A Hole in the Ocean
Residential real estate, by a 2002 projection by The Economist magazine, is a $48 trillion industry, or more than 41 percent of the developed world’s total assets. Because of its importance, real estate is a very big topic with analysts, and one of the more referenced – and controversial – came from Chang-Tai Hsieh, a professor of economics at the University of Chicago, which took a client-centric view of real estate and drew some bold conclusions on how the industry functions.
For his research, Hsieh compared real estate markets across the country. First, he found there was a direct correlation between home values and agent productivity. Home prices in Boston, for instance, are twice that of Minneapolis, but real estate agents in Boston do not make twice the income of agents in Minneapolis. Why? Because the average real estate agent in Minneapolis is twice as productive as the average agent in Boston, selling 6.6 houses per year to Boston’s 3.3. That formula, Hsieh found, was consistent across the country. As home values rose, productivity fell in a one-to-one ratio that was so flawless it would be a “remarkable coincidence” if it were not true, Hsieh says.
Second, and most noteworthy, Hsieh found that real estate remains an industry stuck in the past, despite the technological innovations that have altered the profession’s landscape (the very same ones, in fact, that Patrick referred to). Just as, in 1980, the agent’s daily schedule was based around networking and prospecting for new leads and clients, it’s the same case in 2012, but with one critical difference – home values have risen considerably in the meantime; so, Hsieh concluded, consumers are paying more money for the same, antiquated service. Such static development, he says, is unique to real estate; all other sectors of the U.S. economy, from manufacturing to retail, have seen increases in productivity since 1980, and because agents still spend more time attending networking events and industry gatherings than servicing their clients, considerable funds are wasted. How much? Hsieh’s original estimation, which he based on data from the 1980-1990 census, came out to $8.2 billion – losses, he says, that are certainly higher in today’s marketplace.
“What’s even more tragic is, it’s the case of an industry where huge amounts of money are being thrown into the ocean,” Hsieh says. “And nobody is getting it; it’s all just going up in smoke. Lots of people are spending lots of money, and they’re getting no better services from this, and the Realtors are no better off themselves.”
Kudos to K&S for taking a step in the right direction for Illinois Realtors. Too often realtors get stepped on by the general public and are not always seen as professionals with standards. Personally I have maintained a minimum fee for all transactions which averts myself and my agents working at minimum (or less than minimum) wage on a transaction. Some clients turn their back on the proposition, but most understand that our time is worth money too.
Agree wholeheartedly with this. It should end up becoming state law that it is published in each office. Too many lookee-loos think we get paid a salary to be in the office.
How often do people call us or stop by an office and want to know about buying a home? They then go to another and another office. They seem to think that if they ‘work with’ more than one agent they will get more information than the MLS has.
If they want to pay $250. up front to each of us, they can work with as many agents as they want!
I can appreciate Koenig & Strey’s approach to buyers. I believe that the State of Illinois needs a new law requiring buyers contracts as they do listing agreements. Some buyers do not understand that their agent typically works hard and only gets paid if something is purchased.
Listen to a salaried tenure guy like Hsieh and you’d think Realtors are Romney. Making a lot of money for doing nothing. He misses the point like trying to catch a bullet with a net.
It’s an extremely personal, nuanced and skilled service with risk/reward that can result in a transaction where a lot of money is exchanged. For instance, does Hsieh have any idea where all the data on an MLS comes from and who pays to aggregate it? Agents, maybe? But the data doesn’t get a transaction done. Does he understand why commercial real estate information is so splintered?
Pro agents know how many well-tended deals fall out. It makes you wonder if any residential real estate would ever get sold without us.
Maybe a lot of college professors are lousy teachers because they’re disincentivized by tenure. Are agents getting a salary complacent like them? A commission agent has less incentive to service a client? If that last fallacy has to be refuted on an agent web site, we’re all wasting our time.
The old commission model doesn’t work when some properties are selling for $40,000 or less. Buyer’s that are serious and want to work with an experienced agent will pay the fee.
Interesting to see Chang-Tai Hsieh heavily quoted here. It was a 2002 paper of his that led me to my current business model, similar to Redfin but with true full service. As he says the biggest inefficiency in real estate is the prospecting. Agents spend a disproportionate amount of time prospecting, which is why I give my agents the leads I generate in order to improve their productivity.
The other problem is the clients that waste our time, which is why I recently introduced an hourly model for buyers with a 100% commission rebate as well. At first agents don’t know what to make of it but once they try it they really like it. And serious buyers like it also.
Excellent article. Well researched.