Friday, August 1, 2008

The Psychology of Selling: Price Anchoring

The Psychology of Selling: Price Anchoring

During tumultuous times such as these, Wall Street investors often argue about when the markets are reaching the mass-driven sentiment concepts of Capitulation or Exuberance.

Anytime there is a long stretch of asset price depreciation, be it the past 9 months in US equities, or the past 3 years in real estate, the sentiment factors often move to the foreground. There are important psychological factors affecting sellers in that they feel remorse for missing higher prices and as a consequence develop a significant price anchoring. This anchoring plays a big role in the refusal to sell stocks that have fallen.

Equity and Housing sellers are similar in that respect. When they miss a given price, all they want to do is get back to it to sell (or buy). How many times have we heard someone say "As soon as I get back to break even..." This psychological element of missed opportunity is what underlies the concept of support and resistance lines in technical equity analysis.

Without a daily price print, homeowners tend to be even more anchored in past prices. Add in tract developments were homes are so similar, and the general rationalization is: "My neighbor got $X last year, and our house is nicer -- we have granite countertops in our kitchen and a bigger back yard. So we should get $X plus twenty thousand." "We also need to recover the real estate commission so will add another ten thousand…"

That sort of mental selling analysis is a large part of the reason why there is so much home inventory available for sale. It also explains why prices seem to slowly chase markets down.

Consider the following article about Florida Real Estate auctions. Notice how the elements of psychology are impacting selling prices

Despite the standing-room-only crowd and live music, a recent auction of 22 properties in Port St. Lucie's tony Tesoro community didn't yield a single sale.
It's not that no bids emerged at the June 28 event - it's just that none of them were high enough for the owners of the 16 lots and six homes.

Call it a sign of the times.

One four-bedroom home listed for sale at $3.75 million attracted a high bid of only $1.2 million. Another, a three-bedroom, fetched a $450,000 high bid, though it's on the market for $2.15 million, according to Scott Powell, a Stuart-based appraiser who attended the auction...

What happened at the Tesoro auction is consistent with what agents are seeing around Florida, Boza said.

"Buyers are continuing to look for steep discounts, and sellers are looking for top dollar," he said. "Until sellers readjust their asking prices, there will continue to be an overhang of properties in Florida.

Property owners balk at low bids at Tesoro auction
Palm Beach Post, Sunday, July 06, 2008

The sellers are stuck in a 2005 or 2006 mindset. They are failing to recognize the change in psychology from a period of frantic bidding; they are ignoring the price depreciation, the rise in interest rates and the lack of easy credit. In addition, they ignore that this is a different economy, with great job losses, high energy prices and the associated anxieties about the future.

These are the people who want to sell; the homeowners who have to sell are a different story. Unfortunately, they often realize so too late and end up with even lower sell prices than they could have obtained otherwise.

Buyers, on the other hand, develop a mindset that prices will maintain the momentum they have had. So, just as in 2005 they were chasing ever higher purchase prices, now they are chasing lower prices. The end result is predictable. They end up buying high with the rising tide and end up not buying in the ebbing tide, which will pass them by.


  1. You Got That Right!. This is the hardest thing for a Realtor to work with, a seller that needs to sell, but is unable to see the market reality. The market dictates prices, not the sellers, not the Realtors, not the Pope...

  2. I agree, emotions have a way on getting in the way of business decisions, often with negative results. This is why obtaining the assistance of an objective professional is so important.



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