Home Egonomics - Key West Real Estate at Work

An article in The Washington Post discussed the role emotions play in buying and selling real estate. People think they make calculated decisions when buying or selling a house. The article says research shows emotions play as big a role as intellect.

The article stated that evidence is mounting that people set prices on real estate (especially as applied to homes) as much on ego and self-image as on an objective analysis of the market. This is where the term "sticky prices" comes from -- sellers who won't budge from their price demands or other contract terms to make a deal happen. 

Research economists formerly believed that people made important economic decisions like robots by applying simple logic. But research over the past 20 years has shown otherwise.“These studies have illuminated a few key concepts: Many people will pass up sure profits for illusory ones. Some will turn down profits if they believe someone else is unfairly profiting more. Some will even refuse to sell if they believe they may come to regret it, because fear of future regret can be as powerful a motivator as money in the pocket today.” “In other words, people will cling to prices they recall from a brighter day, even when market conditions have changed; they will walk away from a sale if they feel the buyer is getting too good a deal at their expense; and they are terrified that [if they sell now] the market will rebound and they will feel like fools.”

The article went on to discuss the role of “loss aversion” -– the concept that people deny reality as it applies to something they greatly value when it declines in value, such as stock. They tend to hope that if they wait long enough that the value will return and that the loss they would incur will in fact never happen. 

The article rightly pointed out that most people make rational dollars and cents decisions when buying routine items such as milk and eggs, but let their emotions get involved in potentially life-changing decisions such as buying or selling a home.

 

Hoping for a positive market gain will not make one happen. Changing Realtors will not create any new universe of buyers if the asking price is not competitive or the house is located in the wrong part of town. 

I tend to represent more buyers than sellers because my blog attracts a good number of buyers who read my comments on the market in general and who seek more information about specific homes. When I represent a seller I suggest a list price close to the target sales price. Some sellers prefer to list higher avail themselves of the opportunity to negotiate to a lower and more acceptable price. They think that by setting the bar at a lower level they might miss the chance to sell at a higher price. (Go back and read paragraph 3 above.) The Key West real estate market is the most active between late December until Memorial Day. This is the time period most buyers who are seeking a second home located in Key West will be in town and theoretically making offers to buy. 

One of the first questions that comes out of the mouth of most serious buyers is "How long has the house been on the market?"  If the house has been on the market in Key West for more than 60 days many buyers will assume the house is either over-priced or that there is something wrong with the house or the location. When buyers ask this question they are guarding against buying something that has something wrong with it. Houses priced correctly in Key West tend to sell very quickly because of the serious demand for homes here. This is buyer risk aversion - buying now before some other buyer gets the property.

I firmly believe sellers should not let their egos get in front of their rational thought processes when it comes to setting the asking price. Twenty-seven years ago I worked for the Resolution Trust Corporation, the federal government agency set up to dispose of billions of dollars of assets from failed savings and loan associations. I worked in the Colorado regional office where my department was tasked with managing the sale and disposition of numerous multi-million dollar assets located primarily in the western United States but also in Louisiana, Tennessee, Washington DC, and New York. We went trough an ardent decision making process to determine asking prices on assets and then to evaluate offers. Out job was to sell assets, not to admire our portfolio. We had to write "Cases" to justify the marketing plan and the approval of offers when received. These were government owned assets. Ego-nomics had nothing to do with these assets.  Decisions had to be justified by sound business practices. My former boss would invariably comment: "Pigs get fat and hogs get slaughtered!" That phrase ought to be posted to every would-be home seller's refrigerator door.