Mood of the Market
Mood of the Market
As we discussed last week, the fields of behavioral economics and behavioral finance were created in the hopes of gaining a better understanding of how real people make financial decisions in real life.
Fortunately for all of us, these fields -- which draw from the behavioral sciences, economics and personal finance -- have generated some findings that are anything but academic. These findings include some powerful insights for those of us trying to make decisions about buying and selling our homes.
Following on last week's top four behavioral economics insights for homebuyers, here are a handful of the field's top takeaways for sellers, to help manage your own mindset and to optimize the way you market your home to buyers:
1. Don't let overconfidence lead to overpricing. Real estate agents are the only commissioned salespeople I know of who, as a general rule, spend much of their time trying to talk their clients down in pricing their product. Why? Because real estate agents know that listing a home at too high a price causes unnecessary woe, drama and failure. Set the listing price too high, and a home will lag on the market, attracting lowball offers. The end result is often a price reduction, or even (worst case) the home doesn't sell at all.
Overpricing can result from the same overconfidence and overoptimism that causes buyers to make lowball offers on great homes in a hot market and inspires investors to day trade, erroneously thinking they have superhuman stock picking skills. In fact, when you study up on successful amateur day traders, it becomes clear that what they have is less innate skill and more the willingness to voraciously, constantly research the companies and the markets -- many, for hours every single day. Many have also placed rules on themselves specifically to counter their own human emotions and irrational tendencies.
And that's precisely how home sellers can and should deactivate overconfidence when it comes to pricing: Commit to the exercise of sitting down with your agent and poring over the data about what's going on in your market, the data about what homes have recently sold for in your area, even the data on how long it takes the average home in your market to sell and what the list price-to-sale price ratios are in your area.
It takes time and discipline, but while you're looking through the comps, your agent can show you the potential rewards: Every market has well-priced, well-marketed homes that sell quickly.
2. Understand the endowment effect. Lest you think, like so many do, that the above point is great for all those other clueless sellers, but certainly doesn't apply to your innate, uncanny eye for knowing what homes are truly worth, allow me to introduce you to a little something called the endowment effect. Behavioral economist Dan Ariely explains it as follows:
"Simply put, the endowment effect shows that we value the things we own more than identical products that we don't own. This causes a mismatch between buyers and sellers, where buyers are often willing to spend less than the seller deems an acceptable price."
Just knowing that what you think is your personal prowess for price-setting is actually a thought fallacy that researchers have known about for years might help you stay committed to making your pricing decision based on the data rather than your fallible gut.
3. Consider offering rebates and credits. Beyond using behavioral econ and finance knowledge to optimize your own decisions, smart sellers can take clues from these fields as to how to max out their marketing to buyers. One such clue is this: Offer rebates, or closing-cost credits.
Retailers and big brands have long known that offering a rebate makes buyers feel better -- and less hesitant -- about making a purchase, giving them the sense that they will get a bonus or a gift for spending.
This same effect applies with real estate: If you can price your home competitively with similar, nearby listings and offer a closing-cost credit to the eventual buyer, you boost your home's attractiveness and ability to compete with other listings considerably, reducing the amount of cash a buyer will have to bring in to close the sale and making it that much easier for a buyer to get off the fence.
4. Tell prospective buyers a story. The Atlantic recently did a deep dive into consumer implications of behavioral economics. The article revealed that buyers are more inclined to make purchases where the circumstances of the marketing actually tell the buyers a story that makes them feel like they are getting a bargain, as happened when Williams-Sonoma put a $500 bread maker next to a $300 one and realized that no one bought the expensive one, but sales of the lower-priced machine doubled because of the deal people thought they were getting.
I'm going to take this one further: Don't just tell a story to make buyers feel like they are getting a good deal when they're not. But do provide materials to tell buyers the story of the deal they are getting: Keep a binder in the property with the competitive comparables that you believe your home is priced well against. Market your home with photos and descriptions that surface the value your home holds compared to the competition.
And don't stop there: Stage your home in a way that tells your buyers the story of the life they could lead in your home, whatever that ideal life is for the average buyer who wants a home like yours. And consider writing a love letter about your home and your neighborhood, telling buyers the story of how well loved the home was, and creating a compelling sense of well-being around it.
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