August 14, 2006 01:08 PM
Why a Real Estate Agent May Skip the Extra Mile
Excerpt: Real estate agents have a better sense than others of the best price a home can command. But when they work for others, they don't have the financial incentive to pursue it.
As housing prices keep rising year after year, real estate has become a national obsession - and a more powerful economic engine. Sales of homes and condominiums totaled an estimated $2.17 trillion in 2004, said Lawrence Yun, senior economist at the National Association of Realtors.
The industry couldn't function without the armies of agents who help buyers and sellers reach mutually agreeable terms on those four-bedroom, center-hall colonials, and who generally collect hefty 6 percent commissions for their trouble. But a recent study by two University of Chicago economists suggests that home sellers should regard agents with some caution. The study does not suggest that agents are inherently untrustworthy. Rather, it says, the housing market remains inefficient, and the incentives for agents to maximize profits for their clients aren't powerful enough.
The study was instigated by Steven D. Levitt, a self-described "rogue economist" who has applied the analytical tools of his trade to everything from sumo wrestlers to drug-dealing gangs; his work is cataloged in the forthcoming book "Freakonomics," written with Stephen J. Dubner.
Professor Levitt had fixed up and sold several houses in Oak Park, Ill., a suburb of Chicago. When working with real estate agents, he said, "I got the impression they weren't working solely in their clients' best interest."
Along with a colleague, Chad Syverson, Professor Levitt set out to prove it by comparing data on homes that agents sold on behalf of others with those that they owned and sold for themselves. They analyzed sales from 1992 to 2002 of 98,000 homes in suburban Chicago, of which 3,300 were owned by real estate agents. When the economists constructed an analysis that controlled for amenities, location and the adjectives used to describe the houses, they found that agent-owned homes, on average, stayed on the market 9.5 days longer and commanded median prices that were 3.7 percent higher than comparable homes owned by clients.
Of course, agents may just know how to position homes for sale better than other people do. It's their job, after all. And, being human, they may work harder selling their own homes, the way a dentist may take extra care cleaning her own child's teeth. But these explanations don't square with the data. "If that were the case, you'd expect the clients' homes to stay on the market longer than the brokers' homes," Professor Levitt said.
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