Suppose we agree on the market value of your home. What should we list it for? Some would say, "List it for more than the market value. People are probably going to offer less than the list price, but this way you still may get market value or more." Others might argue, "List it for less than market value. That will attract more offers, and it may well result in the price being bid up above the market value figure." And, of course, there are those who will say, "List it at market value and stick to your price." Who is right?
Wouldn't it be nice if there were some significant empirical evidence that supported one pricing strategy over another? We're not talking about anecdotes here. We all know plenty of those, and different ones support different views. What we want is a study - peer-reviewed and academically blessed.
Recently the Wall Street Journal (August 8, 2013) reported that it had found such a study. An article by Sanette Tanaka discussed research by professors Grace Bucchianeri and Julia Minson that appeared in the May issue of the Journal of Economic Behavior & Organization ("A homeowner's dilemma: Anchoring in residential real estate transactions"). The researchers "analyzed more than 14,000 transactions, taking into account observable property heterogeneity, geographical location and timing of the sales." In a nutshell, they found that "higher starting prices are indeed associated with higher selling prices." More specifically, "... a home that is listed 10-20% higher than other homes in the neighborhood, will command an additional increase of 0.05 - 0.07% in the sale price for each 10% increase in the expected price."
Interestingly, the authors also noted "We do not find evidence that under-pricing is effective in hot markets." Pricing a home 10% - 20% lower than comparable homes led to a 0.05% - 0.08% decrease in the expected price..
The professors offer explanations for each phenomenon. To explain the beneficial effect (for sellers) of overpricing, they refer to the phenomenon that behavioral economists call "anchoring". In the book Predictably Irrational, Daniel Ariely explains anchoring as similar to the phenomenon of imprinting. It is summed up in the maxim, "First impressions last." Our price impressions of products and types of products are strongly influenced by our first exposure. "... price tags by themselves are not necessarily anchors. They become anchors when we contemplate buying a product or service at that particular price. That's when the imprint is set. From then on, we are willing to accept a range of prices - but as with the pull of a bungee cord, we always refer back to the original anchor. Thus, the first anchor influences not only the immediate buying decision, but many others that follow." (p. 30)
On the other hand, the anchoring phenomenon would seem to be contradicted by auctions. Bucchianeri and Minson write, "Recent findings show that auctions that open with low asking prices generate a greater number of bids and ultimately finish with higher closing prices… Indeed, an analysis of real estate-related web content reveals that professional consensus favors pricing a home low, in the hopes of starting a 'bidding war'." But the authors found that their data did not support this. Their explanation for this was that, in the real estate context, there are seldom enough buyers in the market to create the "herding effect" found in a typical auction. The "bidding war" is not sufficiently robust.
The research we have cited is certainly interesting, but, despite the enthusiastic endorsement of the Wall Street Journal, we have to ask ourselves, "How much does it really mean?" Even if we grant all the assumptions and methodological controls that attended the data analysis, we still want to observe that the price differentials that they found ranged (both upward and downward) under 1% of the expected price. In the data they examined, the average sale price was $234,000. They discovered price variations in the general range of $117 - $187. That is what, in other contexts, one would call "a rounding error."
There is no question but that people who are in the business of marketing homes should think about a phenomena such as anchoring and the herding effect of auctions. But as far as answering the general question, "What is the best pricing strategy?" we still have a long way to go.