The Real Estate Scientist Strikes Again: Pricing Your Home

This month’s issue of The Atlantic reports on research by Cornell University’s Manoj Thomas and his colleagues which found that consumers perceive round prices, such as $390,000, as being higher than prices such as $391,534. Round prices were in turn found to be correlated with a lower final sales price. Professor Thomas’s research, posted to the Web last week, validated findings first reported by Redfin in March 2007, based on an analysis of more than 30,000 2006 homes sales in Seattle, Washington. We would have included our March 2007 findings in our original Real Estate Scientist report, but worried that our data lacked a plausible rationale.thomas.jpg

The Cornell study, which evaluated empirical data for 27,000 home sales in Florida and Long Island but also included a controlled trial, took the next step to understand the consumer behavior behind the numbers: when researchers presented 90 college undergraduates with a hypothetical home for sale at different prices and asked if the home were overpriced, the subjects were more likely to say that a home was overpriced if the asking price was a round number. Professor Thomas and his colleagues posited that consumers associate round prices with high-priced items such as a car, and precise prices with low-priced items such as a pair of jeans.

It seems like his findings could help plenty of people: despite the conclusion that a round price is associated with an unfavorable result, Professor Thomas found that more than 63% of homes sold in Long Island and Florida had an asking price ending in three zeros. Of course, since real estate is a competitive marketplace, if everybody took this advice, it wouldn’t help anybody.

It is interesting to compare the Redfin study with the Cornell research:

  • Redfin organized home sales into different buckets according to the last three digits of the asking price, and found that homes with an asking price ending in -500, such as $391,500, had the highest sales price-to-asking-price ratio. By contrast, Professor Thomas found that every zero in the final three digits was correlated with a lower final price.
  • In Redfin’s study, the size of the effect for the last three digits of a house price was never greater than a .58%, whereas in the Cornell study, the effect was as great as .72%. In either case, the effect is significant: .58% of a $500,000 home is $2,900

Unlike Redfin, Professor Thomas excluded transactions from his consideration with an asking price ending in $-999, as this price invites a specific, already well-studied consumer reaction. Professor Thomas also studied houses and condos together, whereas Redfin published separate numbers for each. Neither Redfin nor Professor Thomas evaluated Kevin Boer’s excellent suggestion for Pacific Rim sellers, of ending a price in 8s to appeal to superstitious Chinese buyers.

We’ll add Professor Thomas’s research — and perhaps our own, too — to our summary of practical, data-driven advice for home-sellers. Thanks to a Friend of Redfin for bringing this new research to our attention, and also for submitting our bonus link for today.

Discussion

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  • common1sense

    Ending a price in 888 just makes clients laugh at the listing agent. They ask, what was the extra $88 for?

  • http://blog.redfin.com/blog/author/glenn%20kelman Glenn Kelman

    I see your point and we are admittedly being speculative but why not say, “for good luck!”

  • http://www.lil7.com/ lil7

    Good luck with timing the market.