Real Estate Commissions Under Pressure
INSKEEP: On Fridays the Business News focuses on your money, and today money you pay in real estate commissions, or that you don't. You might expect that the housing boom is a bonanza for agents, but economist Steven Levitt did some research and found that most agents did not do so well after all. Real estate agents might be an endangered species, as he explained to Renee Montagne.
RENEE MONTAGNE, host:
Steven Levitt, along with his fellow Freakanomics columnist Steven Dubner, writes about the travails of real estate agents in this Sunday's New York Times Magazine. And he joined us from Chicago.
Professor STEVEN LEVITT (Economist, University of Chicago): Hello, Renee.
MONTAGNE: Let's get to the whole question of the demise of the real estate agent. You compared it to another profession, that of the travel agent, because this all involves the Internet.
Professor LEVITT: For a travel agent, when there became alternative options for people to figure out how to pick their flights, very quickly travel agents almost disappeared. With real estate agents I think the same thing is likely to happen. If you think about what real estate agents do for their clients, the biggest service, historically, they provided is hooking up a seller of a home with buyers through what's called a multiple listing service.
But now, with the Internet, there are all sorts of alternative ways to get your property out into the hands of buyers. And in particular there are now flat-fee brokers who are willing, for just a small amount of money, $300 to $400, to list your house for you on the multiple listing services. So I think real estate as we know it is in the process of completely changing.
MONTAGNE: In the face of this sort of competition from the Internet or from innovative ways of offering these services for less, might not real estate brokers lower their fees?
Professor LEVITT: What I think is inevitable over time is that there's going to be a much more direct tie between the hours that a real estate agent works on your property and how much you pay them. You know, when you go to the dentist, it depends how long you spend in the dentist's chair, how much you pay them. To think that we would just pay six percent of the value of our home when really an agent provides the same services if the home sells for $200,000 or $2 million is, I think, an archaic incentive structure, which under the burden of the new ways of transferring information through the Internet, is going to buckle.
MONTAGNE: You give an example of a couple, actually, who have a company where they not only list your house, but they will also offer other services that are priced for the individual service. And it still adds up to some fraction of what a broker's fee would be.
Professor LEVITT: That's correct. If you take a house that sells for $500,000 today at a six-percent commission, that's a $30,000 payment to real estate agents. Now, if you start breaking down the services that agents actually provide and how many hours they spend per house, it comes out to be an outrageous fee per hour. So it takes maybe, I would estimate, 40 hours for a real estate agent to sell your house. So, on an hourly basis, they're making an absurd amount of money.
MONTAGNE: And that's, you know, writing the contracts, figuring out what the price of the house is, showing it.
Professor LEVITT: Showing the home.
MONTAGNE: Everything that they do.
Professor LEVITT: Exactly. But really, they have to charge that kind of absurd amount per hour because they spend 90 percent of their time out trolling, trying to find new clients. The reason that agents are willing to work so hard and spend so much time trying to find new clients is that each client they find is extremely lucrative for them.
MONTAGNE: But you write, pity the poor real estate agent because in the larger picture they haven't made out like bandits during the housing boom.
Professor LEVITT: Two economists wrote a fascinating paper, which I published in the journal that I edit, which looked at the exact question about what happens to the wages of real estate agents when prices go up. And they make a really telling comparison between Boston and Minneapolis, this is back in the 1990 census.
Housing prices in Boston were about twice as high as those in Minneapolis. And yet, real estate agents in Boston made exactly the same wages as real estate agents in Minneapolis. And you ask, why is that true? Well, it's because of course there were twice as many real estate agents in Boston as there were in Minneapolis. And there were twice as man real estate agents precisely because when there's a lot more money to be made selling real estate, every Tom, Dick and Harry rushes in to get their real estate license to go and start selling homes.
It's actually a basic idea of economics.
MONTAGNE: Steven Levitt, thank you very much.
Professor LEVITT: Thank you for having me.
MONTAGNE: University of Chicago economist Steven Levitt. He co-wrote Endangered Species, an article on the future of real estate agents in this Sunday's New York Time Magazine.