Real Estate Brokers Must Hate Economists

If any one profession should be cursing the rise of empirical economics, it has to be residential real estate brokers who earned some $55 billion in commissions in 2007, down from about $68 billion in 2005.

One study conducted in 2005 found that real estate agents got better prices for their own homes than for their clients' homes, on the order of 3.7 percent. The reason is that real estate agents don't have an incentive to push for a few thousand dollars more for their clients' homes since six percent -- the typical commission -- of that extra amount isn't all that much. But when it comes to their own homes, it's a different story.

Then in 2007, another study comparing homes sold through the Multiple Listing Service which could only be accessed by agents found that homes didn't sell for any more when they had representation. The best thing that the study's authors could say about realtors was that they "can save sellers time and generally help through a stressful and maybe difficult period."

The next reason to reconsider using a real estate agent -- or paying them the six percent -- comes from a new NBER paper by B. Douglas Bernheim and Jonathan Meer of Stanford University.

The duo looked at six services, typically bundled, that real estate brokers offer and tried figure out if the typical commission was worth it.

The six services they identified:

1) Preparing homes for sales, circulating flyers, placing advertisements, holding open houses, and recommending the house to buyers

2) Assisting with negotiations

3) Matching buyers and sellers

4) Providing access to the Multiple Listing Service

5) Providing market information and recommendations on the asking price

6) Assisting with paperwork and legal documentation

How much do these cost on their own? Access to MLS can be had for about $300, market information from professional appraisals usually costs a few hundred dollars, and in Illinois were sellers are required to retain real estate attorneys, legal fees cost $700. So, half of the services real estate agents provide cost $1,400, Berhneim and Meer estimate, which is only enough to justify a 6 percent commission on a $23,000 home.

That must mean that the first three services either must be quite valuable, or highly overpriced.

To find out, the researchers looked at how real estate agents affected list prices, selling prices, and speed of sale for homes sold on the Stanford University campus over a 26 year period. The university keeps a list of all homes on sale and assists with paperwork so services four and six are not required in transactions. The eligible pool of people able to buy the homes is also small, so service three is out too.

Bernheim and Meer found no difference in sale price between homes sold through a broker and those without representation, which means the value of service five was low and service two greatly diminished.

But if you do want to sell your home fast, then using a broker seems to be the way to go. On the Stanford campus, the probability of a sale was 25 percent higher if a home was represented by a broker. (But as the 2005 paper showed, that probably means the homes could've been sold for a higher price.)

The median home in their data sold for $570,000. A six percent commission on that is $34,000. A hefty sum for providing a service that seems to be worth much, much less than that.

With homes sales on the decline around the nation, if sellers opted to forgo brokers and framed the six percent that would've gone to the agent as an unexpected windfall, the housing crunch might not feel so bad. And if you live in a region where home prices have declined by less than five to six percent, you might even think you came out ahead.