Amidst the competitive landscape of today’s housing market, participating in a bidding war can feel like a significant achievement for homebuyers. However, research indicates that victory in such scenarios often leads to a downside: many buyers end up paying more than the property’s value, a phenomenon known as the “winner’s curse.”
As a real estate economist, I, along with my colleagues, examined close to 14 million home sales across 30 states in the U.S. over a span of approximately twenty years. Our findings reveal that buyers who exceed the asking price—indicative of a bidding war—face a higher likelihood of defaulting on their mortgages and generally experience diminished financial returns.
Our analysis showed that those who emerged victorious in bidding wars realized annual returns that were, on average, 1.3 percentage points less than those who did not engage in such competition. Specifically, we focused on “unlevered” returns, which are based on cash purchases without mortgage considerations.
Considering that the average homeowner retained their property for 6.3 years before selling, this effectively resulted in an 8.2% overpayment. Additionally, the likelihood of default was 1.9 percentage points higher for bidding-war victors.
Some buyers might justify this loss if the property holds significant personal value; however, our research found that these homeowners often resell quickly, suggesting their purchase was driven more by the heat of competition than by a lasting attachment.
Our study also highlighted that regions with frequent bidding wars, such as Rochester, New York—a noted hotspot—exhibit more pronounced effects of the winner’s curse, including lower appreciation rates and increased defaults.
The impact is not evenly distributed; lower-income buyers, particularly those from Black and Hispanic backgrounds, are more prone to overpaying during bidding wars, exacerbating financial inequalities in competitive housing markets.
Why it matters
Homeownership represents the largest form of wealth for many Americans, yet prior research on the winner’s curse primarily focused on auctions and mergers rather than the nation’s approximately 76 million owner-occupied homes. Our study is pioneering in demonstrating the winner’s curse within residential real estate.
This is particularly relevant now as the housing market cools. Post-pandemic buyers listing their properties by 2025 may face potential losses, a risk disproportionately affecting Black and Hispanic homeowners, potentially widening the wealth gap.
Foreclosure rates have increased 18% year over year. Should these losses predominantly affect lower-income families, the result could exacerbate housing insecurity and lead to increased homelessness.
There is a silver lining: the winner’s curse might be avoidable. Enhanced resources for educating first-time buyers and broader financial literacy on mortgages and debt could mitigate this issue.
What still isn’t known
Implementing more transparent bidding processes or formal auction systems might help prospective buyers avoid overpaying. Should the U.S. mandate that real estate agents or financial institutions advise clients against exceeding the asking price, or would that disadvantage sellers? Experimental research is needed to explore these questions.
Our research is currently limited to the U.S. housing market. It remains unclear whether the winner’s curse also affects homebuyers in international markets.
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