We bought a house a few years ago. It was our first entry into the real estate market and it was quite scary. Most houses in Sydney are sold by auction, and this seemed to be a way to coax buyers into paying more than they could afford. We saw a house that my wife really wanted, and while talking to the sellers’ agent she blurted out the maximum price we would be willing to pay for it. We had sort of resigned ourselves to paying that much, but when the auction came around, we got the house for $10,000 less than that. That was my bid in the auction, and nobody was willing to bid more, so the auction price was less than the highest price we were willing to pay.
There is an explanation for what happened—while $10,000 is a lot of money for the seller, the real estate agent’s cut of this is quite small, so it is in his interest to work towards a quick sale, rather than getting the best price for the seller. Well, that is an explanation, but is it true? Steven Levitt came up with a clever way to test the explanation. He analyzed what happened when real estate agents sold their own homes as compared with regular folks and found that real estate agents took ten extra days to sell their own homes and got 3% more for them. His research is full of clever insights like this and now he has teamed up with Stephen Dubner to write Freakonomics a book giving a popular account of some of the things he has found out in his work. It was a very interesting and easy read. As I was reading it I left it in the living room while I did a few things and when I got back it had vanished because my 16-year-old had grabbed it and started reading it. He read the whole book after I had finished. His comment: “Very fascinating book”, and he passed it on to the 12-year-old, who said it was an “Amazing genius book”. Both boys told Mrs Lambert that she had to read it. She also enjoyed it, telling me “Almost makes me believe in statistics again”. So the unanimous opinion of my family is that it is a great book full of ideas that spark your interest.
Of particular interest to this blog is the discussion on John Lott in the chapter examining the reasons for the crime drop in America in the 90s. Levitt describes Lott’s dishonest use of his Mary Rosh sock puppet and the question as to whether Lott fabricated research before dismissing Lott’s argument that carry laws caused crime to fall, citing Ayres and Donohue’s refutation of Lott’s studies.
So I have a question. Why do sellers agree to use auctions to sell their houses? Auctions are good deal for the agents, because they sell the house quickly, but they won’t give the sellers the best price. While most houses in this part of Sydney are sold by auction, it’s easy to find an agent who will sell it the other way. So why use a method that won’t give you the best price? Give me your answers in comments.