Should You Price a Home High or Low? A New Study Makes a Surprising Recommendation

Home prices are up. Mortgage rates are low. Housing supply is stretched thin. Suffice it to say -- it's a tight market.

And in a tight market, the conventional wisdom is to price your house a little lower than its actual value, in the hopes of sparking a bidding war that will result in an above-market sale price.

Not so fast! Homes priced higher might end up selling even higher, according to a study published in the Journal of Economic Behavior & Organization.

The authors surveyed more than 200,000 homes listed in Delaware, New Jersey, and Pennsylvania from 2005 to 2009 and found that homes priced 10% to 20% higher than similar homes saw a bump.

It's tied to a psychological tendency called "anchoring" -- using the first price we see as the anchor around which we base our judgment. It's why sales make shoppers salivate -- if jeans have an $80 price tag, then we think 20% off is a steal, even if another store sells jeans at $60.

We may also accentuate the positive in order to fit our anchored model -- "a buyer exposed to a high-priced property might attend more to the attractive landscaping, than to the outdated plumbing," the study notes.

But there are a few caveats -- the numbers came before and during the market crash of 2007 -- 2008. And the returns, while statistically relevant, may not mean much for the bottom line. A Wall Street Journal article on the study notes that brokers may also have to spend more time marketing the house to justify the price tag and the difference in fees wouldn't be worth it.

In the current market, brokers suggest the opposite. All around the country, they research comparable sales. Could they price a home a little higher? Perhaps. But is it worth the risk?

John Windle, a Coldwell Banker Apex Realtor in McKinney, TX, says the market in his area is tight enough -- lots of buyers, not enough inventory -- that homeowners can price to sell at the top end of the suggested range. But prices still hew closely to what similar homes recently sold for.

Homes that sold last year for $200,000 easily sell for $205,000 or more this year, he says. So while comparable sales and research might suggest lower pricing, based on last year's data, he might suggest a slightly higher price based on the current market.

"I always encourage them to price it for where the market settled," he says.

In the San Francisco Bay Area, Darcy Barrow and her husband have a high-end real estate business, Foundation Homes International. They sell homes in a price range that's about 10 times what Windle handles in Texas, but they approach home sales similarly. If anything, they suggest underpricing the homes they represent.

"If you price it just a hair under market, you get a buzz going," she says. "Smart buyers who are advised well are usually coming in just a little over market."

So the home still sells, money changes hands quickly, and everyone walks away with a deal.

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