Professors Dubner and Levitt Made Erroneous Statements on Today Show!!

I guess the National Association of Realtors was not so pleased with our latest visit to the Today show. The letter below is posted on the front page of their web site. I’ve taken the liberty of interspersing a few comments in italics.

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NAR Responds to Erroneous Statements Made on Today Show(June 17, 2005) — On June 16, guests on the Today Show made several erroneous statements about the real estate transaction process and real estate agents. In response, the NATIONAL ASSOCIATION OF REALTORS? wrote a letter to the Today Show’s executive producer, Tom Toucher, to set the record straight.

The full text of NAR’s response follows, and is available in PDF.

June 16, 2005

Mr. Tom Toucher
Executive Producer, Today Show
NBC News
30 Rockefeller Plaza, Suite 374E
New York, NY 10112-0002

Dear Mr. Toucher:

On the June 16th Today Show, Professors Dubner and Levitt reached some conclusions that are based on false assumptions about the real estate industry.

Speaking of erroneous, Professor Dubner will be glad to hear about his new title. His alma mater did recently ask him to give the commencement address next year. Maybe that confused the letter writer.

They assume that real estate sales are a one-time transaction in which real estate agents don’t have to go the extra mile. That’s simply not the case. Most clients are obtained through referrals and many buyers will hire the same Realtor for repeat business. Home transactions are not in fact a one-time affair. People move once every seven years on average, and referrals and repeat business are an important source of business for real estate agents. It’s in an agent’s economic self-interest to look beyond the immediate profit to a long-term relationship.

We don’t assume anything about one-time transactions. What we did was look at 100,000 real estate transactions, and the data say that realtors get 3-4% more for their own houses and leave their own houses on the market 10% longer. This suggests to us that at least some agents do not share the views of the NAR that it is in their own self interest to look beyond immediate profit opportunities.

They also said that agents often advise sellers to accept an early, unnecessarily low offer to close the sale quickly so the agent can move on to other properties, but that agents tend to hold out for better prices when selling their own property. However, in the case of the average consumer transaction, it’s frequently to the advantage of the consumer to make a transaction in a timely manner, due to family and personal factors. It is a fact that price concessions often become deeper the longer a home stays on the market. Sellers needing to move may have to make a price concession with each passing week. In the practical world, if agents were trying to make a higher commission, seems to me they’d leave the property on the market longer to get the higher price Levitt thinks is forthcoming.

This last sentence suggests the letter writer doesn’t understand our basic argument, which is that the agent’s cut is so low that waiting longer is not worthwhile when weighed against the time and cost of marketing a home. And if it is to the advantage of the client to sell in a timely manner due to family and personal factors, why not to the advantage of the real estate agent when selling his or her own home?

Professor Levitt may have misunderstood the real reasons why real estate agent-owned properties – a very tiny portion of the home sales market – tend to stay on the market for a longer period than owner-occupants’ properties. It is a common acceptance that a majority of homes owned by real estate agents are second or investor homes. With investor properties, the seller can usually wait for the best price and not worry about factors such as job transfers or school year timing. In that kind of sale, the type of home, not the status of the owners, is driving the results.

It is interesting that the National Association of Realtors would write this letter without closely reading the academic research first, in which we clearly state that we eliminate from our sample any home that sells twice in any three year period, precisely to avoid investor properties.

Professor Levitt overlooks the obligation of real estate agents to exercise due diligence on behalf of clients. Doing due diligence is an agent’s legal obligation, as well as a moral and professional one. In fact, the National Association of Realtors was one of the first trade associations to adopt a code of ethics. NAR members are required to receive training in our Code of Ethics and review this subject matter on a periodic basis. A major emphasis in this Code is the obligation of due diligence which the agent owes to clients.

Seems to me if real estate agents were so honest, there would be no need for a code of ethics, training in the code, and periodic reviews. And let’s not forget that sumo wrestling has thousands of years of honor bound ritual going for it, but that hasn’t stopped cheating there either.

Professor Levitt’s rush to endorse reduced service and discounted sales models overlooks the reason sales by full-service brokers remain so popular, an omission that misleads your viewers There are a large number of reduced service and reduced fee discount sales approaches, and it is a fact that most are soon replaced or discontinued, due to flaws in their business model. In a market economy, a better business model survives over the long run. If the services provided by real estate professionals are not valuable, then the demand for them would surely diminish over time. The fact that owner-facilitated and limited, flat-fee sales cannot gain market share is itself a confirmation that agents are providing value-added services.

My “rush?” Who’s rushing? I’ve thought hard about this for roughly five years and personally used flat-fee agents to sell three houses. I use www.chubin.com. they are absolutely fantastic, by the way. If the full-service model is so superior to flat-fee, why the need to write this letter protesting? Clients of flat-fee realtors will be sorely dissapointed and quickly return to the fold.

In light of the importance of these issues to millions of your viewers, we would like to offer the Today Show our chief economist, David Lereah, or our president, Al Mansell, to discuss them.

Sincerely,

Stephen K. Cook
Vice President, Public Affairs