What would you do? Say you’re about to move, but your current home hasn’t sold yet. Do you opt for a low asking price, which means a quick sale at a low(er) but acceptable price? Or do you opt for a higher asking price and wait for higher bids? Hans Koster and Jan Rouwendal investigated the behavior of home sellers in this specific situation. The study, titled “Housing Market Discount Rates: Evidence from Bargaining and Bidding Wars,” is forthcoming in the International Economic Review.
Housing prices in the Netherlands are surging again and the housing market is still quite overheated. Overbids and quick sales are the order of the day. So sellers will need to keep heads their cool, but many are failing to do so, unfortunately. The research by Koster and Rouwendal shows that sellers are impatient and choose relatively low asking prices. If they set their asking prices a little higher, meaning it takes a little longer to find a suitable buyer, they could get more money for their home. So being patient pays off!
Why the rush anyway?
The impatience of sellers can be explained by the fact that selling your house is something you do only a few times in your life and with a lot of money at stake. This creates some tension. Many will have double mortgage payments and it can be expensive to keep the house clean and tidy for inspections by potential buyers. To get it over with, sellers tend to opt for a lower asking price.
What patience can yield…
To determine how impatient sellers are, Koster and Rouwendal measure a so-called discount rate. A discount rate is the percentage by which the price of a future home sale is adjusted to its value if you sold it now. Normally, this discount rate closely follows the market interest rate (currently around 3%). So one euro now will be worth 97 cents a year from now. Koster and Rouwendal find that the discount rate for home sellers is easily about 25 to 30%, so more than 10 times higher than the market interest rate. In other words, one euro will only be worth 77 cents a year from now, according to home sellers. If sellers were a bit more patient, they could earn quite a bit by opting for a higher asking price and waiting a bit longer. The estimated discount rates are higher for sellers who have already moved or are low educated, but are not necessarily higher or lower in overheated markets.