It’s a very personal, a very important thing. Hell, it’s a family motto. Are you ready, Jerry? I wanna make sure you’re ready, brother. Here it is: Show me the money.
– Rod Tidwell, Jerry Maguire
I was recently researching a somewhat different topic (deflation, inflation, and price sensitivity in real estate) when I came across a paper written in 2007 by a trio of economists at respected institutions. This paper has me in a tizzy. I need to know what you think of it, and how we as an industry might answer it.
The paper is called The Relative Performance of Real Estate Marketing Platforms: MLS versus FSBOMadison.com (PDF) and the authors are Igal Hendel and Aviv Nevo at Northwestern University, and Francois Ortalo-Magne at the University of Wisconsin.
The findings are… disturbing to say the least if you work in or near the real estate industry:
After controlling for houses and seller heterogeneity, we find no support for the hypothesis that the MLS delivers a higher sale price than FSBO. Considering that realtors charge a 6% commission versus $150 for FSBO, FSBO sellers come ahead fi nancially. The lack of a MLS premium does not mean realtors do not provide value to the seller. It means instead that the cost of the convenience provided by realtors seems to be the full commission.
The raw price comparison shows that the average sale price of homes that sell on FSBO is higher than the average price of homes that sell with a realtor. The characteristics, reported in the city assessor’s database, of houses sold on the different platforms are somewhat different. However, after controlling for these observed characteristics a significant price gap persists. Naturally, platform selection is the main suspect behind the persistent premium. We take several approaches to deal with selection. All the approaches support the same conclusion: MLS does not deliver a price premium.
Emphasis are mine. If you are so inclined, read the whole paper. I read through it, but didn’t have time to dive in. For that matter, I don’t have the Ph.D. in economics to really criticize their work.
But the paper supports the argument that, unless you’re the kind of person who needs a little help through a “stressful and maybe difficult period,” and unless you’re unwilling to wait a little longer to sell your house, then the commission that you pay your Realtor is in essence a big fat tip.
Oh wow. This is a problem, y’all.
Paging Dr. NAR
The paper takes direct aim at NAR’s claim that using a REALTOR means more money for the seller:
Homes sold with the help of a real estate professional in 2006 sold on average for 32 percent more than FSBO sales. The median FSBO selling price in 2006 was $187,200, compared with $247,000 for agent-assisted transactions.
I believe the financial benefit of using a REALTOR (or if you prefer, a real estate professional) has to be proven out better than just a website on the industry’s association website. Why?
First, if the gain from using a realtor doesn’t justify the transaction cost of using one — 6% of the sale price — then we all had best start preparing for a very different future.
If you believe that consumers aren’t savvy enough about things like transaction costs, you might want to take a look at the history of The Vanguard Group and its impact on the financial services industry. Vanguard is the largest money manager in the world now with over $1T (that’s trillion, y’know, Obamacare type of numbers) under management. That didn’t happen simply by chance.
There is a convenience to using a real estate agent to sell a house, no doubt about that. Homes listed by a realtor sell faster than FSBO; even the Northwestern paper proved that. And real estate agents — particularly the good ones — do offer a great deal of advice on proper pricing, home staging, etc. But unless there is a link between using a realtor and the final sale price, a seller would have to be pretty stupid to pay a commission. As the New York Times article says, “to justify a $12,000 fee on a $200,000 house, [Prof. Nevo] said, “you’d have to have a very high hourly rate” for an agent’s work.”
Specifically, those who are selling more expensive houses have every reason to start demanding flat-fee services. The authors of the study, and the New York Times blog and article, not to mention the commenters, all more or less say as much.
If there is no financial benefit to using a REALTOR, then buyer agency will look very different indeed. The argument that buyer representation is “free” only works with the most ignorant of consumers. Most savvy buyers know that they’re paying for at least some portion of the 6% brokerage commission, since the seller is going to take that cost into account.
What We Need
First of all, the study by Hendel, et. al., used data only up to 2004. The NYTimes article suggests they are now working with data from 2005 and 2006. I think they — or some other research team — should use data up to 2008. The real estate market didn’t get truly nasty until sometime in late 2007 from what I recall:
The authors themselves admit as much:
The data we analyzed so far end at 2004. It would be interesting to study a market during a more difficult time, during a cooler housing market. We could see if the cost or, returns to, using a realtor vary with the cyclicality of the market.
Second, they only used data from one city, which might be unique in how strong its FSBO market is. We need research using multiple markets to see if Madison, WI is an anomaly or not.
Third, the study did not segment real estate agents enough. Realtors themselves are the first to point out that some real estate agents have no idea what they’re doing. There is little doubt in my mind that truly expert agents and brokers do provide value that can be quantified. I know one case where a realtor listed a house that might have gone for $400K, staging it, marketing it properly, and creating urgency amongst buyers, etc. and ultimately sold it for $450K. Trouble is, anecdotes are not the plural of evidence.
But this is serious.
As an industry, we need to be able to answer this charge that using a real estate agent has no impact (or worse, negative impact) on the customer’s financial state. And while I can think of a number of companies and organizations that can step up, I think this is NAR’s ball to run with. Some of the larger companies, such as Realogy, Remax, Keller Williams, etc. should have enough transaction data in its data warehouses that they too can take on such research. I think they should. I think they need to.
Given that consumers aren’t particularly likely to trust research coming out of NAR and companies who clearly have a vested interest, the best answer might be to work with academics like Hendel, Nevo, and others. Funding these studies, working with universities, and getting them published in peer-reviewed academic journals where other academics who are unrelated to the real estate industry at all can dissect the work will all help tremendously with credibility of claims.
At the local level, if I’m a broker or an agent, I start compiling as much data as I can about my local market, about my performance over FSBO, and start trying to establish quantitative metrics of financial performance. I wouldn’t count on the consumer being ignorant of this paper or others like it.
So what do you think? Am I overreacting to this paper? Are you not at all concerned by this?