Want to Jump-Start the Housing Market? Get Rid of the Realtors!

(iStockphoto)

Okay, okay, that’s not quite the message of a new working paper by Panle Jia Barwick and Parag A. Pathak called “The Costs of Free Entry: An Empirical Study of Real Estate Agents in Greater Boston.” But for those of us who have thought about the Realtor’s role in the housing market, it’s tempting to jump to that conclusion. Here’s the full version of the study, and here’s the abstract:

This paper studies the real estate brokerage industry in Greater Boston, an industry with low entry barriers and substantial turnover. Using a comprehensive dataset of agents and transactions from 1998-2007, we find that entry does not increase sales probabilities or reduce the time it takes for properties to sell, decreases the market share of experienced agents, and leads to a reduction in average service quality.  These empirical patterns motivate an econometric model of the dynamic optimizing behavior of agents that serves as the foundation for simulating counterfactual market structures.  A one-half reduction in the commission rate leads to a 73% increase in the number of houses each agent sells and benefits consumers by about $2 billion.  House price appreciation in the first half of the 2000s accounts for 24% of overall entry and a 31% decline in the number of houses sold by each agent.  Low cost programs that provide information about past agent performance have the potential to  increase overall productivity and generate significant social savings.

And where is all that money going that’s not being spent on home sales? Maybe … the Zillow IPO.

And just for kicks, here’s a clip from the Freakonomics movie in which Levitt and I ask the question: Does your real estate agent really have your best interest in mind?


mike

That video was very LAME. In my market area we always wait 2-3 weeks befroe taking an offer.
We first enter it in the MLS for 5-7 days before showing it. Then have a Brokers tour with the agents, then 2 Suday open houses and set a day for offers usually a few days after the 2nd open house. If it is priced well we may have several offers and even go higher than the list price. If it is priced to high it will sit ont he market like everything else that is overpriced.

SO all the folks that price their homes to high and get greedy don't mind wasting the time and costs of the realtors I guess. If they refuse to lower their price who pays the realtor for the months of effort, advertising costs, signs up and down, virtual tours, brochures, adverstising, MLS dues, internt dues, gasoline costs, etc if it never sells which happens quite often. Then many will take it off the market after several months blame the realtor they used and list it later at the price their former realtor suggested and BOOM! it now sells?

If they think commissions are to high they can have an agreement to pay the realtor say $50 per hour to if it does not sell? Most sellers don't like that since that would cost them money for sure out of pocket. They could continue to overprice their home at the realtors expense and not have to pay him anything. You can't have it both ways. Or try selling it themselves and see how easy it is.

Another thing is just wait a few weeks and shwo the house and set a day for offers. No brainer.

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MinnItMan

It's been six years since this was laid out in Freakonomics, and a lot has changed, particularly the dramatic shift from a so-called "buyers market' to a "sellers market." Back then, it was relatively easy to "overpay" as many of the other third-parties to real estate transactions like lenders and appraisers weren't taking a hard look at pricing. Now, they are much more of a force of resistance. Also, it is much more difficult for a buyer to get away with carrying a property while closing on a new purchase. Oh, and the fact that the number of transactions is down and the prices are down 20-50-plus%, directly reducing the commissions, not only of realtors, but loan originators, etc. I would like to see how much these factors bear on the basic Levitt/Dubner point. It would be very interesting if there was no effect.

Melina Tomson makes good points, IMO. The problem with commissions (any commissions) is that they incorporate many different bets, and people don't like losing bets. My hunch is that the 80/20 rule has all sorts of interesting applications to this problem. Realtors kill themselves on 80% of their deals and lose money, and make a killing on 20% where they don't. The difference between success and failure for an agent is how they reduce the number of losers, and increase the number of winners. Essentially, their goal should be to do "no" work. Talk about misaligned incetives! Shocking.

As a lawyer (a real estate lawyer) who does not do contigency fee work, but is frequently asked to, I would also like to see a compare and contrast on contigency legal fees. One obvious contrast to me is that contigency fees "only" work for legal matters that are nearly certain to pay, and pay in "large" amounts when they do (personal injury and employment law being the best examples). Accepting matters on a contigency basis - like standard residential real estate matters as a bad roof, septic system, wet basement etc. - that fail one or the other criterion is a newbie, solo-practitioner mistake a/k/a rite of passage, and frequently precedes these lawyers finding other jobs, after they've personally financed, say $5,000 of third-party legal costs (filing fees, court reporters, expert fees, etc.) and maybe get a $10,000 settlement. Do the math and I think that nets the client $1666. This is a best-case scenario, by the way.

I raise this comparison because it's another area where almost everybody hates the way something is priced (1/3 of the gross), but the "hidden side" of legal contigency fees might be revealing in all sorts of ways. Tort reform targeted the practice - and it was easy to target - but was it right?

How would this proposition be properly formulated as a Freakonomics question or set of questions? Has this been done?

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MinnItMan

Another way of posing my question at a general level is "how does 'cost-shifting' affect what and how we pay for things?" Pretty big question, no?

MinnItMan

I made a remarkable spelling error that was consistent throughout my post. I actually do know how to spell "contingency."

Scott

I love how economists use models based on a perfect world... A bit of a false dichotomy... How do you know that you will have another offer in a week? The agent is speaking from experience, and getting that first offer so quickly was a surprise to the agent, only because he knew that there were few to choose from. Ignoring the agent's advice is almost a recipe for disaster. It's easy to sit back and draw a model and sling criticism, but when you are doing it day in and day out, you are accountable for results... If someone tells me that they need to sell their home, I can't sit back and draw a model, then run a scenario that will enable their home to sell immediately.... I have to make the best decision about price and home improvements based on experience and knowledge of the market's potential buyers... Certainly, an imperfect world!!

Latesummer2009

Excellent piece on what really motivates a real estate agent when representing a seller. Any commissioned salesperson is going to try and maximize their time and efforts. This means freeing up their time to hunt down more commissions. Especially, the most successful agents which have multiple listings. High powered agents will always prioritize duties by what brings them in the most commission.

Perhaps another piece to this puzzle is how real estate agents use "White Lies" in order to sell a property. If you have ever shopped for a house, than you know what we're talking about. For example, "Multiple Offers", "I have a Pocket Listing", "Safe Neighborhood" , to name just a few.

We are compiling as many "White Lies" used in the real estate industry, as possible. Hopefully buyerf and sellers can educate thelmselves, before entering any type of real estate contract. If you have some, please let us know.

www.westsideremeltdown.blogspot.com

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Damon Wyler

And in since real estate values have been DECLINING for several years now, where does that higher offer come from through waiting? If you wait another week and the next offer comes in at $280,000, the property owner has lost $20,000, but the weak real estate agent has only lost $250 in commission. You get what you pay for. My advice is to hire the best agent you can find to get some good representation. If an agent can't negotiate a good commission rate for themselves, then you will lose more than the perceived commission savings, when it comes to marketing and contract negotiations. Good luck.

seeyes22

You find a nice home at a good price and the realtor drives up the price. Home owner wants to list his property say at 200,000 and the realtor says oh no..tooo cheap and then puts on a high price tag. They never give the owner your offer UNLESS it gives them a good commission. I find it difficult to even make an offer on a home without the realtor calling and saying boy did you know what you offered on that home..that is way too low. Owner never gets the offer. Sad

John

I was in Atlanta not long ago and a friend told me of another friends desperate need to sell his condo. I went to see it and talked to the friend who has been unemployed for two years, way behind on his mortgage, his mother recently died ... he was in a pickle. He introduced me to his local bank that had the mortgage. The market value was clear. It was much less than what he owed. I talked to the banks distressed asset manager and said I'd write a check on the spot. We can agree to having an appraisal done etc but I wanted the condo.

The banker told me that any offer HAD to be submitted through a Realtor!! The seller HAD to list his house on the "open market" and present the offer to the bank for consideration. Now how goofy is that? I had my check book in my hand and was ready, willing and able to give them a check right, then and there. But no. The condo went into foreclosure and was auctioned off by the bank - at less than what I was ready to pay. The bank took a hit all sorts of ways, auction fees, etc to say nothing of the hit on the mortgage itself. Talk about stupid.

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Rick

There probably are many people who can and should buy or sell properties without the use of an agent.

However, what often is overlooked is this question: how much money does an agent make when the customer doesn't buy, or when the seller won't take an offer? How many people in what types of occupation will work for you with zero guarantee of a penny of income? What types of work are you willing to do that does not guarantee a penny of income?

My wife was a Realtor (they have a trademark on the capital R) but gave it up because there are too many lookers and not enough buyers to even pay for the gas she uses. She doesn't expect anyone to feel sorry for her - that's the luck of the draw. However, when we decided to buy our own house, we used a Realtor who was thoroughly familiar with the neighborhood/area and its nuances while we were not, and we are risk-averse. There was no "referral" fee involved, yet we think we got our money's worth, assuming you accept the notion that ultimately it is the buyer who pays the commission.

FSBOs have been around forever. More power to those who choose to go that route. One saves 5-6% by adding a layer of risk. That's not a new concept at all.

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Gerald T.

Very interesting. I also did a study and found out that if you got rid of all the economists in the world, we would have saved $984 billion which could have been used to stimulate the economy, lower taxes, and increase home affordability.
But there's more. If we reduced dentists' fees in half, we could all afford to buy more teeth, why we could all have two mouths full of teeth. By golly, if we cut janitors' salaries in half....and doctors...and heck, everyone! Oh wait, lowering salaries has a few ripple effects, oh well our "model" needs tweaking.
Possibly the most abused (and useless) discipline in this world is economics, and this is a clear example. Throw a few 25 cent words around, twist a fact here and there, create a few more, and voila, you can support any position.
People, don't fall for this silly stuff.

Nestor

House listed at 125,000 I have 5 offers Seller is refusing to accept a$120,000 offer
no problem we just wait until it sells for 125,000 of course house has been in the market for 5 months