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?


A year ago, I started shopping -seriously shopping- for my first home. I decided to go with a realtor, because there was simply too many balls to keep in the air, and being a first-time buyer, I did not know all the ins and outs of home-buying- even after reading about a dozen books about the subject. (In fact, the books convinced me that having a professional on my side was worth it.)

It took six months, tons of emails, 40 walkthroughs, and four offers that fell through before I landed a home that fit my parameters. I know I ran my realtor ragged- she earned her commission. And I got a great place to live.

Sadly, she left the business shortly after I got my home- there were simply NO buyers out there. She told me about several open houses where no one showed up at all- even in highly desirable neighborhoods. Worse, many of the homes I looked at last year are STILL on the market. And I live in an area where housing prices are relatively affordable, and the bubble did not hit us that hard.



Problem: Zero interest in an open house even thought it is in a desirable neighborhood.

Solution: Lower the listing price to something compelling.


I'm selling my house right now (have a contract). I'm not sure what the realtors really do to garner the commissions they get.

The internet has impacted just about every other industry where "agents" used to exist. Best example is travel agents.

There is absolutely nothing my real estate agent has done that I could not have done for a flat fee on realtor.com, and the time investment from me is the same.

Yes, they negotiate, but I can do that too. Yes, they understand the contracts, but that could all be created as a simple workflow on a website (like your taxes and wills are today).

And, finally, they come in and tell you how great your house is, and as soon as they put the sign in the yard, they tell you the price is too high, and changes you should make.

All sales agents - all of them - work for the buyer. In any industry.


"All sales agents – all of them – work for the buyer."

In terms of real estate, that's absolutely untrue. The "listing agent" has a legal, fiduciary obligation to the seller. And in fact, absent a contract specifying otherwise, so does any agent you hire as a buyer.

And in general terms, it's hard to understand how you could think that. A salesman works for his employer, the seller, in every transaction.


Mack is 100% correct ! In RE you have a fiduciary obligation to the seller.

Just Tired

Mack is theoretically 100 percent correct! Like Yogi Berra said: "I theory there is not difference between theory and practice. I practice there is."

Just Tired

In theory... In practice...

John Bakker

It is easy to justify a comment such as what has been shared in the video. However justification for holding out should always be considered upon many things and circumstances. The Realtor if he or she does their job should also be sharing what is happening in the market, share market trends, comparable sales and yes sometimes the first offer is the best offer while also waiting can also be in some cases lead to a potentially higher offer price. However justification of not using a Realtor should not be based on just what has been shared here, but how well does the Realtor share the facts, how well do they know the market and are they truly working with your best interests in mind.

I have been a Realtor since 1999 and I have worked hard at keeping my clients needs before mine. Realtors are also human and we do not have a crystal ball and can not tell what will happen tomorrow, next week or any time in the future. However in most markets, cities and countries there are various trends and factors affecting the sale of real estate. By having a person to help in sharing this inforamtion can help determine what the best descision should be when accepting , rejecting or countering any offer to purchase. It is irresponsible to be giving generalized comments and painting all Realtors in the same way when this is not always the case.

Realtors have proven to help prevent many legal issues that may have been prevented if it had not been for a having a skilled and knowledgeable person assiting working for the specifec parties involved in the transaction.


Joshua Northey

"The Realtor if he or she does their job should also be sharing what is happening in the market, share market trends, comparable sales and yes sometimes the first offer is the best offer while also waiting can also be in some cases lead to a potentially higher offer price"

I might be more interested in these services if the realtors I have spoken to/hired appeared to be able to actually provide them. After the bad experience with the first realtor we shopped around a lot before settling on the second one. And while a bright and personable guy who had gone to Yale in retrospect he did not add anything to my understanding of the things you quoted.

I targeted a few zip codes. I found around 200 houses that fit our parameters. I went through pictures of them with my wife and narrowed them down to 50. We drove past them and narrowed them down to 20. Then he got involved and mainly worked to speed us through the process as quickly as possible. Wanting us to narrow our list, and to not broaden the area of search after being initially discouraged at the selection. When we settled on three and actually started making offers he provided me zero guidance. No comments about what has been happening, no encouragement or discouragement of the different offers I was contemplating other than to make one as soon as possible.

He was mainly useful as someone who had dealt with the paperwork before and someone who was familiar with the process. I should be able to find that for $200 not $6,000. The Edina Realty website provided me with about 100X more information then he did and it was free.


Joshua Northey

It is a classic protection racket. You need to a real estate professional to protect you from the other person's real estate professional, and they need them for the same reason.

The realtor on my first house was horrible and actively misinformed us about what were standard practices (telling us it was normal to assume the properties assessments from the previous owner, when it is in fact unheard of in this part of country).

Worse yet when we left the area and had to put the house up as a rental he refused to listen to our comments that we would be willing to take less for our place then he suggested. We just wanted someone in there, the marginal $25 did not mean anything to us. He seemed strangely reticient to knock the price down. Later I found out he manages 100 rental properties, so of course he doesn't want us to lower the price!

The realtor on our next house was a lot better, but I basically did all the work and research. I only needed him to get keys into the houses because many houses won't let you in without one. He did do some paperwork, and steered us to a mortgage broker and inspector who in retrospect were a little lacking (but were friends of his). I do not feel like we got close to $6,000 in work out of him, nowhere near that. If I ever purchase a house again I am doing 99% of the work and will give some realtor $200 bucks to stand there for the last two meetings.



while I believe there are *some* Realtors/Agents in the market who *may* garner what they are worth in commissions to the buyer or seller . . . . after buying and selling four homes in three markets (las vegas, iowa, idaho) by and large the 6-7% fee is worthless. We've sold an bought by-owner, with a discount brokerage, and full-service agent. I have never seen an agent in the business who doesn't put their own needs first:

1) Buyer's use agents because they are not charged for them, sellers are. Thus, the sellers have little market demand without listing on MLS. (Unless you live in the rare enclaves with healthy FSBO system/markets).
2) Even if you are listed on MLS (say through a flat fee agency), agents with buyers, out of self-protection of their industry, do not show buyers homes listed by-owner (unless buyers DEMAND them to be shown). Even if said home is the best available option for the buyer. And most FSBO listings offer buyer's agents commissions. I've had a Realtor who was a member of our church basically tell me if you didn't list with her brokerage (who listed half of the homes in town) we wouldn't be able to sell, because all of the brokerage's agents show each other's homes first - to keep the commissions in house (and to help annhialate competition). How is this in the best interest of the customer?
3) Even if you use a licensed agent there is no guarantee they will give you good advice. We used personal recommendations for our last agent who pressured/bullied us into an offer likely $5K+ above market price at the peak of the market. Then after buying all our own appliances and another $15k of improvements (furnace/ac, roof, sprinkler system, garage door, drywalling basement, soft water etc. etc.) do we realize we've been had.

We bought this house for $150k and could likely sell for $135. After over $20k+ in improvements we still owe $150k. I could likely qualify for a personal line of credit for half of it and come up with the $15k we are underwater and be able to honestly sell our home and keep our contract.

Oh wait! Minus $8100 agency fees. Minus $4000 to cover buyer's closing costs (90% of homes are selling with in our market). Minus $2000 other fees and charges at closing.

There isn't any way we could come up with $30k-$40k to get out of our house. We listed it for 3 months until we were able to face reality.

We recently rented it losing $300 per month and moved into a ghetto basement apartment in an effort to save money and improve our situation (did I mention my husband has 1.5 jobs and I have 3 part-time jobs with no prospects of being able to add more income?) Said husband is getting job offers for $4-6k more out of state. We can't afford to move without facing reality and taking the hit of the short-sale or foreclosure. Thus bringing down prices in the neighborhood, etc. and prolonging the dip in the market.

Or the gov't could set up a central website in each city/state where buyers and sellers meet (think single payer insurance like) and pay a set fee for the legal work (titles, contracts, etc.). And let me tell you the downturn in the market wouldn't last for much longer.

Oh, did I tell you the National Association of Realtors is in the top 10 largest, most powerful lobbying groups in DC and spends more than Pfizer or Lockheed Martin in giving/bribing public officials?

SHHHH! They don't want you to know!



kristine says:
July 22, 2011 at 12:58 pm

EXACTLY! There is little need for real estate agents anymore except to open doors for homes since buyers can not access them directly.

Patrick Roach

As a Realtor, this video is disturbing due to the assumptions that are made. It also seems out of date/context to our current real estate market. In a boom market, when selling a home seems easy and the Realtor seems irrelevant, I can understand how someone might feel that the commission was unearned. Also, if a seller "knows" they can get an extra $10k for waiting a week, of course they should wait a week. Who gets that luxury?

In today's market, working with someone who can come along side a seller or buyer and help them understand a home's value is extremely valuable. Not just for first timers, but anyone who does not track home values on a daily basis can have inappropriate expectations of a home's real value.

I think the best way a Realtor can truly serve their client's best interest is by taking the time to layout a home's value and an appropriate market value PRIOR to making or receiving an offer. If a seller can see that similar homes have sold between $275-$285, while homes that are selling for $270 are clearly dificient, and homes selling for $290 are clearly superior, the seller can make a principled decision prior to an offer coming in of what should be considered acceptable. Granted if they get an offer in the acceptable range and decide to hold out, that is well within their right. But if a seller knows the offer is acceptable and chooses not to accept it, the Realtor might want to think of moving on to another client. The Realtor's primary role (which I believe many Realtors do not truly understand) is to be a market expert for their client. If a Realtor cannot prove to a seller why a home is worth what it is worth, they are off to a bad start and are likely to breed distrust at some point.


Joshua Northey

A) I can find all of that information about my home relative to others online for free with 2 hours of work. If I have a friend in real estate I can even get the more detailed MLS information.

B) Market expert my ass. When we interviewed a half dozen relators for our second house at least half of them straight out lied to us. Maybe one or two had a better handle on the market then myself. One realtor (in fact one of the leading ones in town) told me he 100% could sell our previous house in 2 months or less at a price $25000 more then what we eventually listed it at. Obviously we didn't use someone who would tell such blatant lies.

Months later not only had it not sold, not a single house in that price range had sold anywhere in that whole quarter of town. Zero sales. There were no sales except slumlords buying up forclosures for half off.

Melina Tomson

This is called "buying a listing" where the listing agent essentially tells the seller what they want to hear and then requests price reductions soon thereafter. The reason they do it, is because it is highly effective. You were well researched enough to see that this wasn't reality for your home, but many sellers don't do any research at all.


So what incentives would you put in place to avoid this scenario? Also, this doesn't seem to take into account that most agents get a lot/most of their business from referrals, so it is in their own best interests to keep clients satisfied over the long term rather than just going for the quick buck. While there is certainly self-interest involved, most agents I know (maybe I'm lucky?) really try to do what' s best for the client. What would you do differently to get better/unbiased information?

Joshua Northey

Well for my selling agent instead of 6% of the gross I suggested an arrangement that he be paid say a flat $500 on the first 80% of the value, and then an increasing % of any amount above that he could get.

He said that the realtor's association had lobbied to make that illegal in my state. So we couldn't do that. It would be one way to help fix the incentives. But the realtors don't want them fixed.

Melina Tomson

I am a brokerage owner and real estate agent.

The factor that the study doesn't take into account is the risk factor. Real estate agents can justify their fees anyway they want with this marketing or that marketing, blah, blah...but the real reason commissions are disproportionately high is because of risk. Doing real estate on commissions is kind of like gambling. If you win and sell a house, you win big. If your lose, you lose big. Because real estate agents take a large risk that they will spend money marketing a house and not getting paid, there is an inherent "risk factor" built into the commission structure to make it worth it.

In my city, Salem, OR, there is a 54 month inventory of homes priced over $600,000. So if I take a 6 month listing agreement on a house and spend $2-3k or so marketing the property, and I have a 10% chance or so of selling the house in 6 months, what is that risk worth? That is why commission go up so much as the home price increases. 1) The risk associated with spending money and not making anything back is huge, and 2) They take a lot longer to sell so more money and time will be spent than in your 40 hours of work you had in your opinion piece. It's a gamble. High risk means high return.

Most people don't have a high tolerance for risk which is why and I can say this because I do this, when given a choice between an all or nothing commission that costs more, or a lower flat rate (fee-for-service) that is guaranteed, consumers will overwhelmingly choose to pay the agent more. I have done fee-for-service for many years and consumers generally prefer to pay me more money at the end for the privilege of not having to pay me in the event the home doesn't sell.

Cutting the fees down without cutting the risk is business suicide. The only way to change that dynamic is to have about 50-75% less real estate agents in the industry. That isn't going to happen because large brokerages make their money on agent fees such as desk fees. The more agents they have, the more a brokerage can make in fees.

And Kristine, the NAR just passed a fee increase earmarked for lobbying. It was highly controversial among members (I am not a member of NAR). I don't think it is a big secret that the NAR is a powerhouse in the lobbying world. There were a bunch of public blogs written about it so I don't consider that being secretive. Just because you aren't aware of something doesn't mean that there is this conspiracy to keep it a secret.



Why should your customers pay for the risk caused by others? I would much rather pay a realtor an hourly fee for the actual work they do than pay the extortion-like commissions. If someone wants a realtor to hold their hand and drive them around town, fine, let them pay for the time. I would prefer to find my home, pay for an hour or two of time for a realtor to open the door and then get out of my way while I look at the home. Realtors are clinging to an outdated business model and using laws and protection schemes to survive.

I am electrician. If I were to charge an hourly rate based on the value of my customers property, it would be considered outrageous. Why do we put up with this from Realtors?


The percent based fee is what is killing the market - pay a real estate agent by the hour. Case closed.


No one wants to pay an hourly fee that is the problem. They want FREE service from a realtor. Drive them around, call them anytime, hold overpriced open houses. Advertise fro free and if the house does not sale say they were a lousy realtor.


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

Enter your name...

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%.


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.


Melina Tomson

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.


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.



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?



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?


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


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!!


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.



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.


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


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.



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.