Exploring the Influences of Networks on Real Estate Auctions
Although the real estate market has cooled down in the second half of 2022, housing prices were red hot from late 2020 to late 2021 and early 2022. We saw many instances where housing prices were sold well above the market price. Phillip Kranefuss, head of Real Estate in Colorado with Homie, states that “offers typically need to exceed at least 1 to 3 percent over the list price when there are multiple competing buyers.” In extremely competitive housing areas, it may be well beyond this amount but during our red hot market, the effect of network demands carry a considerable weight on how auctions play out in this market.
Although variable, the real estate auction generally can fall in one of 3 main auction types:
- A first-price, absolute auction
- A minimum priced auction where seller only accepts minimum values
- A reserve auction (with attached reserve price)
Generally speaking, a buyer typically posts a purchase price where the house can be bought at but is willing to take the highest amount (similar to a first-price auction with a “buy it now/asking” price). In theory, those who value the house higher than the asking price will buy the house at the asking price and the auction is complete. However, during the parabolic real estate market that we had last year, we saw an instance where a plethora of bids were proposed higher than the asking price. Based on our present information and how a majority of homes sold were 1-3% above the list/asking price, we saw that the list/asking price no longer served as a “Buy it now” price. Thus, if you valued the house higher than the asking price during this time, the purchase price generally wasn’t available, and you would have to compete with others in a purely first-price auction format. This is a very interesting phenomenon that we did not directly touch upon in class but can be examined through class concepts. We’re effectively seeing how a network is altering the course of an auction structure
In class, we saw how the network responds to auctions, and prices for an auction can vary depending on the network and its values but we didn’t see an auction format completely change based on individuals in a market. The real estate market truly showcases a unique circumstance where the sheer values that the network has essentially altered the auction format and rather than the network responding to auctions, the auction structure and generally speaking the auction itself are responding to the network.
Sources/examined papers:
https://themortgagereports.com/70484/how-much-over-asking-price-should-you-offer-on-a-house
https://www.nar.realtor/auctions/types-of-auctions