How Consumers Really Think
What exactly are buyers and sellers seeking these days? “Nordstrom service, Disney innovation, and K mart prices,” joked a top Chicago broker speaking recently to an audience of real estate professionals.
He had the audience hooked, but after the laughter subsided, the group moved on to other topics—never truly touching on the critical theme that he’d humorously hinted at.
So, what do consumers really want? How do they make decisions about buying and selling? And just how self-aware are they about what influences those decisions?
Living in an information-soaked age where all who desire it have easy access to data about the economy, consumer spending, and local housing markets doesn’t inherently make finding the answers easier.
A host of consumer behavior specialists from the halls of academia and market research are providing some important clues, but how do those clues translate into practical advice?
A good deal of decision-making about the largest purchase most people ever make can appear irrational, according experts.
No matter how long you’ve been in the business, you may still sometimes be amazed at the mistaken priorities of many buyers as they search for their perfect home. And don’t forget the seemingly whimsical approach they take to determine fair pricing.
Similarly, a fuller understanding of the complicated thought patterns of sellers and the emotional landmines embedded in the closing process may persuade you to reexamine the way you work with consumers.
Armed with more meaningful insights into what drives people’s actions—or inaction—when buying or selling a home, you’re likely to see improvements in your relationships with clients. That, in turn, could well propel your business to the next level and provide a welcome business advantage during these tough economic times.
Closing the Perception Gap
The relationship between sellers and buyers in some ways mirrors the tango between presidential candidates and voters. Both sides need each other to further their goals, but the potential for misunderstanding and mistrust is enormous. In real estate, perception gaps can lead to tension-filled negotiations and derailed transactions.
“The seller’s big fear is always that the buyer might walk away. But sellers tend to underestimate how attached a buyer becomes to a home as soon as the offer is made, even before it is accepted,” explains George Loewenstein, professor of behavioral economics at Carnegie Mellon University, who studies the role of emotions in consumer decision making. “The truth is that buyers feel they own the place as soon as they make an offer.”
This realization should help calm sellers’ anxiety about a buyer’s commitment to a home purchase, even in sluggish, inventory-laden markets.
Still, it has been no small frustration for real estate pros during the economic slump that many would-be buyers still seem stuck. Prices have dropped in many parts of the country, a large selection of properties is available, and mortgage rates have remained attractive for those with solid credit.
But these economic trends belie a more compelling psychological phenomenon: overconfidence. Not overconfidence about the condition of the economy, to be sure, but overconfidence among buyers in their own ability to time the market.
“People think they know more than they really do,” says Jason Zweig, a personal finance columnist at The Wall Street Journal and the author of Your Money & Your Brain (Simon & Schuster, 2007), a critically acclaimed examination of how neuro-science, psychology, and economics affect financial decisions.
Many buyers are skittish about moving forward because they’re convinced prices will drop further. Zweig’s recommendation to real estate salespeople is simple: “Ask buyers, ‘When would be the right time to buy?’”
Most of the time, he says, “they don’t even realize they don’t have an answer to that. What’s going on is unexpressed, even to themselves. As human beings, we have a terrible time admitting when we don’t know something.”
There’s nothing inherently irrational about people’s fears of losing money. What’s harder to fathom is that homeowners—and would-be sellers—are often much more upset when home values decline than when their stock portfolio plummets.
“Logically, you should care less about what’s happened to your home price,” says Loewenstein. “You get to live in a home. It has other purposes than a stock, which you own specifically to conserve or make money.”
One explanation for the discrepancy is that the home is an extension of the self, so a perceived loss of value packs a greater emotional wallop. In contrast, people tend to have less of an attachment to the particular stocks they own, with the exception of shares from the companies where they work. Stock market losses, while still painful, feel less personal.
If sellers have lived in a home for more than a few years and didn’t siphon off all its equity during the high-flying days of cheap credit lines, the reality is they’ll likely turn a tidy profit, even in today’s slower markets. A smart real estate salesperson should help clients see and appreciate the wealth they’ll reap from the transaction, without dwelling on the relative loss of value over the past year or two.
“Looking at what I could have and should have done a few years ago doesn’t help,” says Zweig.
Maintaining a Distance
Buyers who do move off the sidelines commonly approach the selection process in the wrong way, and real estate pros may unwittingly contribute to the problem. “The goal of most buyers is to fall in love with one house and hope that they can afford it. But this kind of behavior is quite irrational,” says Harvard Business School professor Max Bazerman, an expert in negotiations. ”What’s missing is a Plan B. This is a violation of a core concept of negotiating.”
Instead, he notes that initially identifying a “second choice” home that is less expensive gives buyers and their representatives more leverage during the negotiation process. And if discussions collapse, buyers still have a sound, affordable alternative waiting in the wings that could work out just fine.
The final stages of the homebuying process can trigger a different set of emotions. Even when the most jubilant buyers come to closing, “there’s often a notable change in how they feel between the moment right before and right after they sign the papers. People are quite bad at predicting their own reactions to an event like a real estate closing and can feel blindsided by anxiety that often hits them,” says Loewenstein.
To that end, a smart move for real estate salespeople is to warn buyers well in advance of the closing date that there’s a chance they’ll be walloped by a temporary wave of nervousness as soon as the mountain of paperwork is signed.
“It’s better when people know what to expect in those sorts of situations. That knowledge in advance can help mute the pain,” says Loewenstein. He notes that salespeople shouldn’t fret that such a conversation will scare off buyers. “Quite the opposite, consumers will appreciate when salespeople have been honest about the pitfalls. In the long term, buyers will think of the sales associate as wise and trustworthy,” he says.
Sellers, on the other hand, are much less likely to be hijacked by unexpected remorse at closing. Loewenstein notes that by closing, they’ve already become detached from the property, making the process more emotionally straightforward.
Paradoxical Pricing
No issue is more fraught with emotion and contradiction than assessing the reasonableness of home prices. Confusion reigns for both buyers and sellers, even when up-to-date market comps are put under their noses. In a 2006 study published in The Economic Journal, Loewenstein and co-author Uri Simonsohn found that people determined the “best price” to pay for housing based on previous, but irrelevant, experience.
In the first real-world test of a psychological phenomenon called “background context effects,” they found that a Manhattan resident who moved to Pittsburgh will pick a pricier home than a person moving to the Steel City from Gadsden, Ala., regardless of how much money they make or their personal style.
“People really have no clue how much they should spend on housing or how much more to spend on certain features like an extra bedroom,” he says. “People make important economic decisions based on arbitrary, fleeting clues that are difficult to justify on any rational basis.”
Sellers tend to be no more logical in their thinking about prices. Even in areas where sales volume has dropped and prices are falling, people often have a “ratcheted” view of their own property’s worth. “They tend to feel the true value is the maximum value it ever was,” says Loewenstein.
A nationwide survey released in May by Zillow.com and conducted by Harris Interactive confirmed the pervasive denial among homeowners about the effects of market declines on their own properties.
A full 72 percent of owners nationwide said the value of their home had increased or stayed the same over the past year, even though three-quarters of U.S. homes declined in value during that time, according to the popular real estate Web site. Both Zillow and NAR research show that nationwide home values fell 7.7 percent during the first quarter of this year, compared to the same period in 2007.
When it comes to determining listing prices, sellers would do well to take advantage of a little-recognized but well-documented phenomenon known as the “precision heuristic.”
Researchers at Cornell University have found that consumers incorrectly perceive precise prices such as $325,425 to be lower than $325,000, a rounded price of a similar magnitude. Using data from 27,000 real estate transactions in two U.S. markets, they found that buyers paid higher prices when asking prices were more exact. “People learn to associate precision with smaller magnitudes,” wrote the research team led by Manoj Thomas of Cornell’s Johnson Graduate School of Management in Ithaca, N.Y. “Using sharp numbers rather than round numbers could be an important pricing strategy for sellers,” suggests Jason Zweig.
While such a counterintuitive insight speaks to the interests of sellers, experts have identified a buying approach that could make home seekers happier in the long term. Real estate practitioners and financial advisors often recommend that people seek the least expensive home in the most desirable neighborhood as a wise investment move.
But will going this route lead to a contented homeowner? Not necessarily.
Humans are biologically programmed to care about how they rank against their peers, notes Zweig. Even if people say they don’t care about “keeping up with the Joneses,” they may well be afflicted by a comparison complex without realizing it.
Extensive research into what makes people happy shows that, on average, the more money the richest person in your community makes and the greater the number who earn more than you, the less satisfied you will feel with your life.
Hence, Zweig says that people will ultimately be happier if they pick the most expensive house in a lower-cost neighborhood than the least expensive house in a higher-cost area. “A time like this, when prices are soft, may be ideal to make this psychological trade,” he says.
This is the sort of knowledge you can use to find a buyer for the best house in an up-and-coming, modest neighborhood. As Zweig notes, they won’t feel that their home is getting smaller as the years go by and that they’re being constantly outspent by the neighbors. In these unsettling times, those could well be the defining characteristics of today’s happy homeowner.
Can You Spot an “Authentick”?
Ready to delve into the hearts and minds of potential home buyers? Real estate businesses can benefit from using psychographics, a market research tool that incorporates people’s backgrounds, lifestyles, beliefs, and aspirations to develop discrete portraits of consumer behavior.
Long a staple for consumer products companies that sell everything from breakfast cereal to jeans, psychographic subgroups can help connect customers to the right homes.
“Some people get antsy about the idea of pigeonholing people into categories. But this is not about discrimination or steering,” notes Dennis Cahill, an adjunct marketing professor at Cleveland State University who directs marketing for AdWriter, a Sandusky, Ohio–based company that produces targeted real estate advertising based on five homebuying “tribes.”
The company developed the market segments from its proprietary research of home buyers in the Denver area in 1991. Cahill notes that nearly every consumer will recognize himself or herself in a category. “Real estate salespeople can target their advertising and their overall message based on the tribes. Excluding people who wouldn’t buy a certain house, ever, should shorten the buying cycle,” says Cahill.
Wendy Cole is a senior editor of REALTOR® magazine. She can be contacted at wcole@realtors.org.
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He had the audience hooked, but after the laughter subsided, the group moved on to other topics—never truly touching on the critical theme that he’d humorously hinted at.
So, what do consumers really want? How do they make decisions about buying and selling? And just how self-aware are they about what influences those decisions?
Living in an information-soaked age where all who desire it have easy access to data about the economy, consumer spending, and local housing markets doesn’t inherently make finding the answers easier.
A host of consumer behavior specialists from the halls of academia and market research are providing some important clues, but how do those clues translate into practical advice?
A good deal of decision-making about the largest purchase most people ever make can appear irrational, according experts.
No matter how long you’ve been in the business, you may still sometimes be amazed at the mistaken priorities of many buyers as they search for their perfect home. And don’t forget the seemingly whimsical approach they take to determine fair pricing.
Similarly, a fuller understanding of the complicated thought patterns of sellers and the emotional landmines embedded in the closing process may persuade you to reexamine the way you work with consumers.
Armed with more meaningful insights into what drives people’s actions—or inaction—when buying or selling a home, you’re likely to see improvements in your relationships with clients. That, in turn, could well propel your business to the next level and provide a welcome business advantage during these tough economic times.
Closing the Perception Gap
The relationship between sellers and buyers in some ways mirrors the tango between presidential candidates and voters. Both sides need each other to further their goals, but the potential for misunderstanding and mistrust is enormous. In real estate, perception gaps can lead to tension-filled negotiations and derailed transactions.
“The seller’s big fear is always that the buyer might walk away. But sellers tend to underestimate how attached a buyer becomes to a home as soon as the offer is made, even before it is accepted,” explains George Loewenstein, professor of behavioral economics at Carnegie Mellon University, who studies the role of emotions in consumer decision making. “The truth is that buyers feel they own the place as soon as they make an offer.”
This realization should help calm sellers’ anxiety about a buyer’s commitment to a home purchase, even in sluggish, inventory-laden markets.
Still, it has been no small frustration for real estate pros during the economic slump that many would-be buyers still seem stuck. Prices have dropped in many parts of the country, a large selection of properties is available, and mortgage rates have remained attractive for those with solid credit.
But these economic trends belie a more compelling psychological phenomenon: overconfidence. Not overconfidence about the condition of the economy, to be sure, but overconfidence among buyers in their own ability to time the market.
“People think they know more than they really do,” says Jason Zweig, a personal finance columnist at The Wall Street Journal and the author of Your Money & Your Brain (Simon & Schuster, 2007), a critically acclaimed examination of how neuro-science, psychology, and economics affect financial decisions.
Many buyers are skittish about moving forward because they’re convinced prices will drop further. Zweig’s recommendation to real estate salespeople is simple: “Ask buyers, ‘When would be the right time to buy?’”
Most of the time, he says, “they don’t even realize they don’t have an answer to that. What’s going on is unexpressed, even to themselves. As human beings, we have a terrible time admitting when we don’t know something.”
There’s nothing inherently irrational about people’s fears of losing money. What’s harder to fathom is that homeowners—and would-be sellers—are often much more upset when home values decline than when their stock portfolio plummets.
“Logically, you should care less about what’s happened to your home price,” says Loewenstein. “You get to live in a home. It has other purposes than a stock, which you own specifically to conserve or make money.”
One explanation for the discrepancy is that the home is an extension of the self, so a perceived loss of value packs a greater emotional wallop. In contrast, people tend to have less of an attachment to the particular stocks they own, with the exception of shares from the companies where they work. Stock market losses, while still painful, feel less personal.
If sellers have lived in a home for more than a few years and didn’t siphon off all its equity during the high-flying days of cheap credit lines, the reality is they’ll likely turn a tidy profit, even in today’s slower markets. A smart real estate salesperson should help clients see and appreciate the wealth they’ll reap from the transaction, without dwelling on the relative loss of value over the past year or two.
“Looking at what I could have and should have done a few years ago doesn’t help,” says Zweig.
Maintaining a Distance
Buyers who do move off the sidelines commonly approach the selection process in the wrong way, and real estate pros may unwittingly contribute to the problem. “The goal of most buyers is to fall in love with one house and hope that they can afford it. But this kind of behavior is quite irrational,” says Harvard Business School professor Max Bazerman, an expert in negotiations. ”What’s missing is a Plan B. This is a violation of a core concept of negotiating.”
Instead, he notes that initially identifying a “second choice” home that is less expensive gives buyers and their representatives more leverage during the negotiation process. And if discussions collapse, buyers still have a sound, affordable alternative waiting in the wings that could work out just fine.
The final stages of the homebuying process can trigger a different set of emotions. Even when the most jubilant buyers come to closing, “there’s often a notable change in how they feel between the moment right before and right after they sign the papers. People are quite bad at predicting their own reactions to an event like a real estate closing and can feel blindsided by anxiety that often hits them,” says Loewenstein.
To that end, a smart move for real estate salespeople is to warn buyers well in advance of the closing date that there’s a chance they’ll be walloped by a temporary wave of nervousness as soon as the mountain of paperwork is signed.
“It’s better when people know what to expect in those sorts of situations. That knowledge in advance can help mute the pain,” says Loewenstein. He notes that salespeople shouldn’t fret that such a conversation will scare off buyers. “Quite the opposite, consumers will appreciate when salespeople have been honest about the pitfalls. In the long term, buyers will think of the sales associate as wise and trustworthy,” he says.
Sellers, on the other hand, are much less likely to be hijacked by unexpected remorse at closing. Loewenstein notes that by closing, they’ve already become detached from the property, making the process more emotionally straightforward.
Paradoxical Pricing
No issue is more fraught with emotion and contradiction than assessing the reasonableness of home prices. Confusion reigns for both buyers and sellers, even when up-to-date market comps are put under their noses. In a 2006 study published in The Economic Journal, Loewenstein and co-author Uri Simonsohn found that people determined the “best price” to pay for housing based on previous, but irrelevant, experience.
In the first real-world test of a psychological phenomenon called “background context effects,” they found that a Manhattan resident who moved to Pittsburgh will pick a pricier home than a person moving to the Steel City from Gadsden, Ala., regardless of how much money they make or their personal style.
“People really have no clue how much they should spend on housing or how much more to spend on certain features like an extra bedroom,” he says. “People make important economic decisions based on arbitrary, fleeting clues that are difficult to justify on any rational basis.”
Sellers tend to be no more logical in their thinking about prices. Even in areas where sales volume has dropped and prices are falling, people often have a “ratcheted” view of their own property’s worth. “They tend to feel the true value is the maximum value it ever was,” says Loewenstein.
A nationwide survey released in May by Zillow.com and conducted by Harris Interactive confirmed the pervasive denial among homeowners about the effects of market declines on their own properties.
A full 72 percent of owners nationwide said the value of their home had increased or stayed the same over the past year, even though three-quarters of U.S. homes declined in value during that time, according to the popular real estate Web site. Both Zillow and NAR research show that nationwide home values fell 7.7 percent during the first quarter of this year, compared to the same period in 2007.
When it comes to determining listing prices, sellers would do well to take advantage of a little-recognized but well-documented phenomenon known as the “precision heuristic.”
Researchers at Cornell University have found that consumers incorrectly perceive precise prices such as $325,425 to be lower than $325,000, a rounded price of a similar magnitude. Using data from 27,000 real estate transactions in two U.S. markets, they found that buyers paid higher prices when asking prices were more exact. “People learn to associate precision with smaller magnitudes,” wrote the research team led by Manoj Thomas of Cornell’s Johnson Graduate School of Management in Ithaca, N.Y. “Using sharp numbers rather than round numbers could be an important pricing strategy for sellers,” suggests Jason Zweig.
While such a counterintuitive insight speaks to the interests of sellers, experts have identified a buying approach that could make home seekers happier in the long term. Real estate practitioners and financial advisors often recommend that people seek the least expensive home in the most desirable neighborhood as a wise investment move.
But will going this route lead to a contented homeowner? Not necessarily.
Humans are biologically programmed to care about how they rank against their peers, notes Zweig. Even if people say they don’t care about “keeping up with the Joneses,” they may well be afflicted by a comparison complex without realizing it.
Extensive research into what makes people happy shows that, on average, the more money the richest person in your community makes and the greater the number who earn more than you, the less satisfied you will feel with your life.
Hence, Zweig says that people will ultimately be happier if they pick the most expensive house in a lower-cost neighborhood than the least expensive house in a higher-cost area. “A time like this, when prices are soft, may be ideal to make this psychological trade,” he says.
This is the sort of knowledge you can use to find a buyer for the best house in an up-and-coming, modest neighborhood. As Zweig notes, they won’t feel that their home is getting smaller as the years go by and that they’re being constantly outspent by the neighbors. In these unsettling times, those could well be the defining characteristics of today’s happy homeowner.
Can You Spot an “Authentick”?
Ready to delve into the hearts and minds of potential home buyers? Real estate businesses can benefit from using psychographics, a market research tool that incorporates people’s backgrounds, lifestyles, beliefs, and aspirations to develop discrete portraits of consumer behavior.
Long a staple for consumer products companies that sell everything from breakfast cereal to jeans, psychographic subgroups can help connect customers to the right homes.
“Some people get antsy about the idea of pigeonholing people into categories. But this is not about discrimination or steering,” notes Dennis Cahill, an adjunct marketing professor at Cleveland State University who directs marketing for AdWriter, a Sandusky, Ohio–based company that produces targeted real estate advertising based on five homebuying “tribes.”
The company developed the market segments from its proprietary research of home buyers in the Denver area in 1991. Cahill notes that nearly every consumer will recognize himself or herself in a category. “Real estate salespeople can target their advertising and their overall message based on the tribes. Excluding people who wouldn’t buy a certain house, ever, should shorten the buying cycle,” says Cahill.
Wendy Cole is a senior editor of REALTOR® magazine. She can be contacted at wcole@realtors.org.
SI DESEAS LEER DE ECONOMIA
http://www.pakatnamu1.com
MIRANDO OTROS PUNTOS DE VISTA
http://mirandopuntosdevista.blogspot.com
GRUPOS GOOGLE: QUINTO SUYO
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