Don't be insulted, babykins!

From the Palm Beach Post we have Home sale situation a bit less bad.

Yes, home prices are falling, but there's a not-so-thin line between making an offer that reflects this reality and insulting the seller.

"We are amazed at some of the crazy (low) offers people put through on homes that have been marketed at a reasonable price," says Realtor Randy Bianchi of Paradise Properties in West Palm Beach.

"It almost becomes insulting," he says.

Actually, Bianchi is too polite to say that some offers are insulting.

Case in point: Bianchi has a condo in West Palm Beach listed for $170,000 - a reasonable asking price, he says, for an end unit with many upgrades and a great view. The last two sales (within the past 45 days, he points out, not last year) were for that much or more.

"We got an offer of $145,000 with 95 percent LTV (loan-to-value)," he says. "Come on! If it were cash, I might understand. But financed? I think buyers are assuming that all sellers overprice homes, or they're not listening to their agents or nobody is doing their homework."

There are so many things wrong with this article, it's hard to see where to begin.

I'm also going to use standard terminology unlike the reporter who has no clue : an "offer to buy" is called a bid, and "an offer to sell" is called an ask, or an offer.

Firstly, there is no such thing as an "insulting" bid. That's why it's a bid, and that's how capitalism works. People bid what they feel something is worth, and you can either take it or leave it. To call something "insulting" demonstrates a level of foolishness that's shocking.

Secondly, there are two reasons to under-bid, one mathematical, and one pragmatic. (actually, they're the same thing.)

The mathematical reason is called the winner's curse.

Here's the cleanest way to think about it : assume you attend an auction where the true worth of the object being auctioned is unknown. Let us also assume that each bidder bids independently.

Well, obviously the highest bidder wins, but since the object should be worth roughly the same to each bidder, one could make the argument that the "average" (mean or median as is appropriate) is probably a better judge of the "true worth" of the object than any individual bid. In which case, the highest bidder overpaid, by definition.

Oooops!

This is a very nasty mathematical fact that's hard to escape.

The trick out for professionals is called "bid shading". You revise downward your ex ante estimation of the value to a level that you would be comfortable were you to actually win. (In plain English, you need to have no "regrets" that you won the auction.)

Now, the actual implementation of this is tricky (of course! otherwise everyone would get rich off trading stocks, or bonds, or currencies, or fine art.)

As someone who's worked as a professional market-maker, on a pragmatic level, professional bidders also take into account whether the market is rising or falling, and at what rate. You underbid the market to take into account this directionality. You also take into account the fundamentals of the situation given the time-frame that you propose to hold that object.

Given my reading of the Florida market, one could easily make the case that this 15% underbid is actually a huge overbid, and the sellers instead of being insulted should have rushed to pass the buck onto the greater fool.

Thirdly, on a brute-force common-sense level, if this is an "insulting bid", where are all the "non-insulting bids"? If they don't exist, then the perhaps the seller has an inflated value of the object compared to the market (which in this case is a single bid.)

So one more time : there is no such thing as an "insulting" bid or offer!