This chapter dealt with the power of information, the advantages it gives those who have it and the difficulties it presents to those who don't. In economic terms, this is the problem of information symmetry, which pervades every market from stock exchanges to used car markets (see the Market for Lemons Theory - http://en.wikipedia.org/wiki/The_Market_for_Lemons).
According to Levitt and Dubner, real estate agents are some of the biggest culprits of exercising the advantages they are afforded by information asymmetry in their market. Important here is the role the real estate agent's incentive to sell the seller's house at a higher price plays in the selling process. Because a real estate agent earns a commission of between 2.5% and 5% on a sale (depending on whether they also listed the house), they enjoy no benefit from trying to sell a house for $210,000 if they can sell it for $200,000, even if it means an additional $10,000 for the seller, because the difference in commission earned on the sale is at most $500. The $500 is not worth keeping the house on the market longer, spending their own money on advertising, and putting off the realization of their commission income for another month, even if a better buyer could be found.
The authors used house sale data to examine how real estate agents conducted sales of their own homes. For instance, a study of the terms used to describe the house in a real estate ad showed that certain terms were highly correlated with the final sale price of the house. Depending on what words were used in an ad, the agent could encourage the buyer to bid higher or lower on the house. For example, "granite", "state-of-the-art", and "gourmet" were terms correlated with a high sales price. Terms correlated with a low sales price were "spacious", "charming", and "great neighborhood". Real estate agents used terms correlated with higher prices to describe their own houses in ads and kept the houses on the market for a longer time. On average the sale prices were also significantly higher.
But when an outsider gains access to the information or the information is disseminated to the public, information asymmetry is eliminated and the advantage disappears. This occurred when the Ku Klux Klan was infiltrated and its secrets were revealed in radio broadcasts of the Superman show. The advantage of having a secret organization was lost and it could no longer use fear to advance its agenda. The internet can provide the same advantage today. Sites like mls.com allow you to browse real estate listings, giving you the value of a house and allowing you to see what neighboring houses are selling for, effectively removing the real estate agent's information edge. In time we will see the Internet provide access to information in other markets, removing the advantages information asymmetry provides to experts and disabling them from exploiting it at the detriment of non-experts.
Tuesday, November 13, 2007
Chapter 2: The Ku Klux Klan and Real Estate Agents
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5 comments:
Gabe,
I agree with you that over time, the Internet will break down some of those information gaps that we have in the markets. Like you said, zillow.com and mls.com are amazing. There is a house being sold in my neighborhood "For Sale By Owner", but they have a for sale sign that says "ForSaleByOwner.com". Interesting that the "market" created it's own medium on the Internet that competes directly with real estate agents!
Oh yeah...I forgot...
There is a HUGE information gap when people try to interview for new jobs. When I was interviewing a couple of months ago, it was SO hard to find accurate salary info. Also, looking online...you see job postings that describe the job, but they hardly ever tell you the salary. Why is that???!!!! Maybe it is the same technique that some real estate agents use, where they make a nice flyer that describes the house and then try to get you to call about the house (or the job in this case), then try to sweet talk you in.
I hope that these things will become more transparent. Give it some time, and I think it will.
Bobby,
It seems that the seller in your neighborhood has completely bypassed the real estate agent in the sale of their home. This is the first time I hear about someone putting a web address on their for sale sign, but I think real estate agents will continue to lose their information advantage in the market in this way.
I agree that real estate agents will lose some of their advantage over time, however, one thing they do have on their side is that to buy a home most people need an agent, at least for contract purposes. Also, another benefit for having a realtor list your house is the ability for other realtors to show it. Many for sale by owner homes do not have lock boxes on the doors and realtors can't get in. This discourages the realtor showing homes and they end up not showing those homes they can’t get into. Another benefit to having a realtor is time utility. When a potential buyer is looking at homes, they are time sensitive. If they can't get into the home then, they may never go back. Don't get me wrong, I do believe that the internet has changed their industry a lot, but the fact is that most people will not buy a home over the internet. Inevitably, people will continue to use real estate agents.
Perhaps it is only making their job easier because now they don't have take uninterested clients around town all day. If they get a call from someone that has seen their listing, they may have more qualified buyer...it's just a thought.
Gabe,
I think you really get to the heart of issue when you discuss how information asymmetry is becoming less and less of a problem as the free flow of information is eliminating the need for a middle-man, and in this case the real estate agent. I find it extremely helpful and useful to know that when I go to buy my first house in a few years, I can just get on the internet and not only save myself the expense of a real estate agent, but also the time and hassle of dealing with one.
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