SuperFreakonomics on Realtors

Still Casting Stones . . . But Now With (Lots of) Caveats

An economist is an expert who will know tomorrow why the things he predicted yesterday didn't happen today.

—Laurence J. Peter

[Editor's note: to see my rebuttal to Freakonomics, the predecessor to SuperFreakonomics, click here]

So, I finally finished off the (surprisingly short) section on Realtors in SuperFreakonomics.

Two things jumped out at me: 1) the authors, both economists, clearly have bored with attacking Realtors, and have moved on to other, fatter targets; and 2) they still think people who hire Realtors (as opposed to selling their homes themselves) are idiots, but this time they offer a lot of caveats.

Five, to be specific.

Here they are (my commentary follows in italics):

One. Even though Realtors don't do anything you couldn't do -- this seems to be the authors' mantra, by the way -- you still may want to hire one, anyway, if you don't have the time.

I spend anywhere from 40 to 100(!) hours per listing professionally staging my clients' homes, advising on disclosures, putting together professional marketing materials, doing pre-list networking -- and literally 37 other things.

And that's before their homes ever come on the market!

The professionals (and non-professionals) I work for would literally have to take a leave of absence from their day jobs to do what I do. Assuming they knew how.

Which leads to Caveat #2 . . .

Two. "Realtors don't do anything you couldn't do for yourself."

Oh, really? I've been selling real estate for almost 9 years. Before that, I was a corporate attorney and CPA, and have a Stanford economics degree. I have been successfully buying and selling stocks since I was 12 years old, and have started 3 companies.

I say none of that to brag (OK, a little), but to make the point that I'm not a dummy.

And yet every deal I do -- and I've now done about 70 -- I invariably learn something new.

It can be a contractual fine point; a negotiating insight; some arcane feature of a home that comes up on inspection; or even something as simple as "upgrading" to an especially talented, new photographer I heard about through the grapevine (in real estate like other fields, "who you know" can matter as much as "what you know").

The bigger point?

Suggesting that a novice could handle all the phases of a real estate transaction as expertly as a seasoned Realtor can is: a) uninformed; and b) insulting.

How much better?

It depends on the deal, the market, and who the ultimate Buyer is (assuming that I'm the selling, or listing agent).

But industry statistics (and common sense) suggest that the swing between having superior counsel and none at all (or poor counsel) easily exceeds 10%.

Which makes my commission -- substantially less than that -- a bargain.

Three. Madison, Wisconsin -- the market the authors cite as evidence that FSBO ("For Sale by Owner") Sellers do as well as Realtor-assisted ones -- may not be representative (call it the "your mileage may vary" caveat).

Yuh think!?!

Madison is a highly educated, college town with a metro population just over 200,000. It is about as representative of broader America as Manhattan is -- or Hollywood.

Notwithstanding Madison's experience with FSBO's, no other metro area has followed suit.

And even in Madison, FSBO's only account for 26% of home sales. That means almost three-quarters(!) of all homeowners there still list with traditional brokers.

In my experience, if something truly is a "better mousetrap," sooner or later people tend to discover it . . . and switch (assuming they have a choice, i.e., there's no monopoly provider).

Instead, FSBO's are now declining as a percentage of the market place nationally (about 12%).

Four. Self-selection. Or, as the authors put it, "the kind of people who choose to sell their own houses without a Realtor may have a better business head to start with."

At least in my experience, that statement is categorically wrong -- which, ironically, actually supports the authors' argument that FSBO's can do better, net of commission, selling themselves.

From what I've observed, what invariably characterizes FSBO Sellers isn't a "better head for business" -- it's a simple (if uninformed) desire to net more on the sale of their home, coupled with having some "extra time" on their hands (in economic-speak, their perceived "opportunity cost" is low).

Unfortunately, the vast majority of FSBO's don't have a clue as to how to go about doing it.

So, something like 9 out of 10 FSBO's egregiously overprice, while the 10th literally gives their home away (then brags that they "sold without a Realtor").

Which gets to caveat #5 . . .

Five. The authors' data and conclusions may be flawed.

To recap, the authors allege that Realtors selling their own homes (vs. clients') are more patient waiting for a deal, and (therefore) sell for more. They base that conclusion on a study of 100,000 homes sales in suburban Chicago -- 3,000 of which were sold by owner-agents.

Charge #2 is that FSBO Sellers fetch the same price that Realtor-listed homes do -- they just take a little longer (20 days on average) to sell. That's based on the aforementioned study of FSBO Sellers in Madison.

I couldn't find the Chicago study the authors refer to (anyone who knows, please feel free to point me in the right direction).

However, the study of FSBO Sellers in Madison was conducted between 1998 and 2004 -- a Seller's market there (and most of the rest of the country, too).

I doubt that FSBO sellers in Madison today would fare nearly as well.

Meanwhile, the authors' contention that more market time equals higher price contradicts what I've observed over thousands of deals covering the better part of a decade -- namely, the longer a given home is on the market, the lower the selling price. Period.

And that relationship holds whether the Seller is an owner-agent, a FSBO . . . or the man from Mars.

But the most significant weakness in the authors' argument is their assumption that it's possible to isolate differences between Realtor and non-Realtor sold homes by "carefully controlling along several dimensions -- price; house and neighborhood characteristics; time on market; and so on."

Unfortunately, that's notoriously difficult to do in practice.

Precisely to avoid such an "apples-to-oranges" problem, the housing market's leading price index, Case-Shiller, opts in favor of tracking "sale pairs" -- the same home across multiple transactions.

Echoes of Peter Lynch

The arguments in Freakonomics and now SuperFreakonomics ultimately recall Peter Lynch's best-selling book, "One Up on Wall Street," in which Lynch disingenuously tells retail investors -- "Mom & Pop" types -- that they can outsmart the pro's.

How?

By following their spouses and kids to the mall, being the first to notice the hot new, retail trends, then buying the companies positioned to profit.

Unfortunately, for every Apple Computer discovered that way, there are 10 -- or 100 -- "Krispy Kremes" (busts, flame outs, and one-hit wonders).

What Lynch omits is that, in his hey day, he traveled 300-plus days a year, personally talking to senior managers at thousands of companies; checking out their facilities; quizzing their employees and competitors; and relying on a battery of Fidelity analysts to analyze thousands of companies' financial statements.

Level playing field, indeed.

"If You Don't Know Who the Patsy Is . . " *

The authors of Freakonomics (and now SuperFreakonomics) perpetuate the same myth about real estate -- namely, that amateurs who do their homework can outsmart the pro's.

Who ultimately profits from that misconception?

Just as in the stock market, in the housing market the beneficiaries are the pro's on the other side of the transaction.

So, on behalf of Realtors everywhere, I suppose I should say: 'Thank you, Freakonomics!'

*It was Warren Buffet who said, "if you've been playing poker for 30 minutes, and you don't know who the pasty is . . . it's you."