The costs of moving house.. bid offer spreads

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The costs of moving house.. bid offer spreads

Postby Valuethinker » Thu May 23, 2013 6:14 am

The issue about moving frequently is important. In the US as I understand it agents still charge 5-6%? In addition there is a 'bid offer spread' on houses that you don't see: you seldom get the 'market' price for a house, you get a slight discount representing whatever the buyer negotiates. And then when you buy, you have the same problem (ie you sell at the bid price, and buy at the offer/ask price, and there is probably typically a 3-4% gap between the two). Add it all up, you can lose 10% every time you move house. Huge transactions costs.


I don't have enough information to fully quantify the above. But my sense is we are losing c. 10% of our value every time we sell (and then buy) another house.

That's obvious if you sell and then buy stocks: it's on the screen. But NOT so obvious with houses, where the bid offer spread is not quoted, and there is a lot of noise in pricing. But my contention is the noise (where you sell for more than it's worth, buy for less than it's worth) will on average, average out, it's not a durable source of gain of wealth to you. Sometimes you win, sometimes you lose, but on average there must be a 3-5% bid offer spread reflecting liquidity and transactions costs.

It really underlines the dangers of moving frequently. I am on my second home, and hope that in my life there is not a third (there probably is). Agents fees are far, far lower here (sub 3%). But there is stamp duty (4%-- a huge cost) plus everything else.

It seems to me all indices of returns for retail housing are skewed because they cannot take these factors fully into account. We are not, generally, 'buy and hold' investors in our own homes-- life forces us to move. Your returns as a 'fund investor' in your house are nothing like the returns reported by the indices (which don't adjust for taxes, maintenance, stamp duty, agents costs etc.).

Houses in London have outperformed just about any financial asset long term-- +6% pa real increment 1994-2009 (plus rental return if you were a landlord). Nonetheless I still think housing is a difficult bet against stocks given the factors of transactions costs. Note that house prices (and rents) are still going up here (rest of the UK outside the SE commuter belt, fallen c. 10-12% real since 2008).

A number of US single family dwelling REITs are coming to market- -PE and hedge funds which gobbled up unsold Sun Belt dwellings during the housing bust. Historically REITs are apartments, so this is an entirely new asset class. It remains to be seen whether the relatively high administration and capex requirements of single family residential housing are properly valued at IPO. But the Prospectuses should have very interesting information on this new asset class, including estimates I hope of SFH returns, historically.
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Re: The costs of moving house.. bid offer spreads

Postby TomatoTomahto » Thu May 23, 2013 6:35 am

I think the agent commissions are usually lower, but there are other transaction costs (transfer fees/taxes, cost of making home look good (staging), home inspection fees, etc.). I personally, in my mental accounting, think the cost is around 6% all in. It is one reason that I usually recommend, especially to young people whose careers might take a dramatic turn, that they rent rather than buy. Liquidity costs money.

Even absent moving for a job, it can be expensive to own a home. We moved to our house almost 19 years ago. We moved here for the train line and the great schools. Since we purchased, we no longer take the trains (it's no longer as convenient, although it was useful for 10 years) and the schools are not (in our opinion) as good as they once were. So, we pay $40k/year for each of two children in a private school and still pay $38k in property taxes. We could move to a more cost-efficient home, but then would have the transaction costs now, and again when we downsize as empty nesters in a few years. We have decided to stay put until the kids are in college and we no longer need to be near the city. Selling a house once is more than enough.
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Re: The costs of moving house.. bid offer spreads

Postby Epsilon Delta » Thu May 23, 2013 10:01 am

Valuethinker wrote:
And then when you buy, you have the same problem (ie you sell at the bid price, and buy at the offer/ask price, and there is probably typically a 3-4% gap between the two). Add it all up, you can lose 10% every time you move house. Huge transactions costs.


But NOT so obvious with houses, where the bid offer spread is not quoted, and there is a lot of noise in pricing. But my contention is the noise (where you sell for more than it's worth, buy for less than it's worth) will on average, average out, it's not a durable source of gain of wealth to you. Sometimes you win, sometimes you lose, but on average there must be a 3-5% bid offer spread reflecting liquidity and transactions costs.

So who gets the advantage of this "bid offer spread"? Almost all (used) home transactions are between private individuals. There is only a very small group (mostly bottom feeders) that provide liquidity by holding an inventory of houses for sale. In a transaction between private parties the average spread must be zero. That does not rule out the case that you might be a lousy negotiator but we can't all be below average.
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Re: The costs of moving house.. bid offer spreads

Postby Call_Me_Op » Thu May 23, 2013 10:20 am

Epsilon Delta wrote:So who gets the advantage of this "bid offer spread"?


Let's see - real estate agents, mortgage companies/banks, moving companies, furniture companies, drapery companies, cleaning services,....shall I go on?
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Re: The costs of moving house.. bid offer spreads

Postby swaption » Thu May 23, 2013 10:43 am

The bid/ask spread is the agent commission, not all that different than for financial assets. The price is the same for the buyer and the seller. So doesn't really make sense to add anything for this on top of the commission. There are other costs in addition to the commission, but the bid/ask spread should not be among them.
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Re: The costs of moving house.. bid offer spreads

Postby market timer » Fri May 24, 2013 12:15 am

swaption wrote:The bid/ask spread is the agent commission, not all that different than for financial assets. The price is the same for the buyer and the seller. So doesn't really make sense to add anything for this on top of the commission. There are other costs in addition to the commission, but the bid/ask spread should not be among them.

Liquidity is not free. If you want to buy something now, it will cost more than if you shop around--likewise for selling. Whether you pay the bid/ask spread with your time (by being patient and shopping around) or with money, there is definitely a spread to cross. I'd also add vacancies (foregone rent) and moving costs to the list of transaction costs listed previously.
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Re: The costs of moving house.. bid offer spreads

Postby market timer » Fri May 24, 2013 12:20 am

Epsilon Delta wrote:So who gets the advantage of this "bid offer spread"? Almost all (used) home transactions are between private individuals. There is only a very small group (mostly bottom feeders) that provide liquidity by holding an inventory of houses for sale. In a transaction between private parties the average spread must be zero. That does not rule out the case that you might be a lousy negotiator but we can't all be below average.

The net loss in this case is time (if there were market makers, it would show up instead as money). Some people will be very picky and perhaps extract some value from the market, others happy to complete the transaction quickly and pay a bit more. Pickiness could potentially be modeled as a negative externality.
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Re: The costs of moving house.. bid offer spreads

Postby deanbrew » Fri May 24, 2013 8:06 am

I was curious about the topic, and am not sure bid/offer is the proper terminology. Nonetheless, there are real costs involved with selling and buying real estate, and it typically adds up to more than 6 percent. You pay the commission to sell, plus half the recording fees and taxes. Then, when you buy, you again pay half of the recording fees/taxes, as well as all of the costs associated with obtaining a mortgage. 9 to 10 percent is not unrealistic. You can reduce these figures if you hire a low-commission listing agent and don't need a mortgage, but doing so is atypical.

If you add in moving costs, you easily hit 10 percent. Want to go up from there? Add in the requisite decorating costs (ever see a woman who kept the window coverings and didn't want to paint or replace light fixtures?), and you are well over 10 percent.
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Re: The costs of moving house.. bid offer spreads

Postby Valuethinker » Fri May 24, 2013 12:43 pm

Epsilon Delta wrote:
Valuethinker wrote:
And then when you buy, you have the same problem (ie you sell at the bid price, and buy at the offer/ask price, and there is probably typically a 3-4% gap between the two). Add it all up, you can lose 10% every time you move house. Huge transactions costs.


But NOT so obvious with houses, where the bid offer spread is not quoted, and there is a lot of noise in pricing. But my contention is the noise (where you sell for more than it's worth, buy for less than it's worth) will on average, average out, it's not a durable source of gain of wealth to you. Sometimes you win, sometimes you lose, but on average there must be a 3-5% bid offer spread reflecting liquidity and transactions costs.

So who gets the advantage of this "bid offer spread"? Almost all (used) home transactions are between private individuals. There is only a very small group (mostly bottom feeders) that provide liquidity by holding an inventory of houses for sale. In a transaction between private parties the average spread must be zero. That does not rule out the case that you might be a lousy negotiator but we can't all be below average.


I agree that the net gain loss *should* be zero. Excepting agents fees, moving costs, land transfer and registration fees, legal costs etc.

Maybe the key is a time cost. Here in the UK, one is typically in a 'chain'. One has a buyer for one's house (who in turn may be trying to sell a property) and one wants to buy, one cannot do the latter without the former. So at some point your position has to stretch to make the chain work, you have to sell your property for a bit less than it is 'worth' to buy the house you want.

Chains break down all the time, a chain 8-10 long is not unusual. I have seen people go to other links in the chain (other than theirs) and facilitate that transaction (with cash, or undertakings to do something), just to keep the chain moving.

Obviously the first time buyer is not in a chain (their only cost is in finding another property to buy). And ditto the person at the other end of the chain eg exiting the housing market (mum died, estate sale etc.).

It does seem, intuitively, and I don't think that this is simply I am a bad bargainer, that one has to take down the price to sell, and pay up over the odds to buy. Maybe that is simply covering the costs of the deal (there is a 4% stamp duty on purchasing a property over £250k, agents typically charge 1.5-2.5%, lawyers etc.).
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Re: The costs of moving house.. bid offer spreads

Postby Valuethinker » Fri May 24, 2013 12:44 pm

swaption wrote:The bid/ask spread is the agent commission, not all that different than for financial assets. The price is the same for the buyer and the seller. So doesn't really make sense to add anything for this on top of the commission. There are other costs in addition to the commission, but the bid/ask spread should not be among them.


Maybe logically that's the way to look at it, and bid-offer is a misnomer, as you and others suggest.

There is a consensus here, I think, though, that a 10% transactions cost is not a bad estimate. It makes trading properties financially suicidal, imagine if we paid 10% commission to buy stocks!
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Re: The costs of moving house.. bid offer spreads

Postby Epsilon Delta » Fri May 24, 2013 1:23 pm

Valuethinker wrote:
swaption wrote:The bid/ask spread is the agent commission, not all that different than for financial assets. The price is the same for the buyer and the seller. So doesn't really make sense to add anything for this on top of the commission. There are other costs in addition to the commission, but the bid/ask spread should not be among them.


Maybe logically that's the way to look at it, and bid-offer is a misnomer, as you and others suggest.

There is a consensus here, I think, though, that a 10% transactions cost is not a bad estimate. It makes trading properties financially suicidal, imagine if we paid 10% commission to buy stocks!


That's pretty much how I was looking at it. There are large transactions costs, but strictly speaking not a bid-ask spread, since there are no market makers.

On the other hand if you take a broader view of the residential market the people who provide liquidity are landlords. In theory they will get paid for providing liquidity. So there will be a trade off between paying the transaction costs and paying the landlord.
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Re: The costs of moving house.. bid offer spreads

Postby avalpert » Fri May 24, 2013 4:16 pm

Call_Me_Op wrote:
Epsilon Delta wrote:So who gets the advantage of this "bid offer spread"?


Let's see - real estate agents, mortgage companies/banks, moving companies, furniture companies, drapery companies, cleaning services,....shall I go on?


I think those are better though of as transaction costs than a bid/ask spread (like your trading commission for buying/selling equities).
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