Current Housing Market and the Bipartite Graph Auction Procedure
http://www.nytimes.com/2012/09/26/business/home-prices-climb-again.html?ref=business&_r=moc.semityn.
Shaila Dewan and Nelson Schwartz published an article today analyzing the recent increase in home prices for the low end. These low end homes were affected the most during the crisis and yet have now achieve an annual gain of 1.2% according to Standard & Poor’s Case Shriller Index across 20 cities in July. Luxury homes on the other hand lost less value, but rebounded much more quickly than lower end houses. The article emphasizes how lower end houses are now catching up in increase to these upper tier houses. The market for lower houses has expanded as the amount of investors have increased so much so that “Houses are going on the market and within a day have multiple offers already on them.” These investors outcompete families trying to buy these homes and use these houses for rentals.
What’s even more interesting about this article is its relation to several topics discussed in lecture. The phenomenon that immediately jumps out at me is the adjustment of the pricing of lower houses and its similarity to the bipartite graph auction procedure discussed in chapter 10. The graph consists of houses, the sellers, and buyers, the consumers. The incentive of the market described in the article is essentially to provide houses priced so that consumers buy the houses for positive payoffs while at the same time resulting in optimal profits for the sellers. Thus social welfare maximizing provides the best prices for the buyers. The article describes a bipartite graph that doesn’t yet have market-clearing prices, but instead is always striving to maximize profits for sellers and to satisfy the values of consumers:
“Houses are going on the market and within a day have multiple offers already on them,” Mr. Graham said, adding that most of the offers were from investors who did not need financing. “It’s more or less a heartbreaking market, because you get your heart set on a house, and then someone walks in with cash”
As there are an increasing amount of investors on these lower end homes, the prices for them are increasing just as the prices in bipartite auction procedure in chapter 10 in order to reach market clearing prices and eventually reach the optimal social welfare. And thus it is interesting to see how this increase in lower end homes values relates to the principles of maximum social welfare and the auctioning procedure to reach a market clearing price. Furthermore, evidence of the graph described in the article reaching maximum social welfare is quantified by consumer confidence in the market, which the article states “reached 70.3 points, well above economists’ expectations of 63 and a significant improvement from the upwardly revised level of 61.3 in August.”
Another interesting concept that is seen in this article is that unlike the bipartite graphs we deal with in class, these graphs have dynamic values. The buyers/consumers are always changing their values depending on their own wealth/life. The investors in the article are actually converting their value for these low end homes by renting these homes to families with lower values, and thus there is a sort of a conversion of values and a more complicated graph, where the buyer becomes the seller.
-AP123