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A Deflating Bubble Tale:

From Bankrate.com:

I have a contract to buy a new town home for $800,000, but recently I learned that since I signed, the builder has reduced the price of the same type of town home by $100,000. I have a closing coming up and will be sitting there with a house which has already depreciated before I move in. If I put it on the market, will I get $800,000? Should I stay for a while or rent it out? I am confused and frustrated!

The answers are pretty obvious here, but this is a great example of the complete craziness of the housing market over the last few years: someone is plunking down $800,000 for a townhouse, and now that the builder has cut prices to $700,000, thinks that he still might be able to get $800,000 if he puts it on the market. Are there people out there who really took all the cocktail party talk that real estate "never goes down" seriously? Are there people out there buying $800K townhouses so naive as to think that someone will pay them $800K because they paid that much, even if anyone can buy the house next door for $700K? Mindboggling.

UPDATE: This phenomenon explains why, for example, inventory can be absolutely exploding in a city like Phoenix, but prices have only gone down marginally. Sellers think they should be able to get as much as their neighbor got in July, when there was less than half as much inventory; flippers think they are entitled to at least break even on their speculation. So sellers ask unrealistic prices, buyers sit on their hands, and inventory grows. Eventually, reality will set in as some sellers will need to sell for whatever the market will bear, and prices in Phoenix will plummet.

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