We are amid an extremely hot real estate market. The common lament among realtors is there isn’t enough inventory on the market to meet the demand of potential buyers. Yet, when I click on Zillow or Realtor.com to check on the housing market (my obsession), I’m amazed at how many properties remain unsold months after their listing. Since pretty much every house will sell if correctly priced, my thought is that some of these sellers aren’t particularly motivated, but will do so for an above market price, under the adage that “it only takes one buyer.” Although I can understand this mindset, I suspect there are houses where the owner really does want to sell, but simply is not pricing his or her home appropriately.
So why the disconnect? To me, when one’s personal economic choices don’t seem to conform to that which rational economic theory would predict, I suspect that there may be a cognitive bias at play. A cognitive bias is a subconscious error in processing information, based on personal experiences, that may affect one’s judgment pertaining to real-world objectivity. Stated more succinctly, cognitive biases are personal perceptions that cause people to get in their own way.
One bias that I find is underappreciated is the Endowment Effect. Richard Thaler, a Nobel laureate economist, coined the term “Entitlement Effect” to describe why “people often demand much more to give up an object than they would be willing to pay to acquire it.” Since the pricing of a home is inherently subjective (houses are not traded on a national exchange), even a motivated seller easily can misprice his or her home.
I wrote about the Endowment Effect for the Journal of Financial Planning as one reason why corporate executives tend to be highly concentrated in their company’s stock (“The Endowment Effect: Why Executives Love Their Company’s Stock”). The same bias can influence setting an appropriate price on a home, especially one that has remained in the family for a long period of time.
Entitlement sellers have a perception of their home’s value that is based on their attachment to it rather than the economics of the marketplace. Some of these subjectivities may include: a unique floor plan that has worked well for your family, but perhaps a buyer may find as a little weird; a school system with attributes that have worked well for your kids that is of little importance to a buyer not utilizing local schools; perhaps even the fond memories of your children’s happy childhood – including the pencil marks on the kitchen doorframe – might be influencing how you choose to value your house.
Most sellers are acutely aware of comparable neighborhood sales, although the reality is that they often are less comparable than one may perceive. When viewing comps, it is easy to accentuate the advantages of your house while undervaluing the advantages of a comp. I recall a client selling a condominium apartment comparing his unit to one on a higher floor in the same line, convinced that his updated kitchen added more market value than the comp’s better view. Six-months later he learned otherwise and lowered the price.
Perhaps the most common manifestation of cognitive biases, especially when selling a relatively recently purchased home that may not have had time to appreciate, is the need to break even. When discussing the pricing of a house (or stock) we all have heard some form of: “I need my price to recoup my investment?” Loss aversion, another cognitive bias, exacerbates the need to break even. (Hint: whether you’re selling your house of shares of stock, the marketplace is completely indifferent to your need to break even!)
The way to look past the Entitlement Effect, and other biases, is by consulting with an independent third-party, especially one with an alignment of interests, such as a quality realtor. As your agent, a realtor balances the quest for the highest price with the desire to have your home sell quickly – neither of you want a stale property with successive price reductions, or to get caught in the winds of a shift in market valuations.
There is nothing wrong with having biases; life wouldn’t be very interesting without them. However, if you are seriously motivated to sell your home, you might want to consider ignoring them and listen to a realtor.
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October 21, 2021 at 09:30PM
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Why Your House Isn’t Selling In This Hot Market - Forbes
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