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Assessing the performance of real estate auctions

  • Christopher J. Meyer
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    This paper investigates the performance of real estate auctions in selling real estate relative to the more traditional method of negotiated sale. Estimates from auctions in Los Angeles during the boom of the mid 1980s show a discount that ranges between 0 and 9 percent, while similar sales in Dallas during the real estate bust of the late 1980s obtained discounts in the 9 to 21 percent range. This evidence is censistent with a theory that predicts larger percentage discounts in down markets. Although these results differ from previous studies of U.S. auctions that find much larger discounts, a comparison of methodologies suggests that previous papers that use a hedonic equation suffer from a selection bias problem, pushing auction coefficients towards finding larger discounts. Another interesting finding is that publishing a reserve price does not affect the estimated auction prices. Finally, the study notes that scattered-site auctions sell at a larger discount than the more homogeneous sales of single-site condominiums and finds no evidence of price declines over the course of an auction. The paper concludes that despite the discounts, auctions are still a viable sales strategy, especially for large sellers that face high holding costs and long average sales times, and for developers of single-site condominium complexes.

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    File URL: http://www.bostonfed.org/economic/wp/wp1993/wp93_1.pdf
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    Paper provided by Federal Reserve Bank of Boston in its series Working Papers with number 93-1.

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    Date of creation: 1993
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    Handle: RePEc:fip:fedbwp:93-1
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    1. Bulow, Jeremy & Roberts, John, 1989. "The Simple Economics of Optimal Auctions," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1060-90, October.
    2. Vanderporten, Bruce, 1992. "Strategic behavior in pooled condominium auctions," Journal of Urban Economics, Elsevier, vol. 31(1), pages 123-137, January.
    3. McAfee, R Preston & McMillan, John, 1987. "Auctions and Bidding," Journal of Economic Literature, American Economic Association, vol. 25(2), pages 699-738, June.
    4. Orley Ashenfelter & David Genesove, 1992. "Testing for Price Anomalies in Real Estate Auctions," NBER Working Papers 4036, National Bureau of Economic Research, Inc.
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    7. Karl E. Case & Robert J. Shiller, 1987. "Prices of Single Family Homes Since 1970: New Indexes for Four Cities," NBER Working Papers 2393, National Bureau of Economic Research, Inc.
    8. Giliberto, S Michael & Varaiya, Nikhil P, 1989. " The Winner's Curse and Bidder Competition in Acquisitions: Evidence from Failed Bank Auctions," Journal of Finance, American Finance Association, vol. 44(1), pages 59-75, March.
    9. Riley, John G, 1989. "Expected Revenue from Open and Sealed Bid Auctions," Journal of Economic Perspectives, American Economic Association, vol. 3(3), pages 41-50, Summer.
    10. Case, Karl E & Shiller, Robert J, 1989. "The Efficiency of the Market for Single-Family Homes," American Economic Review, American Economic Association, vol. 79(1), pages 125-37, March.
    11. Milgrom, Paul R & Weber, Robert J, 1982. "A Theory of Auctions and Competitive Bidding," Econometrica, Econometric Society, vol. 50(5), pages 1089-1122, September.
    12. Brannman, Lance & Klein, J Douglass & Weiss, Leonard W, 1987. "The Price Effects of Increased Competition in Auction Markets," The Review of Economics and Statistics, MIT Press, vol. 69(1), pages 24-32, February.
    13. Ashenfelter, Orley, 1989. "How Auctions Work for Wine and Art," Journal of Economic Perspectives, American Economic Association, vol. 3(3), pages 23-36, Summer.
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    17. Salant, S.W., 1990. "For Sale by Owner: When to Use a Realtor and How to Price the House," Papers 90-14, Michigan - Center for Research on Economic & Social Theory.
    18. Kenneth Hendricks, 1990. "Auctions for Oil and Gas Leases with an Informed Bidder and a Random Reservation Price," Discussion Papers 910, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    19. Bradford Case & Henry O. Pollakowski & Susan M. Wachter, 1991. "On Choosing Among House Price Index Methodologies," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 19(3), pages 286-307.
    20. Goetzmann, W.N., 1990. "The Accuracy Of Real Estimate Indices: Repeat Sale Estimators," Papers fb-_90-17, Columbia - Graduate School of Business.
    21. Adams, Paul D & Kluger, Brian D & Wyatt, Steve B, 1992. "Integrating Auction and Search Markets: The Slow Dutch Auction," The Journal of Real Estate Finance and Economics, Springer, vol. 5(3), pages 239-53, September.
    22. Sorensen, Eric H, 1979. "Negotiated Municipal Bond Underwritings: Implications for Efficiency: A Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 366-70, August.
    23. Donald R. Haurin & Patric H. Hendershott, 1991. "House Price Indexes: Issues and Results," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 19(3), pages 259-269.
    24. John M. Clapp & Carmelo Giaccotto & Dogan Tirtiroglu, 1991. "Housing Price Indices Based on All Transactions Compared to Repeat Subsamples," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 19(3), pages 270-285.
    25. Hopewell, Michael H & Kaufman, George G, 1977. "Commercial Bank Bidding on Municipal Revenue Bonds: New Evidence," Journal of Finance, American Finance Association, vol. 32(5), pages 1647-56, December.
    26. Clapp, John M & Giaccotto, Carmelo, 1992. "Estimating Price Trends for Residential Property: A Comparison of Repeat Sales and Assessed Value Methods," The Journal of Real Estate Finance and Economics, Springer, vol. 5(4), pages 357-74, December.
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