Monday, July 09, 2007
We're Having A Fire! (Sale.)
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?"
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.
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.
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).