Friday, June 22, 2012

Psychology & Real Estate

If you have ever house-hunted, you have likely got a sense that home buying does not represent consumers at their most rational state of mind.  For example, did you ever happen to like a house or condo more or less depending on whether it was sunny on the day you saw it?  Chances are - you did...

Buying a home is not the same as buying a stock, a refrigerator, or even a car.  It is not just a product with pluses and minuses - good school system vs. small kitchen, new roof vs. longer commute, etc.  A home (to a large degree) represents the kind of life you want to live.  And given its cost, a house and the marketable value it gains (or loses) represent in a very concrete way the life you will be able to live.  Thus, it is both expected and disturbing to realize our judgment about real estate is susceptible to many of the foolish forces that affect so many other consumer buying decisions.
Home is where the Head is
Research shows that consumers struggle to stay rational when buying or selling homes.  Some examples:
Fresh look: It is not just the fresh paint job of a property that lures Buyers, but the more attractive the real estate agent who is showing a house that motivates a Buyers’ decisions, and potential willingness to pay more, research shows. 

Refusing to lose: People who buy homes near the peak of a boom tend to list them at higher prices, even if that means they don't sell.  Blame it on "loss aversion," the mental quirk by which we feel losses much more sharply than we feel equivalent gains.

My home is better: Homeowners consistently overestimate the value of their homes by 5 to 10 percent.  The only group that is an exception are those who bought during a market slump (downturn).  Buyers getting in now may be at a cognitive advantage for years to come.  Boom buyers, however, have to come to terms not just with economic losses, but with psychological losses as well.