Searching for that ultimate bargain in the depressed market for condos? Chances are you may have been tempted by the auction extravaganzas, in which dozens of apartments in half-empty developments are offered to the highest bidders.
But the temptation, suggest Professors Orley Ashenfelter of Princeton and David Genesove of the Massachusetts Institute of Technology, is probably worth resisting. For the only real winners seem to be buyers who wait until the auction is completed, and then scavenge the remains.
In a paper presented recently at the annual meeting of the American Economic Association in New Orleans, the two economists analyzed the results of the auction of 83 units in a New Jersey apartment complex.
They were looking for -- and found -- evidence of what economic theoreticians call a price anomaly. Buyers early in the auction paid considerably more for equivalent apartments than those who waited until late in the day.
But to their surprise, they discovered that the auction also failed to define a true market price: The best deals by far were made in private negotiations after the auction was over.
Auctions interest economists because they can provide insights into the nuts-and-bolts workings of larger, more anonymous markets for everything from currencies to common stocks.
Mr. Ashenfelter, a wine buff who writes a newsletter on the economics of the wine market, has been struck by seemingly irrational behavior of bidders at wine auctions. When identical cases of wine are sold in a single auction, he noted, the ones sold first generally fetched higher prices.
Wine auctioneers are apparently aware of the phenomenon, he says, and generally take care to package wines in lots that are not precisely identical.
Otherwise, bidders would catch on and avoid the early lots, driving down the total proceeds from the auction.
Mr. Ashenfelter wondered whether this price anomaly was at work in the market for housing. He and Mr. Genesove used a condo auction that took place in April 1990 in Princeton to find out.
Prices in the early sales were indeed higher: On average, the winning bid on units from the same line fell by about a quarter of a percent in each sequential sale. But the way this (and most other) condo auctions are structured forced the economists to look further to see whether the decline was really the result of a price anomaly.
Under the auction rules, all the units in a specific line were put up for bids together. The first winner got his pick of any of 30 apartments; the next winner chose among the remaining 29, and so forth. Thus the observed decline in winning bids might also be due to quality differences -- some, for example, were on higher floors and some had better views.
So the economists assigned an assistant to check local records for resales of apartments that had been purchased at the auction as investments.
These secondary sales, the economists figured, would provide a statistical benchmark for separating price differences associated with quality differences from any anomaly caused solely by the order of the auction sale.
This task proved easier than expected.
It appears that 37 percent of the auction sales fell through -- buyers got cold feet, or could not come up with the financing. And these apartments were all quickly resold by the developer at prices that were negotiated.
Matching first and second selling prices, the two economists found that no more than a quarter of the price decline observed during the auction was related to lesser quality; when it was sold during the auction remained important.
Thus the bizarre and not easily explained price anomaly effect holds for $100,000 condos as much as it does for $30 vintage Bordeaux. What really surprised Mr. Ashenfelter, though, was the dramatic decline in condo prices after the auction was finished.
The intuitive appeal of a condo auction (apart from the irrational hope of getting something for nothing) is that the open bidding will provide a realistic sense of what the real estate is worth in the market. But this auction -- and, Mr. Ashenfelter suspects, most condo auctions -- did anything but: By waiting a few days, buyers could have had the same units for an average of 13 percent less.