The Psychology of Real Estate

I found this interesting article on SmartMoney.com and wanted to share with my readers. What are your thoughts on the results from the study?

EARLIER THIS YEAR 27 STUDENTS at Old Dominion University pressed their foreheads into a padded frame and peered ahead, much like patients at an eye doctor. They scrolled through pictures of 10 on-the-market homes on a computer screen as an ocular tracking program recorded their eye movements. In some of the homes, for some of the students, the living rooms were painted pink.

The question: Would a pink room—a problem you could fix for the price of a few cans of paint—make the students less likely to purchase the homes? The answer, based on preliminary results, is yes.

The study is part of a growing body of research that is putting real estate under the microscope. Scientists are finding that psychology—everything from how a buyer perceives his agent to how a seller prices her home—plays an unexpectedly large role. “When the market was going up, these questions were mildly interesting,” says Michael Seiler, a professor of real estate at Old Dominion University and the coauthor of numerous studies in the field (including the one about the pink room). Today, with the market wobbly, “they’re much more relevant,” and the results of such research, he and other academics say, can offer useful insights to buyers and sellers alike.

Here’s a roundup of some pertinent findings.

Choose Your Words Carefully

For a seller, advertising that you’ve recently painted your house seems like a no-brainer. But in a study that looked at nearly 60,000 residential real estate transactions in Texas, listings that mentioned new paint, new carpet and/or roof work sold, on average, for slightly less than those that did not.

Thomas A. Thomson, the study’s coauthor and the director of the Real Estate Finance and Development Program at the University of Texas at San Antonio, says that buyers aren’t going to be fooled by a problem house simply because it has a fresh coat of paint. “It’s kind of like putting lipstick on a pig,” he says. But even if there’s nothing wrong with the house, an advertisement that touts new features could set off alarm bells. If a seller says everything is new, a buyer might wonder why everything needed to be replaced—and whether there are other defects lurking.

Thomson recommends sellers take the simpler route: Let potential buyers be surprised by the quality of the home instead of disappointed by how average it is compared with its description.

Looks Do Count

Do buyers pay more when sellers’ real estate agents are attractive? Apparently so: Preliminary results of a study from Old Dominion University suggest that, put bluntly, the more attractive a male finds his female agent, the higher the price he’ll probably be willing to pay. Women also seem to be susceptible to attractive female agents, although not to the degree that men are. (Neither women nor men seem to respond much to attractive males.) “I’d like to think I wouldn’t fall prey to it,” says Seiler. “But I think that the people who were in our study would have said the exact same thing.”

Welcome, Out-of-Towners!

Out-of-state buyers tend to pay more than locals for properties of equal value, particularly when they come from states with higher real estate prices, according to a study from Brigham Young University. Researchers looked at apartment sales in the Phoenix metropolitan area—2,854 transactions from 1990 to 2002—and found that, on average, out-of-state buyers paid more than 5 percent more than their in-state counterparts.

BYU’s Grant McQueen says it often makes economic sense for out-of-state buyers to find homes fast, even if it means shelling out more money than if they shopped more or negotiated longer. Otherwise, they can end up paying more in travel costs than they save on the price of the home. The other reason, though, is less rational: In what’s known as “anchoring,” buyers tend to pay more for a home when they’re used to paying a higher price elsewhere.

The Downside of Upbeat

A big part of any decision to sell a house is where a homeowner thinks prices are heading. So how do owners feel after the brutal market of the past few years? Surprisingly—perhaps naively—optimistic. A recent survey of 479 homeowners in 20 U.S. metropolitan areas found that people were about five times more likely to say their own homes would see their prices increase in the next 12 months than they were to say their neighbors’ homes would do better. 

Robert Shiller, a professor at Yale University, and Karl Case, a professor at Wellesley College, survey homeowners every year to gauge how confident they are that their homes will increase in value. Only once, when the housing market was at its worst in the recent crash, did the poll results slide into the negative. In general, the average respondent figured his home was bound to jump in value in the near future. “People don’t change their opinions that quickly,” says Shiller.

Whether they’ll regret those opinions later, only time will tell. If his expectations are out of whack with reality, an overoptimistic seller could wind up waiting for a higher price that will never arrive. But pessimists should tread just as carefully: An overly downbeat seller could wind up dumping a house at a price far below what it could fetch a year or two later.

Published July 15, 2010

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