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.”