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 also point out that prices have increased. The positive effect of all of the media hype is motivating 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 the remainder of this year and possibly even 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 perspective seller to look at today’s prices and speculate the value of their home will be significantly higher in the near future, so why should they be in such a hurry to sell now?
In most cases, seller behavior is based on how much they perceive their home to be worth at the height of the market. 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 has 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 seller’s 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. Sellers should also take into consideration carrying costs and lost opportunity costs, or the money they could have made in the stock market. By adding together the costs in 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 greater fear of losing even more money if they wait. 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.