Home Is Where The Heart Is

Based on research by Utpal Dholakia, Katherine E. Loveland and Naomi Mandel 

• Longtime homeowners who stand to make a profit ask for higher selling prices on their houses than longtime homeowners in a losing position.
• Longtime owners hold out for a higher price even when a lower bid represents financial gain.
• Conversely, short-time homeowners in a profitable position ask for lower prices than owners who are selling at a loss. The reason: The short-timers are less emotionally invested in the home.

Buying a house is the biggest investment most people make in their lives. Unlike other financial transactions, though, this investment becomes emotionally laden over time, gathering not only monetary but also much harder-to-measure personal value. Your perfect neighbor who drives your kids to soccer and yells over the fence that hamburgers are served may, to a new buyer, be a loudmouthed nuisance with an overgrown lawn.

Such variables inevitably skew buyer and seller perceptions. They also throw a wrench into theories on how investors can be expected to act. Long-time homeowners, it seems, are a separate breed of investor. Their quirks can have national ramifications.

From 2006 to 2011, falling home values throughout the United States affected millions of households, in some cases plummeting 40 percent from the peak. Yet even as prices declined, a 12-month supply of homes remained for sale, twice that of a healthy market. Many homeowners continued to set unreasonably high prices given current conditions, leading to a glut of 6.2 million homes.

Using these puzzling statistics as a launching point, Rice Business Professor Utpal M. Dholakia, Katherine E. Loveland of Xavier University and Naomi Mandel of Arizona State University studied how the experience and duration of homeownership affects sellers’ initial asking prices and their willingness to change them.

Using laboratory simulations and real-life case studies in four U.S. cities, the researchers reached identical outcomes. Longtime owners, they found, asked for higher prices when they stood to profit. Short-term owners asked for lower prices when they were in the so-called “gains domain,” and higher prices when they were in a losing position.

These results contradict Prospect Theory, a foundational tenet of behavioral economics. According to the theory, if an individual is presented with two equal choices, one a loss and the other a gain, the individual will always pick financial gain.

Dholakia and his colleagues took a different approach, linking loss or gain to the experience of ownership itself. By doing so, they acknowledged that people with a positive experience with an object, in this case a home, already feel they are in the “gain domain,” before they begin negotiating.

To reach their conclusions, the researchers trawled through house listings in Phoenix, Minneapolis, Philadelphia and Wilmington, excluding any that had been owned for less than a year as well as bank-owned homes and those in foreclosure or on short sale. Rather than comparing asking prices, they calculated the price premium for a home as a percentage of the home’s market value. In cases of longtime ownership, they found, homeowners in the gains domain asked for a significantly higher adjusted price premium than homeowners whose places had lost value and whose sale was going to bring a financial loss. It was a stark reversal of Prospect Theory.

For the longtime owners, the researchers reasoned, the home was no longer just a marketable commodity. It had become a physical vessel of their most cherished experiences. Prospective buyers saw square footage and comparable pricing. Prospective sellers saw more. “THIS house is special,” their asking prices announced.

Curiously, long-term homeowners in the gains domain asked for a higher premium-to-market value even when asking for a lower price would’ve still brought a profit. Was this greed? Likely not, the researchers showed. The long-time homeowners just valued their homes in ways that buyers couldn’t share.

Understanding how such emotional and financial reference points interact with length of homeownership can help real estate professionals and policymakers identify which homeowners are likely to price more aggressively than market conditions warrant. It could also lend some self-awareness to sellers themselves.

A financial gain is easy to measure. But how do you price 10 years of weekends on the couch savoring kids, dogs, and a glass of Malbec? No external reference point, Dholakia and his colleagues concluded, can put a price on those moments. It may be the true definition of home: the one place the invisible hand of the market does not touch.

Utpal M. Dholakia is the George R. Brown Professor of Marketing at the Jones Graduate School of Business at Rice University.

To learn more, please see: Loveland, K. E., Mandel, N., & Dholakia, U. M. (2014). Understanding homeowners’ pricing decisions: An investigation of the role of ownership duration and financial and emotional reference points. Customer Needs and Solutions, 1(3), 225-240.