Published April 16, 2010
If you're selling a house now, there's reason enough to want to seal a deal quickly. House prices have bounced a smidgen since last summer, but the latest numbers suggest the momentum is fading. Meanwhile, a government program awarding cash bonuses to house buyers expires after this month. The number of house foreclosures hit a record in the first three months of this year, RealtyTrac reported Thursday. And the Urban Land Institute recently issued a gloomy report on the demographics of housing in America.
Don't panic. Houses are nowhere near as overpriced as they once were. Prices have fallen close to 30% nominally (and several percentage points more after adjusting for inflation) since April 2007, when I argued that renting had become a much better financial deal than homeownership. A reworking of the numbers last July convinced me that affordability was nearly restored and that houses in some markets were cheap.
If you're a seller, then, don't rush to cut your asking price. In fact, if you're looking for a slight advantage over the competition, you might try raising your price just a little -- from a rounded number to a precise-looking one.
Most of us think of numbers as describing quantities, and nothing more. Four is more than three; case closed. However, numbers have aesthetic qualities, too. There's a reason an estimated two-thirds of items on retail shelves have prices ending in nine. It's good for sales. Researchers have known about this nine-ending effect for nearly 80 years. Many theorize that such numbers simply look smaller to buyers, especially in cases where the far-left digit is reduced ($2.99). Of course, the appearance of cheapness can backfire. Upscale restaurants should sell the wild boar ravioli for $18, never $17.99. (Ideally, they should banish dollar signs from the menu, too.)
Wal-Mart (WMT: 53.64, -0.06, -0.11%) seems not to play by these rules. For example, a recent look at personal care products listed on its web site showed a razor for $6.47, a hairbrush for $5.88 and a nose hair trimmer for $11.86. Why do the prices at America's largest company by revenue look so precise?
Perhaps because precise prices look low -- even lower than those ending in nine.
A Cornell University study published recently in the academic journal Marketing Science looks at buyer attitudes toward precise numbers, both in the laboratory and the marketplace. Subjects sorted into groups and asked to make flash decisions on where a string of large numbers ranked on a magnitude scale of 1 to 9 consistently assigned higher magnitudes to round numbers than to precise, slightly higher ones.
For example, they judged $510,000 to be slightly higher on the scale than $511,534, and they saw $400,000 as considerably higher than $401,298. The researchers theorize that people aren't used to discussing large numbers with precision, so they tend to associate precision with smallness. They call this tendency the precision heuristic (a heuristic is a type of mental shortcut that humans use to make decisions quickly, but not always wisely). The habit seems to be learned, not hard-wired; the researchers found that they could retrain subjects through additional demonstrations in which the obviously large numbers were precise and the obviously small ones were rounded.
That's all well and good in the lab, but would the precision heuristic work in real life? It already has, apparently. The researchers studied thousands of real estate transactions in South Florida and Long Island where houses sold for less than the asking price. All else held equal, houses that were originally listed at precise amounts sold for about three-quarters of one percent more than those that started with rounded prices. On a $500,000 house, that's $3,750.
Jack Hough is an associate editor at SmartMoney.com and author of "Your Next Great Stock."
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