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


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. Pat says:


    Former FSBO CEO sells home the traditional way
    Founder and former CEO of ForSalebyOwner.com, Colby Sambrotto listed his 2,000 square foot New York condominium on his own through online classified ads and FSBO sites, but after six months, he opted to hire New York broker Jesse Buckler who immediately advised a price change as the listing was not attracting the right buyer.

    After giving up on the DIY route, Sambrotto’s decision to hire a broker led to attracting multiple offers, closing for $150,000 over the original asking price. The WSJ reports the listing sold for $2.15 million including a 6% commission.

    Many FSBOs turn to Realtors
    The news stands as an enormous validation of the real estate profession and while some may tease, it is no laughing matter and the former FSBO CEO made a good financial decision.

    AGBeat columnist Herman Chan said, “If people want to take a stab at For Sale By Owner (ie FSBO), go for it. But well over 80% of FSBO’s eventually have to list with an real estate agent to get their house sold. It’s harder than it looks!”

    Not a new dilemma
    Marlow Harris, Seattle Residential and Investment Consultant at Coldwell Banker Bain Associates told AGBeat, “The ForSaleByOwner.com founder’s dilemma is one we see quite often and is not unusual. Trying to sell your own property yourself or using a discount brokerage, is not the solution for everyone. Unusual properties, properties in the higher price range, these are more difficult to sell and often require specialization.”

    Harris continues, “We see these choices across the board, from single family homes to huge housing developments. For instance, Vulcan, one of Paul Allen’s companies which has invested heavily in Redfin, does not use Redfin to market their many condominium projects. They use traditional real estate firms such as John L. Scott, Williams Marketing and Matrix Real Estate, finding that the do-it-yourself approach to real estate just doesn’t work for these types of sales.”

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  2. Rex Blackburn says:

    So the question is whether the agent is acting in the best interest of the client or putting his/her self interest first? Realtors live by a Code of Ethics and have a fiduciary responsibility to their clients. Of course, the catch is, can an agent live by that code or does temptation get the best of people? I prefer to think that most will be ethical and moral in their actions. In any profession, there are practitioners who abuse the system, and/or break the law. We read or hear on the news, stories every day of attorneys, doctors, politicians, etc, who are convicted of crimes related to their profession.
    As you might guess, I am a practicing Realtor. I am also a Real Estate Trainer. Although our income is based on a percentage of a sale, I do not consider my fee when offering advice to my clients, and teach this practice as well. If we provide all of the information necessary for our clients to make a qualified, educated decision, then it is in fact their decision. I believe that, as a professional Realtor, I will be well compensated and will build a business based on a solid reputation with all of my clients.
    The example used in this video does not take into account all of the potential facts or statistics that might apply. Will you get a full price offer in 10 days? Is $290,000 a fair market value based on prior sales? Is the house in need of any repairs that might be reflected in the offer?
    This debate will always be around, but I believe, so will our Profession.

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  3. RobR says:

    There are other incentives. Funny you didn’t consider anything else. I read Freakonmics. Funny that a MASSIVE amount of research went into all other stories but this one. So how about the truth….

    An agent takes his/her own advice and STAGES. That costs money, but your home outshines the competition by a LOT. We painted, gardened, cleaned up, had extra open houses – did everything that our clients find so annoying and expensive.

    We also know when the negotiate and when not to negotiate. The idea that 10 days makes a difference is ridiculous unless there is other interest. 10 days – in what? How many total days in your research? From 10 to 20? From 30 to 40? From 60 to 70? Let me guess – publishing that fact wouldn’t help this piece of nonsense.

    Now about incentives. $10,000 may not mean anything in commission to us – but if you have ever been a Realtor you know that almost any number is meaningless. We don’t count commissions between a $200,000 home or a $300,000 home. I suppose it changes when you at least double the price – in that you would spend more time on a $600k home than a $300k home. But when it comes to $10,000 differences the ONLY thing that matters is whether or not you are going to have a satisfied client who will give you a positive testimonial, and may refer you other clients. So in fact, if 10 days would help me earn than $10,000 I would do it every time. But the reality is they are sick and tired of cleaning up for open houses and appointments, they don’t want to carry their mortgage any more, they don’t trust what might happen next, and they never listened to my advice in the first place about staging, decluttering, cleaning up, and so on.

    And you guys? Pathetic. An amazing amout of research before you throw teachers under the bus. But one stat, and one interview, and you make MASSIVE assumptions. Pathetic.

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  4. Jim Lee says:

    Cute cartoon. The flaw in your logic is that unless you know beyond the shadow of doubt that you will actually get a $10K higher offer next week, you’re far better off with the known now than the unknown later.

    A solid buyer right now is much more valuable than a ‘maybe’ buyer later.

    Were I your agent and knew for a fact you could sell for 10 grand more in a week or a month or two my advice would absolutely be to wait.

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  5. Steve says:

    I found a great home on the internet that was listed that morning and informed my buying agent I wanted to see it. This was early 2007 when nothing was moving in CT. She had not seen the house before but agreed it was a great house for the price. We went back to her office and I learned that she worked with a partner, with whom she split everything. She told her partner about this great house, and then we put in an offer on the house. The next day she told me there was another offer on the house, which surprised me. When I went back to her office, I noticed on her white board that her partner had a buyer put in an offer on the house that I had found! I was LIVID. I asked her about the other offer and she said her partner took another client to see the house that I FOUND and that person went ahead with an offer. I told her that that wasn’t in my best interest and yet she didn’t see a problem with what had happened. I told her to get her manager and then I reamed them all out, making sure that what they did was wrong, and also making sure whoever was in that office heard what I was saying. I can only hope I scared away some potential client. Realtors don’t care at all about their clients….they care about transactions. They get paid on transactions. And by putting two offers in on this house, she and her partner decided they had a better chance to close a deal if two offers were made on the one house.

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