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.
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.
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The Real Estate Scientist Strikes Again: Pricing Your Home
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Redfin is launching tonight The Real Estate Scientist, an initiative to use empirical techniques to improve the way our agents and clients buy and sell homes. We’re releasing our first report, which provides seven recommendations for home-sellers, and training our agents on the findings, which should allow us to have more informed conversations with our clients.
We developed this research because the housing downturn has made it harder to sell our clients’ homes. This in turn has made us more introspective about how we can use our special powers – our computer science background and our consumer commitment – to be the best brokerage, not just the best real estate website.
This has been a contentious process. At lunch we argue over the practical questions we have to address for our clients, like the best day to debut a listing or whether it’s really worthwhile to post an MLS property on craigslist. But why argue when you can experiment?
There are plenty of excellent academic studies of local real estate markets. And Redfin has data that most academics don’t: access to 17 MLSs with more than 250,000 listings, and a website used by hundreds of thousands of buyers every month.
We’ve tried to put this information to good use. We know that listings that debuted on Friday rather than Thursday drew 7.7% more visitors; that a vacant home increased the odds of a price reduction by 9.5%; that, because of how real estate websites filter on price, a listing priced at $351,001 got as much as 7.1% less traffic than one priced a dollar lower. A team of agents, engineers, statisticians and writers worked together to produce the report. Some of their findings are surprising, while others confirm conventional wisdom, which has value too.
We only worry that the name we’ve given this initiative, “The Real Estate Scientist,” will open us to being mocked. And too, we hesitated to give consumers simple answers due to the complexity of the underlying data. But in the end we chose the name because it was the one we had used all along, it was fun, and it was the simplest way to explain how our approach was different. We strove for conclusive answers because we have houses to sell every week, and customers who need straightforward guidance.
Consumers who have read early drafts of the report overwhelmingly found our recommendations useful and effective. The industry reaction will likely be different. Some will argue that the report substantiates already well-understood tactics, while others will take the exact opposite position, refuting our points one by one.
But the truth is that a discussion of how real estate brokerages can deliver better results, based on data rather than just opinion, is in everyone’s best interests. And the findings aren’t simply a prescription for how we’ll serve our customers, but the starting point for an informed conversation about pricing and marketing our listings. Hopefully you can contribute to this conversation too, suggesting future avenues for research.
And now we are going to be talking about the findings on “Today,” probably around 7:40 Friday morning. What fun! To get ready for the interview I got my first $50-haircut, by a young Albanian in midtown Manhattan who compared my current style to 1989 Depeche Mode, and suggested I try a different color. “Like blonde?” I said, intrigued. “Just not so gray,” she mumbled. Because I had 30 minutes before running for a train, she cut quickly, putting off a very stylish socialite who was demanding that her hair be wrapped for the ice storm.
And then it was exhilarating to run – really run – through the streets as the year’s first flakes fell and pedestrians looked up gratefully into the sky. On the sidewalks at nearly every corner, there was one guy pushing a salt spreader and, this being New York, another to stand there and tell him what to do.
I had a meeting in the coffee shop of a remote, pretty Connecticut town, covered in silence and snow. Now on the train back, a teenager next to me is reading an article entitled “Sex Snafus That Can Send You to the ER”; a culinary school student who cried after being short on the fare has asked if we could stay together through the connection; and a bald salesman has been eavesdropping on my cell phone conversations.
“You can’t live in fear,” he says, repeating what I just said when I hung up on my last call. Then he adds: “Guys like us, we’re not afraid.” I nod, thinking about the next day’s show. If only that were true!
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