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Archive for July 8th, 2005

July 8

Today is quite a dichotomy: it marks the 12th anniversary of my father’s passing and is the wedding day for a good friend (whose bachelor weekend was in Montreal recently).

I am all for adding a happy memory to the date.

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More on Freakonomics:

My baseball buddy & brother in blogdom Andrew Clem told me about an article he found via Instapundit on Freakonomics where the author makes some good points. Arnold Kling is an economist and wrote a review on the book on Tech Central Station. Here is what he had to say on the real estate agent chapter:

Buyers are Liars

One topic Levitt studied was real estate agents. He says that real estate agents, rather than helping you get the best price for your house, actually talk you into underpricing your house so that they can earn their commissions with little effort.

Levitt looked at 100,000 homes sold in the Chicago area, and he compared the way agents sold their own homes with the way that they sold clients homes. On page 9 of Freakonomics, the authors write, "it turns out that a real-estate agent keeps her own home on the market an average of ten days longer and sells it for an extra 3-plus percent, or $10,000 on a $300,000 house." Gotcha!

I share the general resentment of real estate commissions. I believe that the transaction costs involved in buying and selling houses are ridiculously high. Nonetheless, I think that Levitt has not invested enough time in understanding how the housing market works. One thing that economics teaches you is that there are many ways for high incomes to be competed away — unless they are earned.

A decade ago, I met with a housing data expert whose wife is a real estate agent. At the time, I thought that the Internet would soon make real estate agents obsolete. The expert disagreed, and he told me that the key to the housing market is this phrase: Buyers are Liars

What "buyers are liars" means for you as a seller is that the family that spends a lot of time dickering may never end up making a written offer. Even worse, the written offer may fall through. Experienced real estate agents filter out the liars.

Suppose that you are vacating on September 1st in order to take a job in a different city. In July, Smith offers to buy your home for $300,000 and Jones offers to buy it for $292,000. Smith’s offer is contingent on selling his own home first, and Jones’ offer is not. Which offer should you take?

If you rejected Smith’s offer because of the contingency, you missed out. It turns out that he was making a good-faith effort to sell his house at a fair price, and he succeeded. You could have had the higher price.

Jones, meanwhile, also needed to sell his house in order to buy yours. But in order to get you to accept his offer, he did not make a contingency bid. Too bad you didn’t know that he was a liar. When he had to back out of the deal you made with him, he forfeited a good-faith deposit of $1000.

When buyers back out of deals, sellers can collect out of the good-faith deposits. Some of the money. Sometimes. I have never heard of a seller who felt like the money was sufficient to compensate for the hassle.

I am not saying that you should not go FSBO (for sale by owner) or let your house be sold by Aunt Millie, who just got her license last month. But if you want to measure the benefit of using an experienced real estate agent, don’t just look at transaction prices. Compare the number of deals that fall through.

As for Levitt’s findings comparing real estate agents’ home sales to those of their clients, consider this. A typical client may or may not be "under the gun" to sell because of a relocation, change in family status, or what have you. Real estate agents on average are more likely to be moving for "trade-up" reasons. When you are trading up, your focus is on getting the highest price. When you are "under the gun," your focus is on selling as quickly as possible. Perhaps that is what accounts for Levitt’s results.

My view is that Kling barely touches on the tip of the iceburg, but his points give insight that raw data cannot. The stats cited are only a portion of the picture; without knowledge of the industry, interpreting them can yield big mistakes. That is the source of my differences with Levitt’s theories. Kling’s differences are more far reaching, namely that economists ought to not try to be sociologists. His conclusion:

Reading Freakonomics, what I kept seeing was evidence and analysis that by my standards seemed tenuous. Yet it was presented as the "surprising truth." In that way, it violated what for me is the precious Law of Proportionate Belief.

For someone steeped in the social sciences, Freakonomics can be a fun and useful read. But if you read just one economics book this year, make it something else.

MY copy was free.

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