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Herding behavior and real estate decisions

herding real estateHave you ever wondered why real estate trends develop? When we’re buying and selling a home, we like to think we act rationally and with intention. However, our decision making is influenced externally. We are affected by the attitudes of the experts, family and friends, from whom we solicit advice. We are also consciously and unconsciously influenced by information we get from TV, the internet, social media, news papers, and even from eavesdropping conversations. Your decision making may be based on others’ behaviors that signaled it was the correct thing to do, and in turn magnifies and strengthens the signal to others – which is described as herding behavior.

Herding behavior plays a large role in our daily lives, as well as in our real estate choices and conclusions. Decisions about home buying and selling, which agent to hire, sales prices, and even whether or not we should default on our mortgage can be influenced by herding behaviors.

A 2013 study of herding behavior in strategic default revealed significant findings about our vulnerability to information (Luchtenberg & Seiler (2013).The effect of exogenous information signal strength on herding. Review of Behavioral Finance, 5(2),153-174). To refresh your memory, strategic default (allowing a home to go to foreclosure when financially able to pay the mortgage) became a significant trend that was widely covered in the media during 2010-2012. Luchtenberg & Seiler’s research into decision making and herding behavior suggested that those who are susceptible to information can be easily swayed. Their findings among professionals revealed that low consensus information (“weak information signals”) caused herding when asked to make a personal choice; while high consensus information (“strong information signals”) caused herding when providing advice to a friend.

The notion that the housing and financial crises were caused by herding behavior is not new. However, economist Christian Hott researched if housing bubbles are caused by herding behavior (Hott, C. (2012). The influence of herding behaviour on house prices. Journal of European Real Estate Research, 5(3),177-198). Citing others, Hott explains that herding behaviors are formed by those who are “imperfectly informed” and “learn from the decisions” of others; and that people tend to “overestimate the likelihood of an event” to occur to them when they hear it happened to someone else (expecting the same experience that someone else had). Although Hott concluded that herding was not the only contributor to the housing market collapse, and suggested that mortgage banking was also likely responsible; the findings indicated that herding behavior does play a role in home price fluctuations and housing bubbles.

Cognitive dissonance may also be at work to reinforce your herding behaviors. You may act on information that is not widely acknowledged just because the source is significant to you (such as a relative, close friend or co-worker). And the stronger your belief in the information, the more likely you will in turn confidently give the same advice to others, even though it may be inaccurate and/or irrational.

Breaking away from the herd is difficult; buying and selling a home may not seem to be a rational process – even when confronted with facts. People don’t always base decision of logical choices, but rather base decisions on psycho-emotional needs and/or fears (such as status, acceptance, and avoidance of failure). However, seeking balanced information and becoming aware of your motivations may improve your decision making.

Original published at https://dankrell.com/blog/2015/09/30/herding-behavior-can-interfere-with-real-estate-decisions/

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

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Can we really see negative mortgage rates?

real estateSome speculate that it is possible for the Fed to set negative rates to stave off deflation; something that happened in Europe earlier this year.

Can you believe that 30-year fixed rate conventional mortgage rates have been below 5% for about five years? Rates have essentially been hovering around 4% (plus/minus) for the last three years. To put it in perspective, you’d probably have to go back to the 1940’s to get a lower rate. To contrast, rates from 1979 through the 1980’s were in double digits; and according to Freddie Mac’s Monthly Average Commitment Rate And Points On 30-Year Fixed-Rate Mortgages Since 1971 (freddiemac.com), the average mortgage commitment rate reached a peak of 18.45% during October of 1981.

With such low rates, it’s hard to imagine signing up for a mortgage at 18%, or 10%, or even 7% interest. Keep in mind that the consensus is that the average mortgage rate over the last forty years has been about 8.75%. And as economists have anticipated rising rates since 2011, rates have actually decreased.

Many thought that Fed would finally begin to raise the federal funds rate towards the end of this year. However, an interesting thing happened last week from probably the most anticipated Fed meeting ever. On September 17th, the Fed’s Open Market Committee issued a statement on the economy and monetary policy, and left the federal funds rate unchanged at a target rate of 0% to 1/4%. Although mortgage rates are not directly influenced by the federal funds rate, they are indirectly affected because the federal funds rate is the rate in which banks borrow money.

Initially it appears to be good news from the Fed’s September 17th press release, housing was described as improving, and it is felt that mortgage rates will likely to remain relatively low for the short term. However, in a press conference following the Fed statement, Fed Chair Janet Yellen referred to housing as “depressed.” Depressed is certainly not the description that anyone was expecting of a housing market that has seen slow improvement. Yet, it’s not the first time Yellen expressed concern for housing; she raised concerns about a housing market slowdown last year.

Should we also be concerned when others are optimistic? Maybe Yellen sees something that we do not. An August 16th 2013 Washington Post piece by Neil Irwin and Ylan Q. Mui details Yellen’s background and how she predicted the housing crisis and forecasted the following financial crisis (Janet Yellen called the housing bust and has been mostly right on jobs. Does she have what it takes to lead the Fed?). It’s not that Yellen is clairvoyant, as far as anyone knows, but rather her ability to connect the correct data points. In last week’s press conference she cited that housing was basically not improving in step with other economic indicators, such as employment.

So when will interest rates go up? Some speculate that it is possible for the Fed to set negative rates to stave off deflation; something that happened in Europe earlier this year. And in a couple of European counties, such as Spain, you could get a negative interest mortgage! CNN-Money reported on European negative interest rates, quoting Luca Bertalot (secretary general of the European Mortgage Federation) to say “We are in uncharted waters.” And described Spain’s Bankinter’s negative interest rate dilemma, saying that “they could not pay interest to borrowers, but instead reduced the principal for some customers (The crazy world of negative rates: Banks pay your mortgage for you?; money.cnn.com, April 22, 2015).”

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

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Drone use takes off to sell homes

Real Estate Aerial pictures and video may seem cutting edge, but you should consider a number of issues before agreeing to have a drone flying over your home and neighborhood.

The Bulletin of Photography Volume 15 (published in 1914) includes an article about Des Moines, Iowa real estate agents contemplating a “scheme” of photographing homes. The photographs were to make touring homes easier for busy clients; agents were to have four photographs per home in their exclusive portfolios. Real estate photography has come a long way since 1914. Today, home sellers expect dozens of high resolution pictures and even video to market their homes. In addition to the typical media array, some agents promote aerial photography to capture different perspectives of large estates, farms, and acreage.

Aerial photography has been around almost as long as commercial photography. According to the Professional Aerial Photographers Association (professionalaerialphotographers.com), the idea of aerial photography was patented in 1855; however, the first known aerial photograph wasn’t taken until 1858. No one knows for sure when aerial photography was first used for real estate sales, but you can bet it that it probably coincided with the broad acceptance of real estate photography. Although aerial photography has been accomplished by helicopter, balloons, and even very tall poles, it is increasingly becoming the domain of drones (also known as “unmanned aircraft systems”).

Many tout the drone’s potential and value. However, as commercial and hobby drone use skyrocketed, many also began to see the threat to personal privacy and safety. There has been a dramatic increase in pilot reported close calls; compare the 238 sightings during 2014 to the 650+ sightings during 2015 – through August 9th (FAA.gov). Federal and local agencies have sought to regulate drone use by implementing rules for safe and ethical use. You may have read Rebecca Guterman’s article investigating this issue earlier this year in the Montgomery County Sentinel  (State explores new drone rules; February 25, 2015).

On February 15th, the FAA published proposed rules for unmanned aerial systems as a step forward to integrating drones in our skies. Jenna Portman and Josh Hicks reported in a June 30th Washington Post piece (New laws in Va., Md. and D.C. regulate drones, Uber, social media) that Maryland will propose drone use rules by 2018; and in the interim has prohibited counties and municipalities from legislating drones, giving “exclusive jurisdiction” to federal and state agencies.

Commercial drone use has soared, especially in real estate applications; such that Dronelife.com estimated that real estate drone use could generate $10 million by 2016. The National Association of Realtors® has been at the front of this issue, promoting and educating safe and ethical drone use to members. NAR President Chris Polychron stated in his testimony to the U.S. House Judiciary Subcommittee on Courts, Intellectual Property, and the Internet: “Realtors® have shown a consistent interest in the safe, responsible use of drones in the business of real estate… (realtor.org).”

It may seem cutting edge to integrate aerial pictures and video into your marketing plan, however there are some issues you might consider before agreeing to have a drone flying over your home and neighborhood. You should ensure that the operator is experienced and authorized to operate the vehicle. Make sure the drone operator is insured, as accidents and property damage can occur. Finally, confirm that any aerial pictures and video publicized are worthwhile; poorly executed aerial photography could detract from your marketing efforts, and interfere with a buyer’s appreciation of your home’s qualities and charm. For more information, visit Know Before You Fly (knowbeforeyoufly.org).

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

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TRID implementation remakes the home buying process

real estateEarlier this year I informed you about the upcoming Consumer Finance Protection Bureau (CPFB) TILA-RESPA Integrated Disclosure (TRID) rule that was to begin in August. The implementation date was moved to October 3rd for a number of reasons, including feedback from the lender community indicating that they needed more time for compliance.

Fast forward to the present, and we are several weeks away from implementation. Overall, lenders are ready to comply with new disclosures and procedures. Realtor® Associations have also been busy getting members up to speed on expected changes and how to cope with potential issues that may arise. However, many are bracing themselves for the initial implementation to see how transactions will be affected.

Some have offered a different perspective on how the initial implementation may happen. For instance, the CFPB requires lenders to provide new disclosures three days prior to closing; however, some lenders may superimpose a longer waiting period (such as five or seven days) so as to ensure their compliance with the new rule. So any delay would tack on those extra days. Additionally, I have been told by loan officers that the 30 to 45 day mortgage closing process will go by the wayside, and that home sale contracts should allow for at least 60 days to go to closing; as well as allowing for flexibility if glitches arise to ensure compliance with the new rule.

The settlement process will be different. Closing documents will no longer emanate from the title company, but instead will be prepared by the lender and sent to the buyer and seller. Closing will occur at least three days later. Lenders are vetting title companies to ensure compliance with the new rule. As a result, an unintended consequence may be that home buyers will not be able to choose their title attorney like they are used to (as provided by RESPA and state law); and will have to choose from a list of lender “approved” title companies. Hopefully the lenders are not steering buyers to title companies where affiliated business arrangements exist, as that is an entirely another issue that the CFPB is pursuing.

If you’ve bought or sold a home in the past, the current contracts may seem somewhat familiar. However, as of October 3rd, new contracts and addenda will be in use to address the new rule; making it a new experience for everyone. If you’re planning a sale or purchase after October 3rd, make sure your agent is familiar with the new contracts and addenda so as to ensure they are managing timelines properly and understand how contingencies are affected.

The lingo will change too. If you’re borrowing money from a lender, you will no longer be a borrower; but instead you’ll be called a “consumer;” and your lender will be referred to as the “creditor.” Your good faith estimate will be a “loan estimate.” The time tested HUD1 with which we are familiar seeing at closing, will no longer be in use; and in its place will be the “closing disclosure” sent to the buyer and seller.   You will no longer look forward to your settlement day, but instead you will look forward to the “consummation.”

If you are planning to be in the market, you can familiarize yourself with expected changes to the buying/selling process by visiting CFPB’s “Know Before You Owe” (consumerfinance.gov/knowbeforeyouowe).

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

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Real estate agents, emotional intelligence, and sale price

Can real estate agents with high emotional intelligence get you a higher sale price?

home for saleWhen it comes to selling a home, the prescribed course of action is to set the right listing price and prepare the home to be shown. Real estate gurus proclaim these as the two most important items to making the most money from your home sale. And although these are widely accepted goals to getting your home on the market, recent research may actually counter the conventional wisdom about pricing and staging; while a new line of thinking suggests that you’re choosing the wrong agent too.

Staging, as we know it, has been a staple of home sales for almost forty years. And listing agents almost always discuss it during their listing presentation. Research has already proclaimed that furnished homes sell in less time than vacant homes (see Chien-Chih Peng’s study published in the June 22nd 2004 issue of The Appraisal Journal), but does staging add perceived value to the price? Well, Lane, Seiler, and Seiler (2015. The impact of staging conditions on residential real estate demand. Journal of Housing Research, 24(1), 21-35) conducted the first study to determine the virtues of home staging. Their results suggested that home staging does have some impact on the home buying process, as you might expect; “…we find a neutral wall color and good furnishings do significantly influence a buyer’s perceived livability and overall opinion of the home.” However, the study’s main conclusion was that staging a home does not significantly impact sale price.

If you think that pricing a home is a straight forward process of gathering and extrapolating the latest neighborhood data to your home, think again. There may be more going on in your head than you realize. A recent study by Loveland, Mandel, and Dholakia (2014. Understanding homeowners’ pricing decisions: An investigation of the roles of ownership duration and financial and emotional reference points. Customer Needs and Solutions, 1(3), 225-240) suggested that home sellers make different home pricing decisions based on the length of ownership, anticipation of financial gain, and emotional experiences in the home. It seems that the longer you have owned your home combined with a greater financial gain or positively associated memories, may incline you to over-price your listing and likely maintain a higher price; while those who have a shorter time of ownership combined with less financial gain or bad memories price more reasonably, and are more likely to make larger price adjustments.

So maybe getting the most money for your home comes down to your agent. After all, research confirms that experienced real estate agents sell homes faster and for more money than rookie agents. And yet, subjective conceptions of agent traits may guide you to choose your agent, regardless if your assumptions are valid or erroneous.

Forget savvy, forget aggressiveness, forget connectedness, or any preconceived notion about what personality traits your agent needs. A recent pilot study of licensed real estate agents by Swanson and Zobisch (2014. Emotional intelligence understanding among real estate professionals. Global Journal of Business Research, 8(5), 9-16.) suggested that the key underlying trait for real estate success and financial gain is emotional intelligence (EI). The concept of EI is complex, and is often confused with typical personality traits such as sanguinity or purpose. Rather, EI is the ability to be aware of, and command emotions in oneself and others. Those with EI are thought to be empathetic and able to acknowledge responsibility for actions and emotions. Additionally, those with high EI are likely to better understand and manage others’ motivations – which is fundamental to negotiation.

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

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