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March 05, 2006

this is cutting edge science ????

the so called 

rogue economist has a look at our "profession"...







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"  March 5, 2006

It is hard to think of many occupations 

that garner less good will these days

than the real estate agent.

 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.

Even if you believe

 all these terrible things

 about real estate agents,

 however, you should try to find in your heart

 a bit of sympathy for them.

 There are two reasons for this.

To examine the first reason,

 ask this question:

 Who has prospered during the recent real-estate boom?

 Home sellers, to be sure,

 along with developers,

 mortgage brokers --

 and also, you would assume, 

your average real estate agent.

These agents have rung up millions of sales 

while home prices have been doubling

 and even tripling.

 Since an agent's commission 

is usually based on a fixed percentage 

of the sale price -- typically 5 percent

 or 6 percent, 

of which about half goes 

to the listing agent and half to the buyer's agent

 -- agents' fees have climbed along with home prices,

 even though they probably

 don't have to work any harder 

to sell an $800,000 house 

than they do a $200,000 house.

A listing agent really only performs 

four main functions:

 setting the price of your home,

 finding potential buyers,

 prepping and showing the house, 

and 

handling the negotiations and contracts.

Just for fun, 

let's put a value on each of these functions

. Setting a home's asking price

 requires a few hours of work at most,

 studying the house and comparable sales.

Showing the typical home might take

 20 or 30 hours, 

with negotiations and contract

s taking maybe four hours.

Attracting potential buyers 

is of course the trickiest task -- 

which is why, as the Justice Department alleges,

 realtors have tried to block access 

to the databases.

 But it's now easy 

to find independent or discount agents

 who will list your house

 on the Multiple Listing Service 

for about $750.

So in sum,

 we are talking about perhaps

 40 hours of work.

 Let's be generous 

and say that's worth $100 an hour.

 Add another $750 to list the home.

 That's a total of $4,750,

 which makes the 6 percent commission 

that you would pay on the sale of a $500,000 house

 -- $15,000 each to your agent and the buyer's agent

 -- look pretty steep.

It would seem obvious

 that being an agent

 during a real estate boom 

is a great way to earn a good living.

As it turns out, however

, most agents don't make very much money

 during a boom,

 because of one simple fact:

 the boom attracts way too many of them.

 Over the past 10 years,

 membership in the association 

has risen more than 75 percent.

And why not?

 Compared with most professions,

 becoming a real estate agent

 is quick, cheap,

 and relatively painless.

 In economics,

 this phenomenon is known as free entry.

In a 2003 paper titled 

''Can Free Entry Be Inefficient?"

 Chang-Tai Hsieh and Enrico Moretti,

 economists at the University of California

 at Berkeley, 

examined the income of real estate agents

 in various markets under various conditions.

Relying on data 

from the Census of Population and Housing

 in 1980 and 1990, 

Hsieh and Moretti compared home sales

 in 282 metropolitan areas.

 But their story can be told 

using just a pair of cities:

 Boston and Minneapolis, 

which are similar in size and demographics -

- but quite different 

in the price of their real estate.

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 -- 

even though it turned out 

that more homes were 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)

 -- 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

 -- which would inevitably lead to lower prices --

 is not,

since the price of the agents' service

 is essentially fixed.

The association's own figures

 show the same dynamic at work today,

 nationwide.

 From 2002 to 2004, during one

 of the hottest real estate markets

 in American history,

 the median income for realtors actually fell --

 to $49,300 from $52,200.

This is not to say 

that some agents haven't become rich.

 As in most sales professions,

 whether the product is diamond rings

 or crack cocaine, 

the people at the top of the pyramid 

make an awful lot more money

 than those down below. 

It's just that the base 

of the real estate agent pyramid 

grows significantly during a boom.

And because hungry new realtors

 are discouraged from undercutting 

their competitors by lowering their commission,

 they compete instead by frantically trying 

to obtain new listings.

 This would explain why your mailbox

 is jammed with postcards 

from realtors exhorting you to sell.



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The second reason to feel bad

 for real estate agents is even more dire: 

their very profession is about to join 

the endangered-species list.

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 

-- 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 find each other easily. 

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.

In addition to discount

 and flat-fee brokers,

 one likely successor 

is the fee-for-service broker.

  They charge

 $750 to list a home 

on the Multiple Listing Service,

 $50 an hour for showing the home 

and $250 for negotiations and closing.

 "Do you want to go to the Caribbean? 

Or would you rather give the money

 to your real estate agent?"

Stephen J. Dubner and Steven D. Levitt

 are the authors of ''Freakonomics: 

A Rogue Economist Explores 

the Hidden Side of Everything." 



----------------------------

the science 



"when the average price 

of land in a city increases,

 (1) the fraction 

of real-estate brokers 

in a city increases; 

(2) the productivity 

of an average real-estate agent

 (houses sold per hour worked)

 falls;

 (3) the real wage 

of a typical real-estate agent

 remains unchanged.

                              qed 



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