Four Pricing Tricks to Help Sell Your Home Faster

March 3rd, 2008

By Jonathan Clements
From The Wall Street Journal Online

If you’re selling a car or a house in today’s sluggish economy, make sure the price is right.

Americans are constantly buying stuff. But most of us don’t do a whole lot of selling — which means we don’t have much experience at setting prices.

Want to improve your odds of finding a buyer? As you try to unload your car or your home, consider these four pricing tricks.

Is The Price Right?

Take care when setting a price for your home or car.

• Round numbers signal prestige, while precise numbers suggest a bargain.
• Buyers anchor off the first digit, so $3,999 seems far cheaper than $4,000.
• If you cut your asking price, make it easy to calculate the discount.

• Looking slim. We all know that $1.99 is barely less than $2. Yet retailers continue to use this trick — because there’s ample evidence it works.

“When we look at prices, we make judgments in a fraction of a second,” explains Manoj Thomas, a marketing professor at Cornell University’s Johnson Graduate School of Management. “We read from left to right. We anchor our judgment on the first thing we see.”

For instance, if you’re trying to sell your old car that you think is worth $8,000, you might set the price at $7,999. Potential buyers will read the seven first — and have a sense the car is cheaper than it really is.

Alternatively, you might start at $8,222 and then quickly drop the price to $8,111. One study of price comparisons found that, if the left digits are the same, buyers will focus on the right-hand numbers.

At that point, buyers perceive the discount to be larger if those right numbers are declining from, say, two to one rather than from nine to eight. Even though the decline is the same in dollar terms, “people think they’re getting a better deal,” says one of the study’s co-authors, Robin Coulter, a marketing professor at the University of Connecticut.

• Stacking up. As buyers check out your car or your house, they’ll have in mind a price they are willing to pay. The good news: You can influence that price.

“You should list higher than you’re willing to accept,” says Alan Cooke, a marketing professor at the University of Florida’s Warrington College of Business. “If you ask a high price, people use that as information in setting their reference price. But there’s also evidence that, if you set a price that is implausibly high, the impact will be less than if you set a price that’s more reasonable.”

In addition, you can affect the reference price of buyers by, for instance, telling them your car’s book value or sharing the price of competing properties in the neighborhood. The obvious caveat: Only pass along this information if the comparisons are in your favor.

• Sending messages. Imagine you’re selling your house, which you figure might fetch a little under $600,000. A round number, such as $595,000, will convey quality, while a precise number, like $595,385, will indicate a bargain.

The reason: We associate precise numbers with lower-priced goods. A precise number may also signal that you have given a heap of thought to the price and you aren’t inclined to negotiate.

Trying to settle on an asking price for your home? “If it’s a new development and you’re trying to give the impression of prestige, you would want to go for the round number,” advises Vicki Morwitz, a marketing professor at New York University’s Stern School of Business. “But if you’re going for the quick sale and you want to give the impression of a bargain, you would want to go for the precise number.”

• Cutting prices. In today’s housing market, many homeowners are struggling to find a buyer.

Thinking of dropping your asking price? Suppose that, as in the above example, you initially asked $595,385. If you lower the price to, say, $578,495, potential buyers may perceive the price drop as relatively modest.

“You want to make the computation as easy as possible,” Cornell’s Prof. Thomas says. “If you use digits that make computation difficult, it will lead to a perception of a small difference.”

What to do? You might specify the dollar discount — or, alternatively, lower the price from $595,385 to maybe $580,385 or $575,385. That way, it will be easy for buyers to calculate the price drop.

Email your comments to rjeditor@dowjones.com.

– February 28, 2008

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New Stimulus Plan May Spur Conflict

January 30th, 2008

By Sarah Lueck
From The Wall Street Journal Online

WASHINGTON — The Senate’s top tax writer unveiled an economic-stimulus plan that diverges from a bipartisan deal negotiated last week by the House and the Bush administration, setting up a potential conflict as leaders race to complete action on the legislation by midmonth.

Under a plan to provide millions of Americans with tax rebates, Sen. Max Baucus (D., Mont.), chairman of the Senate tax panel, wouldn’t exclude wealthier taxpayers. That could prove a major sticking point with the House, where Democrats won a deal to set an income limit on tax rebates in tough talks with Republicans. In the Senate, where Democrats hold a slim majority, leaving out such a limit could be important in attracting Republican support.

Sen. Baucus proposed a $500 rebate for people who report at least $3,000 of income on a 2007 tax return, including Social Security income, as well as wages, a move that would provide rebates to millions of seniors not eligible under the House compromise. Married couples would be eligible to receive $1,000. He also revived a top Democratic priority — an extension of unemployment-insurance benefits — that was dropped from the House plan.

• The News: Sen. Max Baucus unveiled an economic-stimulus plan that is the likely basis for action in the Senate.

• Why It Matters: The plan differs in several ways from a deal reached last week between the House and Bush administration.

• What’s Next: Democratic leaders hope to resolve the differences quickly and still plan to have a bill on Mr. Bush’s desk by February.

Congressional leaders said they were optimistic the differences would be worked out quickly. So far President Bush has said only that the Senate shouldn’t delay or derail a bill. He has urged Congress not to add new spending on programs such as unemployment insurance but hasn’t threatened a veto.

The Senate plan, up for debate tomorrow in the Finance Committee, is estimated to cost $156 billion, not far from the roughly $150 billion the House leaders said their bill would cost and that President Bush has backed. There are other similarities: Both the House and Senate plans include tax rebates for millions of people and incentives for businesses to invest in new plants and equipment.

The Senate is expected to retain proposed increases in loan limits for Fannie Mae, Freddie Mac and the Federal Housing Administration that are part of the House plan. But Democratic aides said other provisions of a bill modernizing the FHA and allowing more homeowners to refinance out of costly subprime loans would now move on a slower track. They were dropped from the House agreement in recent days, after resistance from administration officials.

The House is expected to pass its stimulus bill today. Congressional leaders have vowed to send a bill to President Bush by Feb. 15. Any differences between the chambers would have to be settled before then. The political risks to both sides of the effort backfiring are huge, with many people already counting on getting rebate checks this spring.

The House bill would provide rebates of $300 to $1,200 to an estimated 117 million people, including millions of people with incomes too low to pay income taxes. Wealthier people wouldn’t be eligible for rebates under the House bill; rebates would start phasing out for individuals with incomes greater than $75,000 and married couples with incomes greater than $150,000.

Mr. Baucus backs a business incentive not included in the House bill, which would allow companies with operating losses in 2006 and 2007 to apply them to past tax years, as far back as 2001, in order to receive a refund. On unemployment insurance, Mr. Baucus is proposing a 13-week extension nationwide for this year, plus an additional 13 weeks of benefits for people in states with unemployment rates of 6% or higher.

Democrats, including Mr. Baucus, played down the differences between the House and Senate plans and said legislation would be finished quickly. “The White House says we mustn’t slow the economic stimulus agreement down, or blow it up. I agree,” Mr. Baucus said in a statement.

Mr. Baucus said his plan, by taking into account Social Security income, would provide seniors “the same rebate as any wage earner.” To get a rebate, people would have to file tax returns ths year.

The AARP, an advocacy group for retired people, has pushed for the elderly to be included. But “it’s going to be hard to get people to take advantage of it,” said David Certner of AARP, if they don’t normally file tax returns.

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How to Sell A Home in 2008

January 3rd, 2008

By Amy Hoak
From MarketWatch

If you’re planning to sell a home in 2008, it’s time to start thinking about how to make that home stand out from the rest.

But beware: Homeowners aren’t able to recoup as many improvement costs as they did in recent years, according to a recent study by Remodeling magazine. In selling a home, “it’s more important that it’s neat, it’s clean and it looks spacious, rather than making sure it’s the top of the line,” says Cheri Kuhn, owner of Waters Realty in Minnetonka, Minn.

“The thing I find with sellers — if they do a lot of remodeling — they will take the cost of the remodeling and add it to the cost of the home and ask the buyer to pay for it,” she says. But often they’re not going to get that higher price.

To keep costs down and remodel wisely, consider the following tips:

Ask for advice. When Ms. Kuhn first meets with clients — sometimes six months before listing the home — she’ll make a list of improvements that will make a difference. Cleaning the carpets, painting the walls and removing wallpaper are common fixes — if they’re needed.

But prior to any remodeling, declutter your home and rent a storage unit if necessary to hold extra stuff while the home is on the market, says Shannon Aldrich, a Realtor in Maine and New Hampshire with Keller Williams Coastal Realty.

Dig deeper. It also could pay to look below the surface by getting a home inspection before listing the property. That way, problems that could hold up a sale are addressed in advance, says Dan Steward, president of Pillar to Post, a Tampa, Fla.-based home-inspection company. Some estimate that for every dollar of perceived defect, buyers want a $2 to $3 discount, Mr. Steward says. If that’s true, it might pay to spend $2,500 replacing an old furnace.

If there’s a problem with an essential element of the house, Ms. Kuhn says, a buyer might think “if that was neglected, what else was?”

Look outside: Pay attention to exterior details such as the condition of siding and windows, Ms. Aldrich says. According to Remodeling magazine, a wood window replacement recovers an average 81% of cost at resale and a siding replacement recovers an average 83%, some of the best payoffs in the survey.

Spend time in the bathroom. Freshening up the bathroom doesn’t have to be expensive, but can be important. “People will put up with a lot of cosmetic challenges in a house if they know they could use the bathroom right away,” Ms. Aldrich says. It’s important for the bathroom to be clean, but also consider replacing cracked tiles, as well as the sink and the toilet — if they need it, she adds. A toilet, for example, can cost less than $250.

Keep it small in the kitchen: Remodeling magazine found that homeowners could recover 83% of the cost of a minor kitchen remodel at resale compared with 78% of a major kitchen remodeling. Ms. Kuhn cautions her clients not to replace refrigerators, stoves or dishwashers. Buyers considering remodeling the kitchen will likely have their own preferences.

Along those same lines, replace a countertop if it’s crumbling but not if its only fault is that it’s outdated, Ms. Kuhn says. Even then, seriously consider material costs — there’s no need to update to granite unless the competition has granite countertops as well.

Email your comments to rjeditor@dowjones.com.

– January 01, 2008

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Why Borrowers May Not Benefit From Rate Cut

December 15th, 2007

By Jane J. Kim
From The Wall Street Journal Online

Not all borrowers are benefiting from the Fed’s moves to cut interest rates. The problem: Loans that are tied to a variety of interest-rate benchmarks — some of which aren’t necessarily moving in lockstep with Fed action.

Yesterday, the Federal Reserve cut short-term interest rates by a quarter of a percentage point to 4.25% — the central bank’s third rate cut since mid-September — to help ease the credit crunch and reduce the economy’s chances of falling into a recession. The moves have helped some borrowers who have seen interest rates on their credit cards and home-equity lines of credit fall. Interest rates on many fixed-rate mortgages also have dropped amid a decline in Treasury yields as investors sought out safe investments.

But rates remain stubbornly high on other loans, including student debt and many adjustable-rate loans made to the same type of subprime borrowers whose troubles are now reverberating throughout the global financial system. These rates remain high because many of these loans are tied to the London interbank offered rate, or Libor, and not to more conventional interest-rate benchmarks such as Treasurys or banks’ prime rate.

Libor, which is an interest rate banks charge on loans to each other, normally tracks the federal-funds rate closely. But continuing worries over the credit crisis have kept Libor unusually high — partly because banks are reluctant to lend to one another — even as other short-term interest rates have fallen in recent months. The U.S. dollar three-month Libor yesterday was 5.11%, down from 5.36% in late June. Over the same period, three-month Treasury bill yields have fallen much more steeply, to 2.95% from 4.8%. “The Libor spread is screaming that there is a big, big stress point in the banking system,” says James Bianco, president of Bianco Research LLC, a market-research firm in Chicago.

Borrowers may need to read the fine print of their loan agreement or contact their lender to know what benchmark their loan is tied to. The biggest impact is likely to be felt among borrowers with ARMs that are about to reset. “If you have a Libor-indexed ARM and you’re facing a reset, that’s going to be very disadvantageous because of the divergence between the Libor and Treasury yields,” says Greg McBride, a senior financial analyst at Bankrate.com.

For example, consumers with an ARM whose annual reset rate is linked to one-year Libor are likely to see their interest rate jump to 6.75% or more. By contrast, a similar loan that’s linked to one-year Treasurys is likely to reset to a rate that’s about 5.75%, he says.

Libor is frequently used to set rates for ARMs made to subprime borrowers — mainly people with scuffed credit — as well as many ARMs that fall into the “jumbo loan” category, which currently refers to most mortgages for $417,000 or more, says Keith Gumbinger, vice president of mortgage-tracker HSH Associates. Also, roughly half of non-subprime ARMs that were originated in recent years are tied to Libor, he estimates.

The higher Libor rates complicate the Fed’s efforts to assist troubled borrowers and prevent problems related to the housing crisis from spreading further through the economy.

“The more problems we have in the subprime-mortgage market, the more the likelihood of defaults and foreclosures,” says Ray Stone of Stone & McCarthy Research Associates. The federal government has outlined a “rate freeze” program that calls on mortgage servicers to modify certain subprime-mortgage loans to avoid foreclosure.

A recent report from the Federal Reserve Bank of New York shows that the six-month Libor rate will determine the reset rates for an estimated 99% of subprime ARMs and 38% of Alt-A ARMs in the U.S. that have been securitized. A further 1% of subprime ARMs and 22% of Alt-A ARMs will reset based on the one-year Libor rate. Alt-A is a category between prime and subprime that often involves borrowers who don’t fully document their income or assets.

In recent years, lenders began pegging a greater percentage of loans to Libor as more of this debt was securitized and sold to investors around the world, analysts say. Since Libor is a global interest-rate benchmark, investors have an easier time hedging their interest-rate risk because their investments are pegged to a common index, says Bankrate.com’s Mr. McBride.

Another factor: Since the U.S. Treasury Department stopped selling one-year Treasurys in 2001, more lenders started tying their hybrid adjustable-rate mortgages to Libor because they believed the Libor index more accurately reflected their funding costs over time than other benchmarks, says Lou Barnes, partner at Boulder West Financial Services, a Colorado mortgage bank.

Other Libor-based loans include certain types of student loans. About half of student lenders peg their private, variable-rate student loans to Libor. The best rates on private student loans are typically prime minus one percentage point or Libor plus 1.8 percentage point, says Mark Kantrowitz, publisher of FinAid.org, a financial-aid Web site. Normally, those rates are very similar, but right now, Libor-based rates are a little bit higher, he says.

That doesn’t mean borrowers with Libor-linked loans should jump to other types of loans. Private student loans pegged to Libor, for example, have historically tended to charge a slightly lower rate than loans tied to prime over the life of the loan, says Mr. Kantrowitz.

Homeowners, on the other hand, may be better off in Treasury-linked ARMs over Libor-linked products, if both are available on comparable mortgages. Historically, in times of credit crisis, Libor rates have tended to spike, says Mr. Barnes, the mortgage banker. But Treasury yields at such times often are driven down by investors seeking safe investments, he says.

One bright spot for savers: Higher Libor rates have helped sustain healthy returns in money-market mutual funds. These funds’ holdings of Libor-linked debt have helped to offset declining yields on other investments. An estimated 20% to 25% of money-market assets are in floating-rate debt, much of which is linked to Libor, says Peter Crane of Crane Data LLC. That has helped to keep average yields on money-market mutual funds, currently about 4.57%, about a quarter of a percentage point higher than they would normally be in the current interest-rate environment.

The Fed rate cuts have helped borrowers of some other types of loans, especially those tied to banks’ prime rate. Average rates on home-equity lines of credit have dropped to 7.60% from 8.25% in early September, while variable-rate credit cards are now charging 13.46% on average, down from 13.97%, according to Bankrate.com.