Anchors Aweigh
THE DALLAS HOUSING market has recently shown signs of slowing. In our townhome community, I���ve noticed that houses are sitting unsold for longer. Until recently, any place on the market for more than seven days was considered unusually long.
Two weeks ago, we became interested in buying a two bedroom, two bath townhome on our street as a rental property. It was listed at $375,000. Upon a closer look, however, we found the following:
The property hasn���t been upgraded since 1988. We also found several structural problems, including a major foundation crack that seemed to cut across the front room. The roof, heating and cooling system, and hot water heater all needed replacing.
The county tax appraised value is $305,000, which is based on the assumption the house is in average condition and hence doesn���t factor in the structural problems and the lack of upkeep and updating. That $305,000 works out to $188 per square foot, significantly below the list price of $230 per square foot.
Based on the condition and the expected repairs, we made an offer of $280,000, or $95,000 lower than the list price. Yes, that was a big difference. But considering all the repairs needed and the cooling housing market, we thought it fair. The seller countered with $359,000. We walked away.
It struck me that this was a classic example of anchoring bias���the inordinate influence of the first piece of information encountered. With a home sale, the initial price is typically seen as an anchoring point, whether that price is reasonable or not.
I suspect the owner set the selling price based on market conditions in early spring, and then failed to adjust the price despite sharply higher mortgage rates and a recent high cancellation rate for home-sale contracts. Even our own realtor thought our bid was too low. But I suspect she, too, was measuring our bid relative to the list price, not the house's actual condition and value.
Anchoring bias typically occurs in situations where folks are dealing with numbers. But it can also occur with qualitative expectations. If children have good grades in elementary school, that anchors the parents��� expectations. Parents declare their child an ���A student��� and expect subsequent teachers to confirm.
Similarly, athletes who perform well at the junior level are designated forever stars. Donald Young, a U.S. tennis player, was phenomenal in junior tournaments but ranked only as high as 38th as a professional. That���s an incredible achievement���but it���s seen as disappointing compared to our expectations of Young, which are anchored on his early success.
Want to be happier with your achievements? Weigh the anchor of your expectations���and perhaps change it for another if that���s what the facts demand.
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