A Computer Scientist Bids on a House

I was going to favor you all with a post about Java’s System.nanoTime. That post will have to wait until tomorrow. Instead, I spent the day (arguably the weekend since 3:15pm on Friday) putting in a bid on a house. I won’t bore you with the details of property, inspections, financing, etc. However, I think the details of the bidding process are quite interesting.

To quote a friend of mine, when asked how we much we should bid on the house:

In a first-price auction, there’s no dominant strategy. :( However, by the Law of Revenue Equivalence, the seller will, on average, get the second-highest valuation of all the bidders. So, if you think you value the house more than everyone else, all you have to do is guess what the next-best buyer would be willing to pay for it, and bid slightly more than that to win.

Yes, well, that is entirely correct, but unfortunately unhelpful. We are dealing with a non-repeating negotation (so “on average” doesn’t apply). And it’s remarkably unclear that the auction will be run according to any rules at all. Predicting the behavior of the seller and the sellers agent is quite challenging. On Saturday at brunch a different friend recommended The Strategy of Conflict by Thomas Schelling, from the era of game theory research that brought us such gems as “mutually assured destruction.” Unfortunately there wasn’t time to read it.

Obviously (obvious to anyone who hangs around certain kinds of mathematicians) the right thing is to have a Vickrey auction, where the top bidder pays the price of the second highest bid. But this is far from obvious to realtors. They treat making an offer as a very expensive operation. And counteroffers from the seller seem to be very uncommon. There is a lot of concern about “offending” or missing out on an offer. I’m not sure why. If someone wants to buy your house on Monday for $x, they probably still want to buy it on Wednesday. Unless maybe their Realtor is reading something into the delay.

One is left wondering if the world would converge on more optimal auction structure without real estate agents muddying the waters. Or if, as eBay has demonstrated, people would rather keep working in an easy to understand system over an optimal one. Unlike eBay, the current system is quite complicated, with many conventions and few rules. In the age of Redfin, Realtors have an obvious interest in preserving the status quo, since understanding the rules is the only thing they have left. In the past, they at least had priority access to listings and historical sale data. Now they are left understanding the negotiating process.

In the end we offered $410k for the house. There were 5 offers, three of them at a similar price point to ours, $10k over asking. There was one offer at $430k, so the sellers decided to accept that offer, rather than encouraging further bidding. Case closed, transaction completed, Realtor happy. Money might have been left on the table, but getting it would have required both work and risk on the part of the agent.

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