesaw State University, and Bryan Church and Narayanan Jayaraman of Georgia Tech reveals that homeowners often believe that they come out ahead when they sell their home for more than the purchase price, even when those gains are wiped out by inflation.

"They think in nominal terms," says Ackert. "Many people would prefer a situation where they have a real loss, than a real gain and nominal loss."

The study of 141 homeowners in suburban Atlanta – conducted in October 2005, as the housing bubble was about to crest – found that 77 percent had realistic expectations about local home values, but the same percentage said they believe people are happier thinking in terms of nominal value.

University of Florida marketing professor Alan Cooke says people tend to focus on nominal terms over real terms because it is easier to think that way. Ackert believes money illusion coupled with tight supply is "a perfect storm" for creating a housing bubble.

Source: Wall Street Journal (03/28/14) P. M10; Tanaka, Sanette

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