2014 Salesmanship – Resetting the Price Anchor
In many areas, demand for homes has increased, and the supply of homes for sale is dropping. The real estate market is changing from a buyer’s market to a seller’s market. And as usual, the media has been quick to point out that prices increased last year by as much as 17% in some markets. The positive effect of all of the media hype is to motivate buyers to find a home and buy now. Unfortunately, the headlines have had the reverse effect on sellers who believe that double-digit appreciation will be the standard for this year and possibly even for 2015.
John Maynard Keynes’ speculative conjecture about human behavior explains why sellers formulate their expectations. We can all agree that with deficit spending, Fed stimulus policy, stock market gyrations and political gridlock, there is still a great deal of uncertainty surrounding both the present economic recovery and the real estate recovery. Keynes claimed that people cope with uncertainty by assuming the future will be a mirror image of the past. If prices increased 17% last year, they’ll increase the same amount this year. This leads a homeowner that is selling to look at today’s prices and speculate the value of the home will be significantly higher in the near future. That being the case, why should they be in such a hurry to sell now, when they can get their price by waiting a little longer.
In most cases, seller behavior is based on how much they perceive their home to be worth at the height of the market. (For example, in Florida, we are currently still about 20% below peak prices in 2005.) This price has become an Anchor Price, or a price the seller just can’t seem to let go. All of the recent media hype about recovering real estate prices have reinforced the price anchor. So, how do you reset the price anchor? The answer involves a combination of two important principles.
- Fear of loss is far greater than the ecstasy from gain. In other words, if a new price is introduced that is far lower than the anchored price, as an alternative, the sellers’ focus will shift from the desire to achieve the higher price, to the fear associated with ending up getting the lower price.
- Analytics – In most cases, specific market conditions at a certain price point, or within a specific area, behave differently than the national average. For example, in many markets, there has been a complete recovery in prices for homes under $200,000, but we are still seeing prices drop for homes valued at over $1 million. Additionally, the price of the home is just one part of the equation. Home sellers should also take into consideration the carrying costs of homes, and the lost opportunity costs, or the money they could have made in the stock market (for example, the stock market returned an average of 20% in 2013). By adding together the costs associated with all three categories, the risk associated with holding the property increases significantly. Thus, the seller has a new number that has been set in their minds. This new price or number replaces the higher unrealistic number they had fixated on.
When you reset a price anchor, you overcome the fear a seller has of losing money by selling now, with the great fear of losing even more money. Don’t let your sellers be lulled by headlines into a false sense of security, especially if they own a home in the million plus price range. Use the principles above to address unrealistic price expectations.