It’s 14-hundred-and-92, and here’s the latest scientific thinking: the world is flat. Sail far enough and you fall off. Don’t listen to that crazy Chris Columbus!
It’s 2013, and here’s the latest scientific thinking: sellers, overprice your home for best results. Don’t listen to those crazy “realtors”!
Yes, it’s all true, based on some flavor-of-the-month economic theory called “anchoring”, used in this case to support the idea that home buyers don’t know home values because they can’t distinguish context—how one house compares to others. All a seller has to do is tell buyers her house is worth X and, even (and especially) if X is 10 percent or 20 percent above market value, buyers will find a way to justify the price.
Yes, home buyers are fools and agents are louses, according to ground-breaking research (although you can find the same thinking on any bubble blog and in most of the comments following online real estate articles) published in the Journal of Economic Behavior & Organization (all rise!) in May, and cited in the August 8 Wall Street Journal. The study finds that “homeowners who set the initial asking price 10% to 20% higher than similar houses in the neighborhood see a slight increase of $117 to $163, on average, in their sale price”. So why stop at 10% to 20%? Indeed, “pricing a home 20% or more than similar homes leads to an impact three to four times as big”. Sadly, the research didn’t answer the obvious question: why not overprice your house 100% and reap huge gains?
So why do agents recommend underpricing a house? Not, as they claim, to generate a bidding war to maximize sales price. In fact, the study “proves” that bidding wars don’t work (which may surprise local buyers) because “there are seldom enough buyers in the market to create the ‘herding effect’ found in a typical auction”, quotes Bob Hunt of Realty Times in his commentary on the study. Never mind that low rates and tight inventory have led to multiple offers and high overbids even in parts of the country not known for them, let alone areas like the Bay Area with a long history of them.
More than five hundred years after Columbus, modern science demonstrates how you prove the world is flat: take “over 14,000 sales” data! I need more data! from three real estate and economic dead spots, Pennsylvania, Delaware and New Jersey, during maybe one year of tepid boom and 3.5 years of bust (January 2005-April 2009) and extrapolate it to every market throughout the country, including the wealthy high-demand low-inventory mid-Peninsula.
So if bidding wars don’t work, why do “realtors” encourage sellers to price their homes low? Because they’re louses (of course). Or somewhat more politely, so that “realtors” can save “both time and money spent marketing the property”. “It’s intuitive if you think about it”, says one of the study’s authors. “It looks like the realtors are doing what’s best for them, and as homeowners, we need to understand that relationship”.
Friends, if the real estate market was at all intuitive, we’d be getting a lot more profundity out of the real estate economics community and the Internet—and it’s remarkable how much these two groups think alike, which makes me wonder, not for the first time, what wisdom real estate economists garner from grad school. Couldn’t they give us the same insights if they just spent too much time on their computers venting about life in general and real estate in particular, like the untrained observers do? And what does it say about a science when the only places you find it cited are generally the places where you find the most naive comments (including, yes, even the most prestigious old media), and rarely, if ever, in the marketplace? Does a science get the venue and following it deserves?
But if, in fact, the real estate market is at all intuitive, in matters large or small, why do we need real estate economists to explain it—after all, it’s “intuitive”. Mother Science, Real Estate Division, sez, “Kids, don’t bother looking beyond the obvious. The obvious is science, and I’m not sure why they give me grant money”.
Okay, let’s put the overprice-your-house-for-success theory to the test. Let’s say you’ve got a house that, according to the comps, should be priced at about X. But, inspired by Mother Science or some other sterling motive, you price your home at X+$200k. Your home is now about 8 percent overpriced, and the result is predictable: it doesn’t sell. But not, according to Mother Science, because it’s overpriced. No! It’s because your home isn’t overpriced enough. Remember, Mother said “10% to 20%” to show any results, and “20% or more” for best results. Anchor that puppy!
In the meantime, a smaller house in the same neighborhood, with no upgrades and in a lesser location, but priced thoughtfully and realistically at X-$400k, sells at list, in ten days, with four offers, all cash, eight-day close. And I could offer hundreds, maybe thousands, of similar examples. All anyone, even a real estate economist, has to do is look through the MLS, not just in their own back yard, but across the country. (But then they’d have to acknowledge that all real estate is local.) Not cram huge amounts of regional MLS data through a meat grinder and call it science, but look.
Is underpricing the best seller strategy in every market? No, even go-go Silicon Valley has markets, usually found in the hills or at the extreme top end, where underpricing can leave money on the table either because the pool of buyers is small (and sometimes getting smaller) or because buyers aren’t motivated enough to hit a home run. How many $17M buyers are out there, even in Silicon Valley? How many buyers these days are willing to drive for everything and want a back yard only a mountain goat could love?
So what exactly did Mother Science, Real Estate Division, measure, if, in fact, it measured anything other than, perhaps, a few declining rust-belt real estate markets? I think what Mom just proved is that the nicest house in the neighborhood sells at the highest price. Why am I sure these houses aren’t selling at a premium because they’ve been adroitly overpriced? Because overpriced homes don’t sell. Because buyers know value. Because buyers aren’t fools. I know that, and almost every other agent knows that, but apparently a few people whose job is to study and explain real estate don’t know that.
And because overpriced homes don’t sell, they end up listed not under “solds”, where the overprice-your-house-for-success theorist thinks she counts them, but in the “withdrawn”, “canceled” or “expired” categories. Thus Mother Science misses the many times overpricing didn’t work, because she doesn’t look in the right categories.
On the other hand, Mom may have measured nothing more than the margin of error. Even when you’re measuring a market with a relatively low average sales price of $234k, a difference of “$117 to $163” amounts to what Bob Hunt calls “rounding error”.
In the meantime, my money is on Chris sailing the ocean blue. His type of “anchoring” is a lot more credible.
copyright © John Fyten 2013