In the face of the continued mess of the US housing bubble and all the inglorious wisdom that it supposedly imparted on us, you’d think that there would have been a great deal of vigilance against any similar price bubbles.  And to a large extent that’s been true, if not overly so, as most prices have dropped across asset categories over the course of 2008 and now into 2009.

But two instances to note, which differ in fundamental ways from the housing bubble, but carry nevertheless the same flavor of  mispricing that plagued us in the macroeconomy: the Beijing Summer Olympics and the Obama Inauguration.  Both featured ridiculous prices at several times the average monthly rents, oversupply, and a painful or fruitless snap back to reality for sellers.

Markets + stupidity = screwed!  Or something like that.

1. Beijing Summer Olympics

With the estimated two million plus domestic visitors and half-million foreigners expected for the Summer Games, the rental market in Beijing saw some interesting movements.  In the longer-term market, Beijing experienced the fastest-ever growth of average monthly rental rate, from 1,350 to 1,560 yuan, up 15.6percent, according to surveys quoted by China Business Times.  Q3 2008 prices per sq-foot rose 3.8% and 6.8% quarter-on-quarter for luxury and mid-market units, according to a Cushman & Wakefield report. Prices on the short-term rental market were said to be high multiples of monthly rents.   There were several stories of students at Beida University who were able to cover a year’s worth of rent in the two weeks of the Olympics.  In mid-August Xinhua reported that only about 40% (most of which were higher-end apartments) of posted rentals had been leased out of some 20,000 postings.

This evident surplus of rentals led to what Xinhua reported in early August, that short-term rental offering prices were on average half of what the signed rates had been over the first half of the year.  It would be interesting to see how many people had speculatively signed (more expensive) longer-term leases earlier in the year anticipating an Olympics windfall, although I don’t suspect many people had the liquidity to play that market without actually live in the apartment.

More likely, it was that people signing contracts over the first half of 2008 had believed their landlords’ higher offers were justified by an expected profit in August, especially if they lived in nicer apartments close to the Bird’s Nest.  And it seems that they would have been more likely to have made returns:

That’s fair.  If I know I am going to pay a premium on a rental anyway, then high prices would be a good indication that I’m not getting a shitty place.  That also means that most landlords or secondary renters either got screwed or were left empty-handed.

Side note: short term car leases got a little crazy during the Olympics, too.

2. The Obama inauguration

Recent estimates put the high-end number of the expected visitors for the inauguration at approximately the same figure as foreign visitors that had been expected in Beijing.  So I went looking for similar signs of rampant pricing.

Here’s a completely non-scientific calculation of two locations I saw on craigslist on Tuesday January 13th (distances are calculated via Googlemaps):

3.8 miles from the Capitol - 1 bedroom, $1200/night (~3 night minimum) - 3800 Connecticut Ave NW

2.4 miles from the Capitol - 1 bedroom, $1500/night (~3 night minimum) - M st. SW 

The assumption is that the prices are not adjusted for, primarily:

•  the quality of amenities (which, based on the craigslist photos, was slightly better for the more expensive apartment)

or

• the value of one neighborhood versus another (which could either be migitated because of the walkable distance between the two or perhaps even higher for the farther neighborhood).

A buyer choosing simply between these two locations would have to value the 1.4-mile-difference at $900.  And that value would essentially be for the one day of the inauguration. 

Compare that to, if I wanted to just be there for Inauguration Day, I could fly from Los Angeles on Monday night to Dulles and fly back out of the city that afternoon for $299 or that evening from a little over $500.

Then there is the Mayor’s executive order that renting rooms did not require a business license or certificate of occupancy - while I don’t suspect there will be rampant cases of fraud or misconduct because of the prohibitive prices, but I wouldn’t be surprised if there are a spike of small claims court filings in the wake of this.

These price spikes, both of these cases, seem like supply side irrationality, overestimating the demand (and probably underestimating the price elasticity of demand).  Basically you have an entire city of uninformed realtors who are pricing off some notion of “the going rate,” when the going rate seems to be largely the exception.

The problem for potential renters: there is little to no cost for most suppliers to advertise a price and therefore little to no motivation to price more rationally.  Not when there is the intoxicating hope of Big Money.  Other than greed and the herd mentality, I had trouble figuring what else could be motivating the prices.

On an expected value basis, maybe there is value for sellers to drop prices.  Why they are not doing it: individually they overestimate the likelihood that they will be able to rent out their apartment, if not at full offering price then at some point thereafter.   From personal conversations and other online accounts, it seems the expectation doesn’t hold for very long after the initial price decreases.  So in the eyes of sellers, expected value drops significantly as both offering price and probability drop.

Anecdotally, there also doesn’t seem to be a systematic way in which offering prices are lowered.  Price changes probably occur with marginally increasingly rapidity, just random unsuccessful swings in the dark that become increasingly desperate.

Apartment owners set in their mind some price floor, the value assigned to the hassle of renting out a room or a house, but as a potential renter, I would certainly be getting a bad deal if I rented at any time before the last minute.  Even then, I would probably be overpaying, because if sellers know that, they will hold prices even at the last minute.  Luckily (and perhaps a noteworthy difference), I am not actually desperate to rent, so basically any price will seem expensive to me.  But for those are desperate, you could probably count on a slew of price cuts going into the final days before the inauguration because, in any case, craigslist is not the best demonstration of rational market forces.

It all seems like a game theory exercise.  As a seller, do you start high or low?  How do you signal quality?  Do you lower your offer or hold it, especially near the deadline?  Does it even matter, because there are so many other sellers?  As a renter, do you sign early or late?  Do you negotiate?  How do you know if you are overpaying?

Interesting to see two supply-driven price spikes in two monumentally historic moments.

Not that price spikes are hard to imagine.  But you’d imagine that with smarter pricing more apartments might have been rented out.  With Internet-based listings, which I assume accounted for most of the rental market, you can count on the mass market to misprice the hell out of something they think is in high demand.  Hurray, Craigslist!