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March 01, 2007
Home Sellers and Scalpers
Rafi Mohammed, a pricing expert, makes this interesting analogy between home sellers and scalpers on his blog:
The panic that could occur in the housing market is akin to what I experience in buying tickets from scalpers at a rock concert. A few minutes before the show starts, even professional scalpers lose their cool – vigorously competing against others, they drop their prices in an attempt to monetize the rapidly declining value of their tickets. This results in drastic price drops. What does rock concert ticket scalping have to do with the housing market you may be wondering…one concern is that much like ticket scalpers, sellers will aggressively discount their homes (to lock in profits or minimize losses) before they further decline in value. This will lead to even more supply and lower prices.
Read the whole thing here.
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Comparing the value of a home to tickets to a rock concert is kind of a strange analogy. The value of the tickets hits zero as soon as the concert is over so this would be like if a house was going to be worth zero dollars after a certiain period of time (and so was every other house on the market).
I think Rafi a "pricing expert" can do better than this.
Posted by: Terry Sanford at March 1, 2007 10:57 PM
Terry has a good point and one that I should clarify in my analogy between home sellers and ticket scalpers. While the value of a concert ticket does indeed go to zero at some point, I did not mean to intone the value of a house would go to zero.
The point of my analogy is that I believe the behavior of sellers in a shaky market will be akin to the frenzied scalper discounting I observe right before a concert is set to start. These savvy sellers aggressively lower prices to make the most money from an asset they believe is rapidly decling in value. If home sellers behave similarly (which is arguably rational to do), this intense seller competition will lead to a housing market crash.
Posted by: Rafi Mohammed at March 2, 2007 12:05 PM