Selling our house, the new strategy!
May 14, 2007
Well, my wife has been reading Dr. Dyer recently and has decided that we should live in abundance versus scarcity. What does this mean? For the Muse family it means we bought a new house without selling our old home. This seemed a little crazy to me at first, but I learned long ago that my wife has very good instincts and ignoring them is a very bad idea. We bought the home six years ago and when we listed the house we decided to list at a ‘break-even’ price, despite the fact that housing prices have increased substantially here in Dallas. We decided on this low price to offset the objections potential buyers might have with the house backing up to a busy street (Greenville Ave).
Three months later we had not had a single offer. Our realtor suggested that we lower the price. We followed his advice, but a month later no offer. He then suggested we lower the price yet again. I asked why, thinking that our real problem was location. The realtor explained that we might find more ‘internet searchers’ in this lower price range. Based on this theory raising the price would actual accomplish the same thing. In fact, I began to think that buyers who were interested in a high-end home with similar finishout and square footage might be looking $100-150K more. Maybe we were missing out on these buyers. I didn’t even bother to look at homes in my price range when we bought, perhaps others who might consider the home missed it as well.
Randolph Harris, writing for Capitalism 2.0, wrote an interesting article titled Housing Market Friction earlier today suggesting that the housing market has turned around, despite what experts from the industry are suggesting. He points to new research and suggests that this news is "huge" because a) Federal policy makers are basing current policy on faulty assumptions, b) there is a current "surge in activity" due to "hip-pocket" transactions that do not appear in MLS, c) the market has already corrected, and buyers are missing the opportunity to buy at deep discounts and d) the press is no longer a viable source of research. He concludes, "One of the unique economic aspects of residential real estate is that fact that the markets are driven so heavily by information asymmetry. It seems that this monopoly-on-information is maybe even more widespread, more intentional, and probably more damaging to everyday home buyers than I had thought."
This information asymmetry is explained by Steven Levitt in his New York Times best selling book, Freakonomics. Based on research conducted by Levitt and Chad Syverson at the University of Chicago, real estate agents did a much better job of selling their own homes than the homes of their clients. Specifically, realtors kept their houses on the market longer and sold them for significantly higher prices than the homes of their clients. You can read the original academic paper here. To sumarize: Agents are often better informed than the clients who hire them and may exploit this informational advantage. Real-estate agents, who know much more about the housing market than the typical homowner, are one example. Because real estate agents only receive a small share of the incremental profit when a house sells for a higher value, there is an incentive for them to convince their clients to sell their houses too cheaply and too quickly. We test these preductions by comapring homes sales in which real estate agents are hired by others to sell a home to instances in which a real estate agent sells his or her own home. In the former case, the agent has distored incentives; in the latter case, the agents wants to pursue the first-best. Consistent with the theory, we find homes owned by real estate agents sell for about 3.7 percent more than other houses and stay on the market about 9.5 days longer, even after controller for a wide range of housing characteristics.
What does this mean for us? Our realtor is actually a great guy and has done a great job, but I do think that Levitt’s prediction that realtors will "attempt to convince their clients to sell their houses too cheaply and too quickly" is true. Instead, I am going to assume the data Harris has reported is true and we have in fact reached a bottom and increase the price of our home to reflect a 5% increase over the last six years (a far cry from the 20-60% other homes are listed at). Needless to say our realtor is freaking out. He has NEVER heard of anyone increasing the price of their home. The truth is we don’t really need to sell our home for less than we paid, in fact we could easily rent the property and generate a small monthly income. So if you are looking for a great house is Dallas, take a look at ours here on Zillow.
