Price Discovery In Real Estate Auctions

Little is known of the effects of the auction mechanism in relation to post-auction market sales. This empirical study of unsuccessful auctions shows that approximately half of these properties were eventually sold via private negotiations, at higher prices relative to last bids. The probability of a subsequent postauction transaction is significantly higher for apartments and terrace houses and when auction turnout is high; and lower in the absence of any bid and in some years. In addition, downward evisions to the opening bid improve the probability of subsequent sale. Prices of subsequent re-auctioned and privately negotiated sales decline with time to sale, consistent with the search process explanation.

This paper offers an empirical and theoretical comparison of auctions and negotiated sales. It is shown, that the particular choice of auction impacts the auction price. Also, price-increasing factors are examined, which are then incorporated into an auction design that best exploits revenue maximization. Empirical evidence widely supporting a higher price from an auction compared to a fixed price sale is given and a model is built that confirms this relation for unique properties. The model also shows, that a start price increases the expected present value of an auction and that a repeated auction with a start price yields the overall highest expected present value of any auction format.

Little is known of the effects of the auction mechanism in relation to post-auction market sale. This empirical study of 966 unsuccessful auction observations over a period of almost five years is an initial attempt to provide insights on post auction effects. Approximately half of these properties were eventually sold via private negotiations. The post-auction privately negotiated sale prices are on average higher than the opening and last bids when at least one bid is received at the auction. However, properties that received no bids at the auction were transacted on average, at a discount to the opening bids. The probability of a subsequent post-auction transaction is significantly higher for apartments and terrace houses and when auction turnout is high; and lower in the absence of any bid and in some years. The price to opening bid differential increases with the number of increments at the auction, but is lower for more atypical properties and decreases with time-to-subsequent sale. The results lend support to the hypothesis that the auction mechanism provides a positive price discovery effect, ostensibly from publicity and exposure at the auctions. Interestingly, the probability of subsequent sale is also decreasing (albeit insignificantly) in the capital loss experienced by owners, lending some support to the loss aversion theory. However, the attenuation in opening bids is observed for all properties, regardless of whether they are put up for sale by owners or by financial institutions.

This paper examines the process of price discovery at the New York Stock Exchange (NYSE) single price opening auction. Interest in this topic is motivated by the crucial role played by opening mechanisms in information aggregation following the overnight non-trading period. In addition, the operation of auction markets is an issue of considerable importance for new, automated trading systems as well as extant exchanges. We show empirically that specialists significantly facilitate price discovery. Specifically, the opening price set by the specialist is more efficient than the price that would prevail in a pure auction with only public orders. This is consistent with a model where specialists learn from observing the evolution of the limit order book. The specialist's opening trade reflects private information and non-informational factors such as inventory control and price continuity. We discuss the empirical and policy implications of these results.

A nostalgic look at days when-- making a living demanded ingenuity as well as hard work; life, devoid of today's electronic media bombardment, was simple; and entertainment was derived from simple pleasures; family life was close-knit and relationships cherished; simple gifts were appreciated; parents practiced discipline; the Generation Gap had not been discovered; education was taken seriously; friendships endured; moral values were taught at home; value was placed on handmade things; authority was respected; reading was not a lost art; consciences were heeded.

Jaroslaw Morawski offers a practicable and theoretically well-founded solution to the problems encountered when investing in illiquid assets and develops a model of the liquidation process for this category of investments. The result is a coherent investment decision framework designed specifically for private real estate but applicable also to other illiquid assets.