Affordable Housing Institute : US

As the market trembles, cresting or not, behavior of buyers and sellers is shifting, as this New York Times article reveals:

 

“Right now, buyers are daring to put offers that are under the asking price - I just got one for 8 percent under asking,” said Jacky Teplitzky, an executive vice president at Prudential Douglas Elliman,

 

That word ‘daring’ set me off, as it reveals either a complete misunderstanding of the nature of bargaining, or the complete irrationality of the New York City marketplace.

 

 

If markets are conversations among people who are telling each other the truth, bargaining is a kabuki show between known liars.

 

 

Bargaining is not negotiation: it’s more crude.  But bargaining is also something else — a set of moves that tell a story using a miniature vocabulary: a number, and a time. 

 

In this bargaining is very similar to poker (whose World Series is now being played in Las Vegas).  Each poker hand is a sequence of bets that ends either with capitulation (everyone concedes the pot to one person) or a showdown (where the remaining hands are revealed).  Of the information exchanged among the parties, only the sequence of bets are ‘truthful’ — in the critical sense that each one represents a commitment of money.  Everything else is ‘false’ in that it is intended to obscure, confuse, or mislead.

 

But though each bet is ‘true’ in a market sense, their sequence is itself a story that may be false.  And it is a sequence constructed from the simplest of building blocks.  In poker the vocabulary consists of only five words (Bet, Check, Fold, Call, Raise) and a limited range of numbers (dollar amounts).  Yet the best poker players use their knowledge to reconstruct the story being told by their opponents (which bet when, after what cards seen).  They also try to construct stories about their hands, all with the goal of correctly deducing their opponents’ hand and deceptively advertising their own.

 

The same dynamics — limited vocabulary, interim ‘truthful’ actions, the goal of telling a story — are at work in the one-time poker hand of buying a house.  Buying a house has a sequence of five moves (poker has four rounds of betting times the number of players who play), each of which has a number attached:

 

1. I set the asking price P-1.
2. You make an offer P-2.
3. I counter (or don’t) P-3.
4. You counter (or don’t) P-4.
5. We agree P-5.

 Steps 3 and 4 can obviously be repeated an infinite number of times.  All of these steps are signals but signals with risk:

 

But buyers, perhaps fueled by the bubble press, are mounting more resistance.

 

More buyers “are offering ask or slightly over ask,” said Veronica Raehse, an executive vice president and sales manager at Bellmarc Realty’s West Side office. “Two months ago, where they were going $100,000 over ask, it’s maybe only $25,000 to $30,000 now.”

 

A transaction strikes when you offer more than my minimum, and I agree to sell for less than your max.  In between my min and you max lies our potential zone of agreement.

 

1. The zone of agreement may be large or it may be small.
2. We may settle on any point in the range of our zone of agreement.

 The bargaining element of a home sale is our mutual feinting to try to make our proposal look reasonable compared to your or-else (Fisher and Ury call it your BATNA, Best Alternative To Negotiated Agreement, an acronym so clumsy no one should use it).

 

It’s important that the story being told by the sequence of bets/ bid-ask-offers be one that is internally credible.  Revealing its incredibility immensely weakens a player’s position. 

 

Unlike brokers, who play this game repeatedly and who are unabashedly pro-transaction because their ultimate clients are themselves, sellers and buyers are typically one-timers.  Like World Series of Poker newcomers, they can make incredible blunders:

 

Jerry Minsky, a senior vice president for Corcoran in Brooklyn, said that in a five-day period after Memorial Day, four buyers of properties in the $300,000-to-$700,000 range tried to lower their bids by 25 to 30 percent after signing contracts at asking price.

 

“The buyers all systematically came back for cuts after they negotiated their contract, on the advice of their lawyer or mortgage broker,” said Mr. Minsky, who advised his sellers to stand firm but said he could not predict whether they would.

 

In game-playing parlance, a buyer who flinches in this maladroit way has ‘cracked out of turn.’ 

 

 

The move makes a mockery of all previous moves, and reveals that the player was in fact bluffing, telling ‘fibs’:

 

“On the chessboard, lies and deceit do not survive for long.”

– Emanuel Lasker

 

In the marketplace, ‘fibs’ do come a-cropper.  Those buyers who signed contracts have probably now discovered they have forfeited their 10% deposits, a very expensive price for having cracked out of turn, and even before that, for having pushed too many chips into the pot.

 

 

By such decisions, made by amateurs playing for high stakes, some transactions close, and the observant herd takes note, and adjusts its behavior accordingly, and by such schizoid steps do markets define themselves. 

 

“You cannot step in a river twice, for when you come back the second time, you are not the same person, and it is not the same river.”

 

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