For all the efforts to clear the U.S. housing market, the sheer scale of the real estate crash defies even the most aggressive approaches like short selling. What’s needed to get the country out from under a crushing debt crisis and inventory glut is an idea that’s been keeping markets healthy and wealthy for decades, Down Under.
In Australia and New Zealand, homes sell weeks, not months. In some areas, more than 60% sell in four weeks – with cash non-contingent offers and 10% non-refundable down. That’s just about the time it takes the average U.S. agent to finagle their first “price reduction” from their irrational sellers. How can this be the case, in a country where mortgage interest isn’t tax-deductible and the 30-year fixed financing is unheard of?
Simple. Down Under, they sell homes just like any other commodity: They auction them.
Beautiful in its simplicity, the Down Under auctioneering approach to selling homes is the product of clear economic thinking. The auction is the oldest and most stable form of transaction. It maximizes the best features of free market: real-time pricing between interested parties who close and pay immediately. It’s the approach used to sell at the small0town flea market or on a global electronic commodity system.
And it’s exactly what the United States needs to clear out the excess and distressed inventory.
Auctions let market forces bear upon the process of trading those “special” commodities we call houses. From a high level there appear significant advantages to auctions in comparison to more traditional “list, wait and hope” approaches. To keep it simple, let’s focus on the benefits that could be applied to the problem of restoring balance to America’s distorted housing market:
- Auctions communicate better pricing information. In traditional listing practices, the seller makes the “first offer” and then spends days or weeks rejecting lower offers. If offers are close to their first-offer, a negotiation might occur, usually lasting days. Auctions, on the other hand, provide immediate and real-time pricing data to the seller and broker. After a previewing and marketing period of two or three weeks, buyers appear for a short amount of time and communicate what they would actually pay for the home by bidding. This pricing data is better for sellers because it relies upon actual offers to purchase, not historical data in a MLS database (which represent others’ offers to purchase others’ homes). Bids represent the only realistic pricing data that accounts for comparable homes on the market as well. Buyers are likely to have previewed all of the relevant alternative homes that interest them, and take their options into account when bidding. Auctions therefore provide the clearest and cleanest appraisal of what a home is worth to the only person who cares: an actual interested buyer. Even in cases where bids do not reach the minimum requirement of the seller, auctions still provide the best pricing guidance in the least amount of time. Traditional MLS “sold data” cannot compare because sold prices only reflect what a home was worth to other buyers at a time in the past that no longer exists, whereas auction pricing is more “meaningful” to all parties because it represents the actual current market.
- Auctions use resources better. The auction is an extremely efficient use of everyone’s most valuable asset: time. Sellers can complete a deal within a few short weeks, possibly faster. Brokers and agents, selling on commission for a living, can move inventory rapidly and get paid more frequently. Auction are focused on the proper goal: selling the home, not marketing it. Nor showing it, staging it, repairing it, or anything else. It also eliminates the “testing the market” ploy by which sellers consume brokerage resources with no real intention to sell at a market-price. In an auction, everyone is focused on closing the deal as efficiently as possible, especially sellers who often pay up-front for the marketing campaign (see below). Auctions work for even more complex transactions than a house sale – like fine works of art -so they make perfect sense for real estate. Taken to a logical conclusion, auctioning homes would eliminate the traditional six or twelve-month listing agreement. What an insane by-product of real estate industry inefficiency! No other traders of commodities – cars, computers, stocks – contractually hopes to hold their inventory for months. The goal with auctions, as broker Tony Jenkins of Harcourts Holmwood in Christchurch, NZ might say is: Next!
- Significant cost savings. Much of the U.S. real estate industry’s structure is built around heavy “carrying costs” necessitated by inefficiently-lengthy listing periods. As a result, everyone pays more: Sellers contribute higher percentages of equity to pay for months of marketing and showings. Buyers ultimately pay those costs in their offers. Brokers and agents carry higher operating costs such as time, technology, marketing, fuel, (showings take gas) and so on. Even finance and closing periods are inefficiently long, driving up borrowing and closing costs. It’s little wonder that few brokers turn a profit in classic U.S. real estate – even in good times.With auctions, the costs are reduced for everyone. More importantly, they are laid at the doorstep of the appropriately responsible party. Buyers have been assumed to have previewed and pre-inspected at their own cost, the property before the auction, since they must place an immediate 10% down on their winning bid. Closing occurs faster, since there are no contingencies at auction. The cost savings are passed along to everyone: Sellers – who are aptly called “vendors” – typically pay less in commissions in Australia and New Zealand than their American counterparts. Even brokers and agents turn profits because they have lower length carrying costs. When one third or more of inventory moves monthly, it’s called cash flow, which can be used to finance further investment, expansion, training and technology to drive down costs further. Compare that to the typical “run-up-the-debt-then-pay-it-off-and-back-to-zero” cyclical trap that forces 60% of new agents out of the business within months in the U.S and the advantage seems clear.
- Caveat Actor for All. In an auctioning process, everyone has skin in the game. Likewise, moral hazard is placed squarely where it belongs, on sellers and buyers. Price-setting mechanisms rest on the shoulders of only parties who actually bid and pay for what they want. Either can act sanely, or emotionally. Yet neither can blame financiers, inspectors or even their brokers. Buyers spend according to their personal worthiness; lenders assess the consumer’s credit, not the property’s current market value. Sellers frequently pay for marketing services up-front, increasing willingness to act within market forces, not personal agenda. Best of all, auctions let the most-interested parties determine for themselves how much the home is worth at any moment in time.
And in the U.S., that might have meant the moral hazard didn’t rest on one’s neighbors – i.e., the taxpayers left bailing out the bad decisions of so many other parties to whom caveat actor didn’t apply.
It’s likely that there are other benefits of auctioning homes. While Australia and New Zealand have unique factors contributing to the success of the process, auctioning does occurs in some rare segments of land and commercial sales in the United States today. Yet it remains an exception, not even an option, for most sellers (vendors). The dominant system of “wait and see” selling permitting seller-sided pricing practices results in heavy carrying costs for brokers, with burden and hazard dragging down everyone. At the bottom of most deals in the U.S., there’s barely $170 in profit margin. The system becomes one in which brokers lose money on each deal, but try to make it up in volume. It’s clear there’s not enough equity left in America’s housing to support this system much longer.
Unlike other industries in the modern American economy, real estate costs to consumers have risen not declined over time. Today’s typical commissions remain at much the same percentage as they did two decades ago, despite heavy investment in technology, training and marketing. Somewhere, at the center of the transaction, more effort, knowledge or skill isn’t required. What’s needed is perhaps a better idea – one based upon market forces, not mercantalism. We might even innovate on the approach – applying some EBay technology perhaps – to make it more like apple pie. If America wants to get its housing market out from under water, it might do well to take a lesson from its friends Down Under.