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. Damon Wyler says:

    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.

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  2. seeyes22 says:

    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

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  3. John says:

    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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  4. Rick says:

    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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  5. Gerald T. says:

    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.

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  6. Nestor says:

    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

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  7. Mike says:

    FSBO.COM ftw

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  8. Sheila Lawrence says:

    I suggest these two guys follow an agent around for a month before passing judgement. It’s easy to criticize someone else’s profession when you’ve not been exposed to it.

    The one thing real estate agents don’t seem to excel at is communicating just how much work is involved. We don’t start work when someone walks in with a listing or a need to buy, we’ve already been working and that’s exactly why we can help you.

    Also, sellers who represent themselves are taking tremendous risks. (Funny how often they don’t mind picking my brain though.) I refer people to lawyers if they are bound and determined to sell their own homes because most lawsuits are brought by the Buyer against the Seller, not the other way around. At least with an attorney they’ll know they made all the right disclosures and hopefully did not say anything that could be construed as a mis-presentation by a Buyer.

    I don’t double end my transactions even though it is a lucrative practice, because it adds another layer of protection to my Seller clients. Are there rotten, lazy agents? Absolutely! Just like there are rotten, lazy lawyers, plumbers, doctors, electricians, ….

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