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."

"Economists in Glass Houses . . . "

SuperFreakonomics: due Oct. 20

“A Realtor and a pimp perform the same primary service.”

--SuperFreakonomics (2009)

Egged on by their success skewering Realtors in their best-selling 2005 book, "Freakonomics," its authors have an encore due out next week.

Judging by the above quote from the book, they plan to pick up where they left off.

I'll have a more-considered rebuttal soon.

For now, suffice to say that economists in glass houses shouldn't be throwing stones -- at Realtors, or anyone else.

Not only didn't economists as a group anticipate today's economic ills, their constructs actually laid the groundwork for them -- by assuming that people are always rational, reward-maximizing actors.

Oh, yeah: and free markets are efficient; business (and Wall Street) can be trusted to regulate itself; and a laundry list of other misguided beliefs and practices that are collectively as enlightened as medieval physicians' bloodletting was in their day.

Lagging Indicators

As I've posted before, not only can't economists accurately forecast the future, they can't even accurately describe the present: witness the almost one year lag declaring the current recession.

Is the recession now over? Economists will tell us . . . sometime in 2010.

Enough for now.

In the meantime, please feel free to check out my previous posts on the subject, "Freakonomics Rebuttal" (one of the most popular posts ever on this blog!).

Lying Realtors

Reason Not to Lie #37

Lying is hard, telling the truth is easy. By definition, every good Realtor juggles: multiple clients, dozens of showings, lots of parallel deals at varying stages. It's hard enough keeping all the details straight and presenting them coherently to your client(s); not tripping yourself up in a web of lies would seem to increase the "difficulty factor" exponentially.

--Ross Kaplan, "Freakonomics Rebuttal"; City Lakes Real Estate blog (3/23/08)

Faithful readers of this blog might be surprised to hear me say that, as far as I can tell, Realtors seldom lie -- and good Realtors never do.

There are multiple, reinforcing reasons for that: it's unethical, it's bad business, it's hard to do (see above), it's easily found out, etc., etc.

On that last score -- it's easily found out -- I heard a good anecdote recently about a Realtor who felt the need to "embellish" the turnout at a Tuesday broker open. If you didn't know, at least in the Twin Cities, the custom is for Realtors to tour the new inventory each Tuesday from 11 a.m. to 1 p.m.

Instead of simply reporting to his clients that, for whatever reason, the turnout was poor, the Realtor "borrowed" a slug of colleagues' business cards to leave out on the client's dining room table.

What happened next?

The client wanted to hear the broker open feedback directly from "the horses' mouths," and decided to call the agents directly.

When not one of them turned out to have actually attended the broker open . . . the client did what any client would -- and should -- do: fired the Realtor.

Freakonomics (Re)Revisited

"How is the Klu Klux Klan
Like a Group of Real Estate Agents?"

[Note: this post is a follow-up to to two, earlier posts discussing the best-selling 2005 book, Freakonomics: "Do Realtors Really Add Value," and "What Do Realtors Really Get Paid For?"]

You'd guess that any book with a chapter by that title -- as Freakonomics, Chapter 2 has -- would not exactly be a fan of Realtors.

And you'd be right.

The two authors of Freakonomics, economists Steven Levitt and Stephen Dubner, waste no time trashing Realtors as self-interested weasels who prey on vulnerable clients (it doesn't help that they each appear to have been victims at one time or another).

But are their criticisms fair?

To pick just one example, Levitt and Dubner make much of the fact that listing agents (who represent Sellers) only make a few more pennies in commission for every extra dollar their client's home fetches. Therefore, according to the authors, Realtors will invariably sell out their client's interests and push for quick sales, at less than top dollar.

Their evidence? Some thin, not-so-current data that purports to show that Realtors take slightly longer to sell their own homes than homes they're hired to sell.

Rebutting Levitt and Dubner's argument are these three facts:

One. Good Realtors typically engage colleagues to sell their own homes. Not only isn't it professional to sell your own home (it's too personal, emotional, etc.), it's also risky: if you make a mistake or get sued, you're likely not covered by insurance (the liability policies at brokers like Edina Realty specifically exclude Realtors who are acting as their own agent).

Two. There is an inverse relationship between time on the market and selling price. Translation: homes that sell quickly get top dollar, while homes that languish get discounted -- sometimes A LOT.

Is it possible for an unethical Realtor to convince an ignorant Seller to list for too little?

Unfortunately, I can't say that I've never seen that happen.

However, when it does, the market invariably steps in, and drives up the price (the one conspicuous exception to this is when the listing agent also represents the Buyer -- a practice sometimes called "single-agent" dual agency. It's banned in 43 states, and it's time Minnesota did, too).

Three. A Realtor who puts their self-interest ahead of their client's isn't just a lousy Realtor. They're violating their fiduciary duty to their client.

That's at the core of the relationship between a Realtor, whose job -- acting as an "agent" -- is to serve and advance the best interests of their client, legally known as the "principal."

Too lawyerly?

Try this: 'Good Realtors know not to scr-w their clients.'

For one thing, such clients tend not to refer business to you. For another, they tend to get mad and do things like fire or sue you.

Realtors, Chauffeurs, & Investment Bankers

What Do Realtors Really Get Paid For?

[Note: this post is a companion to "Do Realtors Really Add Value?]

If all realtors did was chauffeur clients around, realtors should -- and would -- make what chauffeurs do: about $20 an hour.

But what realtors really do -- at least in their capacity as listing agents representing Sellers -- is actually much more strategic, and therefore valuable: they position the Seller's home in the marketplace, suggesting how to look at it, and yes, what to pay for it.

In politics, it's called defining your opponent before they define you. In real estate, it's about maximizing each home's potential, then presenting it to prospective Buyers in the most flattering (yet truthful) light.

Every house, even the most impressive, has warts and blemishes; likewise, even the humblest home has hidden virtues and at least a few redeeming features.

Price Imprimatur

Kim Pease, one of the best realtors in the Twin Cities (and a competitor), once advised me to think twice about holding price opinions (price opinions are a popular way for realtors to solicit input from colleagues on a house whose "comp's" (comparable sold homes) are tricky or unclear). If the realtor does their job correctly, according to Kim, realtors (and prospective Buyers) don't give the listing price a second thought, or if they do, it's an almost subconscious, "oh, yes, it's priced right."

By contrast, if you put a spotlight on price, you invite scrutiny and second-guessing. That's one of the reasons why homes that languish on the market forever get especially beat up on price.

Where the Freakonomics authors (realtor-scorners both) get it wrong is that they assume houses are widgets: fungible, interchangeable, homogeneous. In other words, a commodity.

To a talented realtor, homes are very much malleable and unique.

I like to tell clients that a listing is like an iceberg: the part below the surface is what happens before the first prospect walks through. It's not unusual for me to spend months working with a client getting their home ready for sale, directing value-adding home improvements, orchestrating the staging, working with my photographer and desktop publisher to get the marketing materials -- online and print -- just right.

Identifying and unlocking potential value, then correctly pricing and selling it isn't what chauffeurs do. It's what *investment bankers -- er, venture capitalists do.

*While it's true that underwriting a new stock issue typically involves a lot more zeroes than selling the average home, as a percentage of the entity value, home selling is much higher. How so? IPO's typically involve selling just a fraction of the company to the public; the "public slice" then establishes the value for all the rest. By contrast, there's no way I'm aware of to sell just 10% of a single family home.

"Freakonomics" Rebuttal

Do Realtors Really Add Value?

[Note: this post is a companion to "Realtors, Chauffeurs, and Investment Bankers"; Economists in Glass Houses; and "Freakonomics Re-revisited"]

I don't go to that many cocktail parties, so I'm not really privy to "cocktail party" chatter. However, I think that it's safe to say that far fewer realtors these days are being button-holed by their friends and neighbors about the latest real estate killing, hot new development, etc.

Instead, what regularly seems to come up is a criticism famously made about realtors in the book "Freakonomics," by economists Steven Levitt and Stephen Dubner. Suffice to say, neither one is a fan of realtors, or what they do.

In particular, Levitt recounts his dealings with an especially sleazy realtor in Palo Alto, California.

Headed cross-country to a new academic post at Stanford, Levitt hired the realtor to help him house-hunt near the university. In the course of showing him properties, the realtor cautioned that, unfortunately, it was a hot market with an imbalance of prospective buyers like Levitt relative to sellers. As a result, if Levitt wanted to buy anything, he needed to be prepared to pay full price soon after a desirable property hit the market, with little or no negotiation.

Which is apparently what Levitt did.

Just a few months later, Levitt was offered a plum academic post back east, and unexpectedly needed to put his just-purchased home on the market. He called his realtor, who now told him that, due to all the inventory and slow sales, he needed to price his home "realistically" (code for "low") if he wanted to attract a buyer.

Who wouldn't be incensed by such treatment? And which client doesn't wonder, just a teeny bit, whether their realtor is capable of the same?

Truth-Telling

I can't speak for all realtors, but I doubt that such behavior is representative, for the following three reasons:

One. Lying about market conditions is easily found out. In an era when everyone is online and real estate data is ubiquitous, a realtor who calls "up," "down," or "cold," "hot" is simply not credible. The New York Times, The Wall Street Journal, cable tv, local newspapers and Web sites, real estate Web sites, etc. now threaten to drown today's housing consumer with data. To mischaracterize that data would destroy a realtor's credibility, and without credibility there are no clients.

Admittedly, relocation buyers often know little about their new community, and therefore may be more vulnerable initially to an unscrupulous realtor. However, in my experience such clients tend to do more due diligence, not less -- frequently with their realtor's help and encouragement.

Two. Market statistics eventually fade away and what matters is one house -- the one the client is interested in buying. At that point, the discussion between realtor and client becomes very concrete and factual: What are the "comp's" (comparable sold properties)? How do they compare and contrast with the subject property? How long were they on the market, and what did they ultimately sell for?

Twenty minutes into this discussion -- if not far earlier -- it's usually apparent whether area homes are selling in multiple offers above their asking price, or languishing on the market and suffering serial price cuts. It seems unlikely that a trained economist such as Levitt wouldn't be able to tell the difference.

Three. Lying is hard, telling the truth is easy. By definition, every good realtor juggles: multiple clients, dozens of showings, lots of parallel deals at varying stages. It's hard enough keeping all the details straight and presenting them coherently to your client(s); not tripping yourself up in a web of lies would seem to increase the "difficulty factor" exponentially.

Levitt and Dubner do make some legitimate claims. For example, they cite statistics indicating that realtors selling their own homes tend to wait longer, and get a higher price. While the statistical differences are small, they do appear to be real. The explanation applies to any sales professional paid a commission (vs. an hourly fee): each additional dollar that an item fetches accrues overwhelmingly to the owner. Meanwhile, 100% of the costs (time and actual outlays, for advertising, gas, etc.) associated with longer market time fall on the salesman. Ergo, Levitt and Dubner conclude, realtors have an incentive to sell homes too fast and too cheap.

Once again, Levitt and Dubner ignore that prices are ultimately set by the market, not realtors. Specifically, realtors (and appraisers) establish a price range not in a vacuum but based on the comp's -- typically three similar, nearby properties that have sold in the previous six months (or less). Realtors distort or spin the comp's at their own peril (see, "lack of credibility" above).

Path of Least Resistance

In my experience, particularly in today's soft market, it is far more common (and easier) for realtors to accede to clients' unrealistically high initial asking price, than to insist on a lower but achievable target. Too, realtors can often empathize with clients' financial needs, and let their emotions (and hope) influence the asking price rather than cold, market logic.

No matter the motivation, in buyers' markets overpriced homes sit, and the longer they sit the steeper the ultimate discount.

True to their economics background, the Freakonomics authors implicitly treat all homes as indistinguishable "widgets," whose market value is a given. In fact, skilled, conscientious realtors often work with sellers for weeks and even months before a home comes on the market, suggesting strategic repairs and improvements, addressing code compliance and municipal point-of-sale inspection requirements, putting the owner in touch with various contractors, etc. Meanwhile, the realtor is busy networking behind the scenes, building market awareness for the property and identifying prospective buyers.

Perhaps that's why homes listed with realtors sell for 12%-14% more than "FSBO's" (for sale by owners). That's far more than the average realtor's commission -- and a statistic that's nowhere to be found in Freakonomics. The public may not like realtors, for some of the reasons identified by Levitt and Dubner, but they avoid dealing with them at their own (financial) peril.