Another article of interest from this week’s New York Times Magazine.
Stephen J. Dubner and Steven D. Levitt, who wrote the wildly successful book, “Freakonomics”, are back with another attack on the real estate industry.
These guys are milking their fame for all it’s worth. Can’t blame them for that, although I think it’s fair criticism to say they aren’t the most talented economists out there – I think they fly fast and furious with statistics, to make their claims.
Their most recent essay asks your pity for the the poor, much maligned real estate agent.
More often than not, agents are portrayed as hustlers or sharks, unimaginative opportunists who, for not all that much effort, pocket a significant chunk of the sale price of your home. A great many of these agents and brokers, more than 1.2 million, belong to the National Association of Realtors, which the Department of Justice accused in a recent lawsuit of behaving like a cross between a cartel and a mafia, hoarding access to home-sale databases and harassing competitors who dared to offer discounted commissions.
But, the authors say, you should feel sorry for the agents, because they make so little money. Most of them, at least. Why? Because there are so few barriers to entry for a real estate agent, more and more people enter the business. This is especially true in cities where the cost of housing is so high, and the profit potential so alluring. Because of this, the number of deals per agent falls, even as the total number of deals increases.
In 1990, a typical house in Boston cost roughly twice as much as a typical house in Minneapolis. Since commission rates were fixed, an agent would earn twice as much selling a house in Boston. But the Boston market, with so much more commission money up for grabs, attracted many more agents than Minneapolis did â€” even though it turned out that more homes were actually being sold in Minneapolis.
The result? The typical Minneapolis agent sold twice as many homes (6.6 per year) as the typical Boston agent (3.3 per year) â€” which left the Boston agent, despite the higher prices in her market, no better off than her Minneapolis counterpart. What should be a competitive marketplace â€” which would inevitably lead to lower prices â€” is not, since the price of the agents’ service is essentially fixed in place.
But, the real reason you should feel sorry for a real estate agent is because all agents will soon be out of a job. At least, that’s their conclusion.
Think back for a moment to 1999. Travel agents still roamed the earth in vast numbers. So did stockbrokers. But their business models were being blown apart, largely by the Internet. The new market for do-it-yourself online securities trading lowered fees so drastically that a full-price stockbroker could simply no longer earn a living. Travel agents were shoved aside once the Internet gave customers the ability to book their own trips â€” and when, perhaps more damagingly, the airlines decided to stop paying the travel agents’ commissions.
The Internet is a natural repository for the sort of data that drive the real-estate market. New sites like zillow.com let anyone try to figure out (if imperfectly) what his home is worth; sites like craigslist.org allow buyers and sellers to easily find each other. As those services and ones like them become more popular, it is hard to imagine that the market will allow Realtors to maintain their hefty commissions.
But, I take issue with their conclusions. Here’s why. As others have pointed out, buying a home is very different from buying a stock or a seat on an airplane. Each share of Disney stock is the same, whether you use Merrill Lynch or Charles Schwab, or mail in a payment to them, directly.
Airplane seats are the same thing – you can buy an airplane ticket by calling the airline, by booking from the company, online, by going through Expedia.com, or by walking up to the gate and buying right before you board.
No two homes are alike. No two neighborhoods are exactly the same. And, the relationship between any client and agent is different from any other relationship.
I believe wholeheartedly that the real estate industry is in the midst of great change. Just the fact that I work for myself, now, instead of a company like Coldwell Banker, illustrates that fact.
However, the Freakonomics authors see things a bit too simplisticly.
Complete article: Endangered Species – By Stephen J Dubner and Steven D Levitt, The New York Times
(The authors of the book, “Freakonomics”, are looking for real estate agents for a study they are doing on brokers who charge flat-fee commissions. Looks like their research is going to continue.)