When should you buy a house? Avoid the Winner's Curse.

I have been thinking of moving recently... Well, not recently, I've been thinking about it for the past 3 or so.... But I've been giving it a lot more serious consideration in the past year. Aside from my personal reasons as to why I may or may not move I'm trying to determine the best time to buy or sell a house. Obviously the best time to buy a house is when you are financially ready and you know that you don't plan to sell for a while.

But that's not the aspect of it that I'm concerned with at the moment. I am mostly looking at when is the best time to buy or sell in the housing market. So I started looking online and I found a lot of good stuff: There's a bunny island in Japan, some guy filled a bathtub with coke and then threw in a hundreds of mentos to make a sugary spring bath, and some really cool tattoos.

But then I realized I was supposed to be researching the housing market so I started my search over again, this time with a renewed focus.
I started looking into the theories of when to buy and sell when I stumbled across the Winner's Curse. It's a game theory principle about auctions that basically states that in an auction with enough participants the winner will tend to overpay.


the winners curse

The Winner's Curse

A common example of this is a teacher will bring a jar full of coins into a classroom and tell all of the students to bid on it. Each of the students writes down what they would bid for it and submits it to the teacher. The teacher then announces the "winner" and guess how the winner feels... Usually, like a sucker.

The reasoning behind this is that each of the students writes down what they believe their estimate of the jar is worth, and the winner is the person with the highest estimate. If we then assume that the average estimate is accurate then the winner will always overpay.

So, the lesson here is that when you are selling a house you should try to time it when there are a lot of prospective buyers in the market. This way you have a better chance to have multiple bids on your house at the same time, thus creating a bidding war where the winner should be the seller (and the blood sucking realtors).

The best time to buy a house then would be the opposite, when there are a surplus of houses and hopefully not a lot of bidders. As soon as any bidding war begins you should really carefully evaluate what it's worth is to YOU. Try to ignore outside influences, you don't have to listen to your realtor, they may claim to have expert knowledge of the market but at the same time they are trying to sell you one of the biggest purchases that you make in your life and they get an absurd cut of the sale.

The easiest way to avoid the Winner's Curse is to use mindfulness in all of your purchasing decisions. Focus on what the value of things really are to you so that you don't pay more than what you think is really fair.

Have you ever been caught up in the hype that surrounds a home purchase? Did your realtor push you to bite off more than you can chew? Or worse, have you ever been caught in a bidding war, if so, how did it end?

-Zee

8 comments:

  1. Your sentence about all the good stuff you found online made me laugh out loud :)

    There are definitely a ton of buyers in the San Francisco housing market right now. Homes are getting 10-15+ bids within days of going on the market, some of the bids will be all cash, and winners are bidding 10-20% above asking. It's crazy out here. Basically, unless your first offer is for 120% of asking, all cash, no contingencies, it's hard to buy a house in San Francisco right now.

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    1. First, I like to keep my readers on their toes!

      Yeah, the San Francisco market is pretty crazy at the moment. Unfortunately since there's limited space in San Francisco, there's always somewhat more of a demand here. It's also annoying that rent is incredibly high at the same time, I think eventually one of these has to give but I have no idea which one will pull back first. Either that or jobs better start giving better end of year raises to keep people here.

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  2. Zee,

    Found your blog via Dividend Mantra. Nice place you have here! :-)

    I purchased my home a year ago just like you stated is the best situation: a depressed market, over abundance of vacant properties and no bidding! I purchased as an owner occupant and didn't have to get into a situation where I would bid against others. It has worked out for the best.

    Cheers

    The Stoic

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    Replies
    1. The Stoic,

      You bought at the best time, good for you! I wish I was that financially savvy when I purchased my home but unfortunately I wasn't. That's also cool that you made the purchase as an owner occupant, that must have saved a lot of hassle for everyone. I wish I had waited just 6 months and it would have made a HUGE difference.

      Thanks for stopping by!

      -Zee

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