Let the Buyer Be Aware

A common error naïve homebuyers make helps explain housing boom and bust cycles.

What accounts for the tendency of housing prices to steadily increase for several years—and then steadily decline?

That deceptively simple question may have a new answer, based on the research of Charles Nathanson, an assistant professor of finance at the Kellogg School.

Few economic stories get more consistent press coverage than the housing cycle. The media regularly report on “housing starts,” or the number of new home constructions, along with the average cost of new homes and swings in supply and demand. Nearly everyone agrees that the health of the housing market is critical to the economy’s prospects.

But for all that, there are few certainties about precisely what drives the housing cycle, especially the kind of extreme boom and bust that happened in the early 2000s.

Substantial research into the question has not yielded a clear picture of the housing crash. Researchers are also struggling to come up with ways of identifying—or preventing—bubbles.

The challenge is that so many variables—like fluctuating interest rates and construction costs—affect the workings of supply and demand. One thing is certain though: sellers eventually overshoot, buyers will not pay the asking prices, and the boom becomes a bust.

|“How do buyers decide what they are willing to pay for what will likely |become their most valuable asset?”

Nathanson and his coauthor, Edward Glaeser of Harvard University, suggest that an error buyers make in assessing the future value of a house helps to explain the ups and downs of the cycle. The error, which involves forecasting future home prices based on past and current ones, is small but widespread and contributes to momentum toward higher housing prices. When prices reach an unsustainable level, the momentum swings in the other direction, and prices return to the previous level.

One Decision, Two Types of Buyers

For most people, buying a house is unlike any other purchase, and one with which they have minimal experience. “We usually think of people as better at things they do repeatedly,” Nathanson said. Buying a home is not one of those things for most people.

Moreover, a home purchase typically requires the buyer to take on debt that she expects to pay back over the span of decades. Many buyers expect to sell their house at a profit before the loan is paid off. A house is an investment.

But how do buyers decide what they are willing to pay for what will likely become their most valuable asset?

“When you buy a house, you’re probably going to sell it at some point,” Nathanson said. “How much you pay for the house depends on how much you think you can sell it for in 7 to 10 years. That’s a difficult problem. To figure that out, you’re going to look at past house prices and say, ‘Are house prices in this area going up?’”

To be fair, predicting future prices based on past prices is “a very reasonable thing to do,” Nathanson said. But the problem is that it is hard to do this correctly.

In fact, buyers fall into two distinct groups when it comes to forecasting house prices: those who consider all the relevant information, who behave in a way that maximizes profit, or whom economists label “rational” actors; and those who make assumptions based on limited information, or “naïve” buyers.

How do these groups behave when it comes to gauging home prices?

Rational buyers know that prices are not a precise reflection of supply and demand. They recognize that beliefs and expectations are baked into the numbers, and they filter out the psychological factors that inflate home prices, focusing instead on items tied more closely to demand. According to Nathanson, they look at things like “how strong the local economy is, how many people want to live in that neighborhood, and how good the local schools might be in the future.”

Naïve buyers, on the other hand, believe their information is better than it actually is. Consciously or not, they use a rule of thumb that past and current prices accurately reflect demand. “They see prices went up five percent and assume demand to live in that area went up five percent,” Nathanson said. This kind of buyer may look at a house listed for $200,000, see that other homes in the area have similar prices, and assume the prices accurately reflect demand. That makes them willing to pay the list price or even a little bit more if competing with others. “Then you get these things that look like housing bubbles,” Nathanson said.

Small Error, Big Effects

The error naïve buyers make in forecasting future prices based on the past may seem small, but it can snowball. When the results of a model simulating rational behavior are set against a model simulating naïve behavior over several years, the effects are striking. Nathanson and Glaeser found that over time the error leads naïve buyers to overestimate the actual level of housing demand—and thus overvalue homes. Future buyers, in turn, make the same error. This becomes a sequential and self-reinforcing process, and the gap between prices and demand grows ever-wider.

Interestingly, though naïve buyers expect prices to rise, they actually underestimate the near-term rise in the value of homes during a boom. This is true for the same reason that they err when looking to past prices for guidance. They do not consider the fact that future buyers will update their beliefs.

“Naïve buyers don’t realize that other buyers are learning from prices, too,” Nathanson said. “So if I’m thinking about buyers in the future, I know prices are going up today, but I think that buyers in the future aren’t going to learn anything from that. But in reality, they will look at the rising prices, and that will increase their optimism.” Thus, when current buyers fail to take the perceptions of future buyers into account, they underestimate the value of the house in question.

This error is key to understanding the housing market’s momentum—or the tendency for prices to continue on their current path within a given swing of a boom and bust cycle. The gap between naïve buyers’ expectations (what they think the house is worth) and reality (that it is worth more than they think it is) surprises them. It provides a psychological push, realized as momentum, that keeps prices ascending over the short run.

Past the five-year time horizon, however, buyers’ expectations outstrip the actual growth in prices. The same process, working in reverse, then pulls prices back down. Naïve buyers now overestimate the true level of demand and are surprised when homes are worth less than they think they are, creating momentum fueled by sequential undervaluing. And that contributes to a bust.

Curb Your Exuberance

As Glaeser and Nathanson note, this is “only one possible model of semi-rationality in housing markets. Many other forms of irrationality may exist.”

But even if they do not provide the final word on the subject, the authors do offer an explanation for something that is typically assumed but not proven: the psychology, or “irrational exuberance,” that shapes the housing cycle.

“One of the stories [about the boom in the housing market in the early 2000s] is that people just got overly optimistic somehow,” Nathanson said. “And that the bust was predictable,” once buyers started to believe that houses were overvalued.

“We actually have a theory [presented above] for why people would consistently be too optimistic during booms and too pessimistic during busts,” Nathanson said. “In several other papers about housing cycles, including my own work, this optimism and pessimism is just assumed.”

Ultimately, the aim of understanding the ups and downs of the housing cycle is to help legislators and institutions create laws and policies that prevent the kind of dramatic swing in prices that happened from 2000 to 2006. The bust that followed inflicted devastation across the economy and played a critical role in the broader financial crisis that began in 2008.

As Nathanson and Glaeser write, “the economics of real estate bubbles is still in its infancy,” and it is too early to make policy prescriptions with any confidence.

But if their thesis holds up, “the lesson is that people are learning from prices the wrong way,” Nathanson said. “So the question is: Is there a better way for people to forecast future prices from past prices—one that people can use, and that’s not terribly complicated?” That is something Nathanson is exploring in current research.

As he pointed out, the practical implications of such follow-on research could be valuable: “There might be some very simple rules that people can use, that won’t lead them astray. If we can actually discover some simple rule people could use to avoid booms and busts, we could educate people about what that is.”

Source: Kellogg Insight

The Psychology of Home Staging: How to Make Your Home More Appealing to Buyers

Selling a home can be a challenging and stressful experience, especially in a competitive real estate market.

But what if there was a way to make your home stand out and appeal to buyers? Enter home staging, the art of arranging and decorating a home in a way that showcases its best features and creates an inviting atmosphere for potential buyers. But home staging is more than just fluffing pillows and adding a vase of flowers.

It’s rooted in the psychology of buyer behavior and the principles of visual marketing. By understanding how buyers think and what they’re looking for, you can strategically stage your home to make it more appealing and increase your chances of a successful sale. In this article, we’ll explore the psychology of home staging and share tips on how to create a space that will leave a lasting impression on potential buyers.

The Psychology of Home Staging

When it comes to selling a home, first impressions are everything. Potential buyers make a split-second decision on whether they like a home or not within the first few seconds of entering. That’s why home staging is so important. It helps to create a welcoming atmosphere that makes potential buyers feel at home and allows them to envision themselves living in the space. But home staging is more than just making the home look pretty. It’s about understanding the psychology of buyer behavior and using that knowledge to create a space that will appeal to their emotions and desires.

One important aspect of the psychology of home staging is understanding the concept of visual marketing. Visual marketing is the practice of using visual elements such as color, lighting, and layout to create an emotional connection with the viewer. In the context of home staging, this means using visual elements to create a space that will appeal to potential buyers emotions and desires. For example, using warm, inviting colors in the living room can create a cozy atmosphere that makes potential buyers feel at home. Similarly, using soft lighting in the bedroom can create a relaxing atmosphere that makes potential buyers feel calm and comfortable.

Another important aspect of the psychology of home staging is understanding the concept of buyer behavior. Buyers want to feel like they are getting a good deal, and they want to feel like they are making a smart investment. That’s why it’s important to highlight the best features of the home and create a space that looks and feels luxurious. By doing so, potential buyers will be more likely to see the value of the home and feel confident in their decision to buy.

The Importance of First Impressions

As mentioned earlier, first impressions are everything when it comes to selling a home. Potential buyers make a split-second decision on whether they like a home or not within the first few seconds of entering. That’s why it’s important to create a welcoming atmosphere that makes potential buyers feel at home from the moment they walk in the door.

One way to create a welcoming atmosphere is to use warm, inviting colors in the living room. Colors like beige, cream, and light blue are great options because they create a cozy atmosphere that makes potential buyers feel at home. Additionally, using soft lighting in the bedroom can create a relaxing atmosphere that makes potential buyers feel calm and comfortable.

Another way to create a welcoming atmosphere is to use furniture and accessories that are both functional and stylish. For example, a comfortable sofa and a stylish coffee table can create a cozy atmosphere in the living room, while a comfortable bed and stylish nightstands can create a relaxing atmosphere in the bedroom.

Understanding the Buyer’s Perspective

When it comes to selling a home, it’s important to understand the buyer’s perspective. Buyers want to feel like they are getting a good deal, and they want to feel like they are making a smart investment. That’s why it’s important to highlight the best features of the home and create a space that looks and feels luxurious.

One way to highlight the best features of the home is to focus on the kitchen and bathroom. These two rooms are often the most important to potential buyers, and they can make or break a sale. That’s why it’s important to make sure they look and feel luxurious. This can be achieved by using high-end finishes like granite countertops, stainless steel appliances, and designer fixtures.

Another way to understand the buyer’s perspective is to think about what they are looking for in a home. Buyers want a home that is both functional and stylish, so it’s important to use furniture and accessories that are both. Additionally, buyers want a home that is clean and clutter-free, so it’s important to declutter and organize the home before putting it on the market.

The Role of Color Psychology in Home Staging

Color psychology plays a big role in home staging. Different colors can evoke different emotions and feelings, and it’s important to use this to your advantage when staging a home. For example, warm, inviting colors like beige, cream, and light blue can create a cozy atmosphere in the living room that makes potential buyers feel at home. Similarly, cool, calming colors like green and blue can create a relaxing atmosphere in the bedroom that makes potential buyers feel calm and comfortable.

Another way to use color psychology in home staging is to create a color scheme that is both cohesive and stylish. This can be achieved by choosing a color palette and using it throughout the home. For example, a color palette of beige, cream, and light blue can create a cohesive and stylish look throughout the home.

Tips for Creating a Welcoming Atmosphere

Creating a welcoming atmosphere is key when it comes to home staging. Here are some tips for creating a space that potential buyers will love:

1. Use warm, inviting colors in the living room to create a cozy atmosphere that makes potential buyers feel at home.

2. Use soft lighting in the bedroom to create a relaxing atmosphere that makes potential buyers feel calm and comfortable.

3. Use furniture and accessories that are both functional and stylish to create a space that looks and feels luxurious.

4. Highlight the best features of the home, especially the kitchen, and bathroom, to create a space that looks and feels high-end.

5. Declutter and organize the home before putting it on the market to create a clean and clutter-free space.

The Power of Decluttering and Organization

Decluttering and organization are key when it comes to home staging. Potential buyers want a home that is clean and clutter-free, and it’s important to achieve this before putting the home on the market.

One way to declutter and organize the home is to get rid of any unnecessary items. This includes furniture, accessories, and personal items like photos and knick-knacks. By doing this, you’ll create a clean and clutter-free space that potential buyers can envision themselves living in.

Another way to declutter and organize the home is to use storage solutions like baskets and bins. This will help to keep the home organized and clutter-free, which will make it more appealing to potential buyers.

Enhancing Curb Appeal

Curb appeal is another important aspect of home staging. The exterior of the home is the first thing potential buyers see, and it’s important to make a good first impression. One way to enhance curb appeal is to clean up the landscaping. This includes mowing the lawn, trimming bushes and trees, and planting flowers and other plants.

Additionally, painting the front door and adding a new mailbox can make a big difference in the overall look of the home.

Another way to enhance curb appeal is to make sure the home is well-lit. This includes adding outdoor lighting to the front porch and driveway, as well as making sure all existing lighting is in good working order.

The Benefits of Professional Home Staging

Professional home staging can be a game-changer when it comes to selling a home. A professional stager has the knowledge and expertise to create a space that will appeal to potential buyers and increase the chances of a successful sale.

One of the biggest benefits of professional home staging is the ability to create a cohesive and stylish look throughout the home. A professional stager knows how to use furniture, accessories, and color to create a space that looks and feels luxurious. Additionally, a professional stager can help to highlight the best features of the home and create a space that looks and feels high-end.

Another benefit of professional home staging is the ability to create a space in that potential buyers can envision themselves living. A professional stager knows how to use furniture and accessories to create a space that is both functional and stylish, which will make it more appealing to potential buyers.

Conclusion

Home staging is an important aspect of selling a home. By understanding the psychology of buyer behavior and the principles of visual marketing, you can strategically stage your home to make it more appealing and increase your chances of a successful sale. Whether you decide to do it yourself or hire a professional stager, creating a space that potential buyers will love is key to a successful sale.

Source: Real Estate in Atx

Proven ways in debt collection

No business can survive without sufficient funds, as every action done in its operations generally have corresponding costs attached to it. When it comes to finances, however, one of the most common challenges faced by many businesses is the difficulty of collecting from their debtors the amounts owed to them. So, how is debt collection being carried out?

Pressuring debtors to obtain payment

Pressure may be employed, but only through legitimate means, such as filing of legal action, or availment of other legal remedies to collect the amount due. Resort to harassment in collecting from the debtor should be avoided, as this may enable the debtor to turn the table against the creditor who, because of his bullying, would just expose himself to civil liability for damages, and even criminal liability for coercion.

Some examples of such bullying would be by calling debtors during very inconvenient hours (e.g. between 10:00 PM and 6:00 AM); employment of threats; misrepresenting oneself as lawyers, police officers, or other government authorities to intimidate the debtor; making false statements about an impending punishment in connection with a pending case where no case is actually pending; contacting the debtor’s friends, family, neighbors, and workmates, and discussing with them the details of the debtor’s indebtedness; and threatening to deposit post-dated checks prematurely.

Legal remedies in collecting unpaid debt

Creditors who are having problems collecting from their debtors may very well resort to the following legal remedies:

1. To file an action for collection of sum of money before the court.

2. In case the debt is secured by a mortgage, the creditor may choose either to file an ordinary action for collection, or he may have the mortgage foreclosed.

3. In case there is a check issued, which bounced, the offended party may file a complaint for violation of the Anti-Bouncing Checks Law. This is a criminal action, and therefore imprisonment is among the possible consequences upon conviction.

Civil action for collection of sum of money

If the creditor opts to file an action for collection of sum of money, all that the creditor needs to establish are the existence of a transaction for which the debtor became indebted (which may be a loan, or any dealings that create obligations such as sale concerning unpaid purchase price, or lease concerning rentals), the amount of money owed by the debtor, the fact that the obligation is already due and demandable, and that a demand had been made by the creditor upon the debtor.

Please take note, though, that if the debt does not exceed P200,000.00 (excluding damages and interests), the creditor may file his claim before the Small Claims Court. Since the amount of the claim is relatively small and the relief prayed for is solely for payment or reimbursement of sum of money, it is the court’s policy in small claims proceedings not to keep these cases from dragging for long periods before finally being decided. Since the proceedings must be speedy, inexpensive, and informal, the Small Claims Procedure was made much more simple.

Foreclosure of mortgage

Foreclosure is a necessary consequence of non-payment of mortgage indebtedness. In a real estate mortgage, when the principal obligation is not paid when due, the mortgagee-creditor has the right to foreclose the mortgage and to have the property seized and sold for purposes of applying the proceeds to the payment of the obligation.

Foreclosure of mortgage may be done through a complaint filed in court (judicial foreclosure). But the creditor, if authorized by the debtor in writing, may foreclose the mortgage constituted on the property without going to court (extrajudicial foreclosure). By virtue of his granted authority, the creditor may take possession of the mortgaged property, and sell it in a public auction, subject to the requirement that notice of the sale has to be given by posting the same for not less than 20 days in at least three public places in the city or municipality where the property is situated [See: Sec. 2, Act No. 3135]. If no such authority to sell was granted to the creditor, then he has no other alternative but to resort to judicial foreclosure.

If the proceeds of the sale are insufficient to cover the entire amount of the debt in an extrajudicial foreclosure of mortgage, the creditor is entitled to claim the deficiency from the debtor.

Criminal action for violation of Anti-Bouncing Checks Law

The Anti-Bouncing Checks Law was passed for the specific purpose of addressing the problem of continued issuance and circulation of unfunded checks. B.P. Blg. 22 considers the mere act of issuing an unfunded check as a criminal offense.

Violation of B.P. Blg. 22 shall be punished by imprisonment for 30 days to 1 year, or by a fine of double the amount of the check, but in no case it shall exceed P200,000.00. Both such fine and imprisonment may, however, be imposed at the discretion of the court.

With such remedies that every creditor may avail of against the defaulting debtor, all such creditor has to do is to choose what he believes is most effective and convenient based on the circumstances surrounding his credit. Always bear in mind that unless creditors take action, many debtors will simply ignore their obligations. Precious cash need not be unnecessarily sacrificed, especially by business entities, simply because of difficulty in collecting debts. This holds very true when the money to be collected could be used on other business activities that would bring more money in the pocket.

Source: Alburo Law