An Analysis of Residential Auction Sale Prices and Quoted Guide Prices

The majority of the literature concerned with residential auctions has examined whether houses sell at lower or higher prices in comparison with a private treaty negotiated sale. A number of studies have shown, both theoretically and empirically, that auctioned properties should not sell at a premium in comparison to private treaty sales. Mayer (1994) argues that as private sellers can wait longer they would receive a higher price from a more matched buyer. Mayer refers to the auction discount as the cost of liquidity. This argument is also presented by Adams, Kruger & Wyatt (1992). The majority of empirical studies have examined whether properties sell for more or less at auction using a hedonic modeling approach. The results support the theoretical work that argues for auctioned properties selling at a discount. These results are however to some degree influenced by the fact that most auctioned properties in the US involve foreclosures or bankruptcies, especially at the lower end of the market. This is highlighted in studies such as Allen & Swisher (2000) and Allen (2001) that both use Department of Housing and Urban Development (HUD) auction data in their analysis. Both studies find evidence to support the hypothesis that auctioned properties sell at discounts.