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?

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  1. Dixon says:

    Can we be clear that this article means real estate agents/brokers generically, not specifically the brand of agents/brokers called the Realtors?

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  2. Enter your name... says:

    I am an agent and I completely appreciate that you can become a little frustrated after dealing with an agent. In my day to day, I come across many agents who seem incompetent, but please keep these two things in mind – i) not all of us are created equal, and ii) Cost is only a factor in the absence of value. If your agent isn’t demonstrating value, fire him (yes you can fire him before the contract expires). Simple as that. My clients rarely take issue with my commission, after I demonstrate how much I can help them gain. Granted up here in Canada, we only charge 4.5% – 5%.

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  3. Mike says:

    That was a pretty WEAK discussion. In 90% of the listings that we market in my area we do not take the first offer on the house. We market it and hold a Brokers tour and 2 Sunday open houses and set a date for offers usually2 weeks or more AFTER it is listed. If it is priced well it may have several offers at that time and may bid the price higher than list price! If it is priced to high no offers will come and you end upp lowering the price until it sells. Then folks blame the realtor for selling to low?

    You didn’t discuss how many sellers don’t listen to the advice of their realtor and price it way to high and the realtor works many months on it, advertising costs, brochures, showing it, Virtual tours,Gasoline, assistants, office expense, Irate calls from the seller as to why the house is not selling and the realtor is not doing enough yet they won’t adjust the price and they take it off the market becasue they did not GET what they wanted? The realtor worked for free for many months and lost money on it ou tof his pocket. Then later they re-list at a lower price with another realtor and it sells?

    ANother solution is the seller can pay a Realtor an hourly wage to list it at the high price and if it does not sell the home owner has to pay a raltor for his time even if it does not sell? How many would do that? Pay the realtor a fee of $50 per hour if it does not sell. Oh no, they don’t like that but they don’t mind wasting his/her time and pricing it to high. You can’t have it both ways.

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    • Melina Tomson says:

      But it isn’t the consumers fault that agents agree to take listings on commission that are overpriced. That is a poor business decision on the part of the agent. They need to be responsible for that choice. It just means they are unable to evaluate risk well.

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  4. mike says:

    Hidden due to low comment rating. Click here to see.

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  5. MinnItMan says:

    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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  6. MinnItMan says:

    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?

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  7. MinnItMan says:

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

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    • Scott says:

      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!!

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  8. Latesummer2009 says:

    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.

    http://www.westsideremeltdown.blogspot.com

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