These are two captivating real estate headlines from a publication in The New York Times:
- Mortgage Rates Too High? (Blame the Fed, Wall Street and Your Neighbor.)
- With Rates This Low, Where’s the Boom?
Now, before proceeding to the following sentence, attempt to estimate the 30-year fixed mortgage rate at the moment each article was crafted.
The inaugural narrative emerged during the preceding autumn, coinciding with a moment when rates catapulted to a staggering 6.95%. Conversely, the latter account hails from the annals of 1993, a time when rates were considered “low,” descending all the way to… 7.10%.
What precisely is transpiring here? These headlines serve as a testament to the potent sway of perspective. Our cognitive faculties lean on cognitive shortcuts to render judgments and unravel quandaries. However, at times, these shortcuts lead us astray, birthing disparities and erroneous conclusions predicated on an incomplete tapestry of facts.
For individuals navigating the labyrinthine realm of real estate, grappling with the tumultuous landscape can prove arduous. Yet, real estate professionals wield the ability to shepherd their clients towards astute choices. Presented below are three cognitive biases that merit vigilance and three exercises that can furnish customers with a distinct edge within today’s dynamic market.
The Influence of Recency Bias on Expectations
The core concept: Recency bias materializes when we ascribe greater significance to fresh data while undervaluing older information. Consequently, individuals anticipate the formation of patterns grounded in recent trends, even when such assumptions lack empirical validation.
Consider potential homebuyers who, owing to the pandemic, may deem 3% mortgage rates as customary. Alternatively, they might harbor expectations of perpetual surges in home values due to recent increases.
What the empirical evidence reveals: Escaping the clutches of recency bias entirely proves a formidable task. Research unveils its disparate impact across demographic variables. A 2019 study probing investment behavior found that abrupt stock market fluctuations exerted a more pronounced influence on younger individuals and those with modest incomes. Intriguingly, those who sought guidance from professional advisors adhered more steadfastly to their investment strategies during periods of market upheaval.
This insight might well apply to real estate agents. Crafting unambiguous objectives and disseminating informative content can serve as a means of keeping clients on a steady course.
How to guide clients in addressing this bias: Encourage your clients to adopt a broader perspective. Remind them that the prevailing market conditions are transient. Historical trends constitute an invaluable tool in this regard. For instance, during the 1980s, the 30-year fixed mortgage rate never plummeted below 9%, persisting above 12% for the majority of the decade. In juxtaposition, today’s rates might appear less imposing.
Anchoring Bias and Its Influence on Decision-Making
The fundamental premise: Anchoring bias prompts individuals to make judgments hinging on an existing reference point or “anchor.”
Imagine a prospective buyer who first encounters a house listed at $500,000 and subsequently witnesses a price reduction of $10,000. They might perceive it as a superior deal than if the property had been initially listed at $490,000.
What the empirical data uncovers: An insightful study, published in The Economic Journal, unearthed that individuals relocating from pricier locales tended to gravitate toward more expensive homes than those migrating from more affordable areas.
Thus, if a client relocates from a high-cost metropolis like San Diego to, say, Tulsa, their baseline standard, rooted in California’s real estate landscape, may incline them toward pricier properties in Oklahoma. However, anchoring bias is a mutable phenomenon. As clients settle into their new surroundings, their anchor point will recalibrate to align with the local conditions.
How to assist clients in contending with this bias: Channel your clients’ inner game show contestants. Seriously, propose an exercise reminiscent of “The Price Is Right.” Review property listings sans price tags, prompting clients to record the maximum they’d be willing to pay. This approach empowers them to form an opinion based solely on the property’s merits, minimizing preconceived notions.
Left-Digit Bias and Its Influence on Pricing
The fundamental concept: Left-digit bias posits that consumers disproportionately fixate on the leftmost digit within a price.
This phenomenon, often referred to as “charm pricing,” permeates various aspects of consumer decision-making. It elucidates why parting with $3.99 for a gallon of gasoline appears markedly more economical than surrendering $4.00.
What the empirical evidence unveils: Left-digit bias exercises significant sway over substantial purchases, including real estate transactions. Research centered on Sweden’s housing market revealed that residences listed just below a round million garnered final prices 3-5% higher.
Furthermore, a survey conducted among real estate agents demonstrated that most did not anticipate left-digit bias to have any bearing on pricing. Surprisingly, agents with more extensive experience displayed a slightly greater inclination to employ charm pricing when listing properties.
How to assist clients in contending with this bias: If you cater to buyers, contemplate adjusting all listed prices to round numbers before conducting property viewings. Alternatively, revisit the blind evaluation exercise proposed earlier in the anchoring section.
For listing agents, capitalize on charm pricing as a strategic advantage. It may yield a more substantial commission, courtesy of the intricacies of human psychology.