Victims or fools, time for Emergency Bidding War Transparency Act

To see how far winning bids are above or below original asking prices, run your cursor over individual sales in this scatterplot.  Each data point shows ($K over or under, as well as %).  Too zoom-in, drag a box across the area you want to expand.

Around the country, homebuilder associations showcase their new subdivisions with an annual “Parade of Homes; ” but blog comments on Boston.com’s post today about homely properties selling $86,000 to $126,000 over asking price in Cambridge might cause one to ask if “Parade of Dumps” is more fitting.

Or is it “Parade of Fools” — homebuyers who are being fooled into overpaying by a blind bidding war process?

Historical or hysterical context?

Writing twenty-five years ago in The Behavior of Home Buyers in Boom and Post-Boom Cycles, Nobel-prize winning economist Robert Shiller and fellow housing economist Chip Case made this observation:

“…we see a market driven largely by expectations. People seem to form their expectations on the basis of past price movements rather than any knowledge of fundamentals.  This increases the likelihood that price booms will persist as homebuyers in essence BECOME DESTABILIZING SPECULATORS!”

That was when just 6 to 10% of homes selling over asking price was considered overheated.  The Cambridge housing market was at that pace in 4Q2010; but by 4Q2013, the pace increased ten-fold to 60% over asking price.  And last month it rose to 75%.

So when speculation becomes self-perpetuating expectation as stated today’s in Boston.com : “just about any habitable patch of real estate in Cambridge is sure to spark a bidding war these days, isn’t it time for more transparency about what’s going on behind the scene?

Consumer protection

In Toronto, another city blinded by bidding wars, regulators are stepping up efforts to protect homebuyers from phantom bidders, but that’s not enough.

http://bit.ly/PhantomBid  Please share URL with your social network

In an age of transparency, where ingredients are routinely disclosed on products in grocery stories, can’t reasonable people agree that homebuyers should be able to make more informed offers on the most expensive transaction in their lives?  Otherwise, buyers are easily manipulated as this scenario describes below:

“The selling agent said repeatedly that the top two bidders were “really close,” so the buying agent and his client spent hours crafting new offers before relinquishing. The eventual sale price was $70,000 over their highest bid, meaning that the final buyer was probably competing against herself for at least the last $50,000.”

What’s the answer?  Several are proposed in Toronto including this call for transparency:

“Mainly what’s needed is tearing down the curtain of mystery dividing buyers from the Realtors of Oz. “All bidders should see all other bids,” says my friend Dave, who finally triumphed over another buyer this March after four months touring $650,000 houses that all sold for $800,000. ‘There needs to be less opacity, and less chance for sellers and agents to collude to squeeze the buyer.’ ”

Bidding War Backlash

For the past four months, Real Estate Cafe has been blogging about runaway bidding wars in Cambridge, and asking what risks bidding wars pose to taxpayers who now guaranteeing 9 out of 10 mortgages, up from just three in 10 before the collapse of the housing market (2006).

Is it time for a ground swell of bidding war backlash, or call for public intervention?  Regrettably, the first might be unlikely because the housing market pits bidder against bidder, so ordinary first-time homebuyers are competing with cash investors — one of whom complained that other cash buyers are also competing against the most irrational or poorly advised homebuyer in the market.

Is there a case for public intervention?  If there were a water shortage, people would not think twice about rationing water, perhaps limiting or alternating days when homeowners could water their lawns.  Similarly, the Cambridge Consumer Council has submitted testimony to support emergency price disclosure regulations in other marketplaces.  Isn’t it time to extend transparency to the real estate marketplace as well so homebuyers can make informed offers by knowing the truth about competing bids, including whether they are from straw bidders or phantom buyers?

What’s the solution?

As we have written before, the technology exists (see bit.ly—VerifyThis), time for those we’ve elected to protect us to enact an Emergency Bidding War Transparency Act?  If taxpayers are guarantee 9 of out 10 loans, doesn’t it make sense for all of us to stop turning a blind eye to the current BLIND BIDDING PROCESS in real estate?

Without that transparency, conflicts of interest expose us all to risk:

http://bit.ly/GotRisk  Please share URL with your social network

So do irresponsible practices, like competing escalator clauses which can knowingly or unknowingly create in-house sales at inflated prices that make all of us look like fools.  Maybe that’s where legislators and investigative reporters will begin to find tangible evidence that there’s need for transparency and regulatory reform.  Anyone want to look?

http://bit.ly/BetrayME  Please share URL with your social network

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