National Post (National Edition)
Principal-agent problem not so simple
Some sellers more motivated to make a sale than others
Do real estate agents work as hard at selling their clients’ homes as they do when they sell their own?
Earlier research has suggested that agents push their clients to sell their homes cheaply and quickly. Recent research published in the journal Real Estate Economics, however, shows that the previous findings of real estate agents selling their own comparable homes for higher prices and keeping them longer on the market missed an obvious determinant for the difference: motivation heterogeneity.
Some sellers, especially institutional sellers, are much more motivated to sell than the rest and could be driving the difference between sale prices of homes owned by clients and those owned by agents.
The economics literature has for long discussed the implications of the principal-agent problem, in which agents are motivated to act in their own interest and not necessarily in the interest of their clients. It took the bestselling book, Freakonomics, to popularize this problem as it pertains to real estate markets.
Prof. Steven Levitt, one of the coauthors of Freakonomics, revealed the findings from a paper he later published in 2008. His research found that “a real-estate agent keeps her own home on the market an average of 10 days longer and sells it for an extra 3-plus per cent, or $10,000 on a $300,000 house.”
Levitt’s findings generated significant backlash from the real estate industry. Essentially, his research was accusing real estate agents of depriving their clients of roughly 3.7 per cent of the homes’ value by allowing clients to accept an offer instead of waiting for a better one.
It didn’t really help when Levitt later equated the services provided by realtors with those of pimps.
“A realtor and a pimp perform the same primary service: marketing your product to potential customers,” he wrote in the sequel, Superfreakonomics.
While there is no love lost between the real estate industry and Levitt, he is not alone in questioning the utility of real estate agents. For instance, B. Douglas Bernheim and Jonathan Meer, writing in the journal Economic Inquiry in 2012, questioned whether real estate agents add any value to the sale price.
They observed that if brokers’ services were unbundled from listing on the Multiple Listing Service (MLS), the sale price for homes that used a broker was less than the price of homes sold directly by the owner.
The decoupling of broker services from MLS listings has been a bone of contention in the real estate industry. For decades, the industry has resisted — in some cases using litigation — the attempts by some agents to offer discount brokerage services ranging from simple listings on the MLS to full service offerings including staging, marketing, promotion and running open houses.
Using a unique, though very small, data set of housing sales on Stanford University land where housing is exclusively listed by the university’s housing office and could only be bought by the faculty or senior staff members, Bernheim and Meer showed that “when listings are not tied to brokerage services, a seller’s use of a broker reduces the selling price of the typical home by 5.9 per cent to 7.7 per cent.”
Obviously, housing on land owned by a university and sales restricted to faculty and staff members do not make a representative and compelling argument against the use of broker services. However, this study was unique because it was able to demonstrate the outcome when the listing is de-coupled from broker services, which is hard to demonstrate in the open market where the units for sale by owners may be inherently different from those listed on the MLS.
Prof. Jia Xie found a way to work around the limitations of earlier research that many believed was unfairly critical of the real estate industry.
Using housing sales data from Indiana, Xie showed that whereas the average sale price of agents’ homes was higher than that of their clients, the difference was primarily driven by inexperienced real estate agents and institutional clients, such as relocation companies and mortgage lenders who are “very motivated to sell even at substantially lower prices.”
Households thinking of selling their homes using a real estate agent should take comfort in Xie’s research where he found “economically negligible” or “statistically insignificant” difference between the sale price of homes owned by agents and that of their clients.