Monday, July 09, 2007

We're Having A Fire! (Sale.)

by Tom Bozzo

If you've bought a house during the "bubble" period (as we have), it's hard to see this and not feel a nervous gurgle somewhere in the G.I. tract:

For example, a three-bedroom house near Turner Field, where the Atlanta Braves baseball team plays, fetched a high bid late last month of $134,000 at an auction by the bank that took possession of it. Almost three years ago, the new home was bought for $330,000.

The NYT's Vikas Bajaj then shouts fire, or he would were this not buried some 25 paragraphs later in the story:

Economists say auctions are generally the most efficient way to determine prices. But only about 1 percent of residential real estate sold in the country last year by dollar value was auctioned. [Emphasis added.]

Don't get me wrong, that the end of the housing bubble seems to be evolving as a slow-motion train wreck doesn't mean that the wreckage necessarily won't grind to a halt at 41 cents on the dollar. But it's amusing that there isn't a specific economist quoted to back up the claims that auctions "generally" are "efficient." Fair questions would be, "Efficient at what?" and, "Efficient when?"

If the "what" is extracting the maximum valuation for an asset, some auctions — of electromagnetic spectrum, of fine art — could at least credibly claim to meet an initial hurdle of assembling essentially everyone with the means to pay what will turn out to be the market (auction) price. Some of those auctions will have gone some steps further by having been designed by super-smart microeconomic theorists expressly for the purpose of extracting a maximal price from the bidders.

For house sales, there's a good reason why 99% of transactions aren't the result of auctions: as much as electronic tools help with screening, and what not, information does not travel so fast that the problem of matching houses with the potential buyers who value them most is trivial and instantaneous. Indeed, one of the least contentious bits of Freakonomics is the revelation that it tends to pay to be a patient real estate seller.

So it's not impossible for foreclosure auctions to yield about the same price as the usual marketing methods (and Bajaj describes one such case in the article), but what they extract is a "buy it here and now" price, which is not the only "market price" outcome that's possible.

(Title reference.)

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Speaking for those of us who live in that 1% (and are still seeing transactions at five-figures-above-the-offer), I'm not convinced an auction makes any sense.

A former coworker, many years ago, bought the apartment in which he was living. (he was renting, the owner was foreclosed.) He was willing to pay X, but it went to auction.

He was the only person bidding on it at the auction, and got it for 0.5X. Which may also have been part of what happened in the Atlanta case.
The Atlanta buyer is quoted saying that the bidding was less vigorous than expected, so that was somewhat similar. One question is whether your former co-worker couldn't make a deal (no opportunity to negotiate one) or if there was some reason to believe that the auction would do better than X.

Another issue may be that foreclosure auctions' participants may tend to be fix-and-flippers or other speculators whose valuations may be freer of bubble-induced "goodwill" (at least when prices are no longer popularly assumed to be gravity-defying).
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