Maximizing utility, in practice
Mr. Wheelan’s chapter of financial markets does a great job of explaining something that everyone knows, but likes to forget:
If it sounds too good to be true, it is too good to be true. There is no diet that allows you to eat all the ice cream you want and still lose weight. Get rich quick schemes just don’t work.
On page 126 of Naked Economics, he gets to real estate as an example. In his example, Lincoln Park, Illinois townhouses cost about $500,000, more or less, depending on repair and amenities. Therefore the townhouse widely advertised for sale for $250,000 cannot be for real because:
Why can you be sure this is not for real? Because no one leaves $250,000 on the table for no reason. There is something wrong with the story or the property, or both.
Everyone is trying to maximize utility – to get the most money for what they own (sellers) and to get the most commodities for their money (buyers.) Real estate deals live and die in the neutral zone where the seller is getting enough money of the house to feel satisfied and the buyer is getting enough houses for the money to feel satisfied. When one of the parties feels like he/she is getting fleeced, that party abandons the transaction.
Yet hope springs eternal...
I have a neighbor who thinks he’s clever. Whenever he sees me, he asks me why I haven’t found him a 4-unit building for sale for under $100,000 that produces $25,000 a year in income. I tell him that if I find that, he will be the second to know; he will also be too late to buy it.
Do you believe in the all ice cream diet? Are you looking for a $500,000 house for $250,000? If I find the $100,000 investment property for my neighbor, should I call you, too?
