Freak or Freedom: Realtors Wearing Capes?

By
Real Estate Agent with RE/MAX Allegiance, Managing Broker/Branch Vice President

 Many of you no doubt read the book Freakonomics by Steven Levitt and Stephen Dubner.  I read it the other year.  It was a bestseller and caused quite a buzz and a stir when it was first published.  The book is an interesting and entertaining read  that discusses some controversial idea, among them that legalized abortion helped reduce violent crime in the 1990s.

 Most relevant for us in the real estate industry, the authors compared real estate agents with the Ku Klux Klan! 

I don't know about you, but I was flat out, downright offended by such a shocking statement.

The gist of the author's analysis was that real estate agent's have a significant information advantage over the consumer due to their knowledge of the real estate market and they exploit this information asymmetry to the detriment of their clients.

In comparing this to the Ku Klux Klan, the Freakonomics authors state that when the Ku Klux Klan's secret rituals and passwords were exposed, they lost much of their fear factor and were not as intimidating.  They state that with more real estate information available to consumers via the internet, real estate agents can no longer hoard the information and intimidate consumers to work with them.  

You and I both know that it takes more than just knowledge of prices and the market to buy or sell a home and the authors of this bestselling book have a lot of holes in their analysis.  And the internet has been around for a while now, and plenty of people are still hiring Realtors.

Levitt & Dubner argue that "because agents receive only a small share of the incremental profit when a house sells for a higher price, there is an incentive for them to convince their clients to sell their houses too cheaply and too quickly."  While, I am certain that this happens from time to time, I don't think it is systemic of the real estate industry, which for the most part is composed of honest and ethical Realtors.  To further their argument, they state that when selling their own homes, Realtors leave them on the market longer and earn more money for the sale.

 This weekend I read the book Freedomnomics, subtitled "A Rebuttal to Freakonomics and More" 

Author and Economist John Lott, Jr. provides some convincing arguments against the evidence and conclusions of the book Freakonomics.  

Regarding the topic of real estate agents, Lott surmises that Levitt & Dubner habitually fail to realize "that market forces exist that punish dishonest behavior."   

Lott doubts that real estate agents are really ripping off their own clients and states that a listing agent has very little to gain from encouraging buyers to deliberately depress bids on homes.  

Freedomnomics states that Realtors may indeed sell their homes for more money on average (about 2-3 percent higher) than their clients, but provides different reasons:  

1.  one would expect Realtors to make more money selling their own houses because as experts they probably found a good deal when they originally bought.

2.  real estate agents know better than most people what improvements will boost home value.  Realtors are more likely than their clients to take their own advice.

3.  cost for a real estate agent to sell his or her own home is significantly less than the cost of selling a client's home because the Realtor knows his or her own schedule. 

In my opinion, Freedomnomics gets it right, when author Lott states that "Realtors must compete against each other for clients based on their reputations, commission levels, and their recommended selling price for a given house.  Sellers also have the option of selling the house themselves without an agent.  In short, home owners who sell through a Realtor do so because this allows them to get the best price for their house." 

 So, Freakonomics or Freedomnomics?  Which cape do you want to wear?  I'd like to believe that we are superheroes to our clients and to the public, not Klansmen.

Read both books and make up your own mind. 

WEDNESDAY UPDATE:  Yesterday, after posting this review, I was contacted by e-mail by John Lott, author of Freedomnomics.  Here in part is what he said:

"Thank you very much for your review of my book. I thought that you did a very good job of condensing my arguments. I wish that it was possible to reach a broader audience than I have reached so far in making these arguments. One thing that I would love to do is debate Levitt or Dubner on this point. It would be a lot of fun if there were any real estate groups that could set up a debate."

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Rainmaker
333,745
Jeff R. Geoghan
Coldwell Banker Residential Brokerage - Lancaster, PA
REALTOR, Marketing Manager
Good post, Brian.  I'd heard of the first book but not the second.
Sep 04, 2007 07:03 AM #1
Rainer
18,157
John Dye
Terapak Realty & Management - Milwaukee, WI

I haven't checked out either of these books, but I want to now.  I do think that a comparison with the KKK is unfair since it automatically conjures up images of hatred and violence.  It probably takes away from Levitts point and was a poorly chosen comparison, even if his point had some validity.


Thanks for the post.

 

John M. Dye 

Sep 04, 2007 07:16 AM #2
Rainer
41,337
Endea Thibodeaux
Lanham, MD
Solar Energy Consultant, CDPE, CLHMS

Interesting Post.  The thought that came to my mind is that the KKK just went underground with there hatred after they were exposed.  So now its all undercover.  They aren't going anywhere and nor are Realtors.

Sep 04, 2007 07:20 AM #3
Rainer
52,351
delete account
Clayton, MO

Hi Brian! I haven't read freakonomics yet....my daughter mentioned something about an interesting comparison they had done to realtors....now I know what it was!

I need to read that book.....thanks for the reminder.

Sep 04, 2007 08:10 AM #4
Rainmaker
682,040
Brian Block
RE/MAX Allegiance, Managing Broker/Branch Vice President - McLean, VA
Northern Virginia & D.C. Real Estate
JEFF:  Thanks for reading and commenting.  Both books are quick and fun reads -- they put a lot of economic studies and numbers mumbo jumbo into easy to understand anecdotes and stories.  The only shame in my opinion is that Freedomnomics will not be as big a bestseller as Freakonomics -- maybe something about the name, or being published later.
Sep 04, 2007 09:37 AM #5
Rainmaker
682,040
Brian Block
RE/MAX Allegiance, Managing Broker/Branch Vice President - McLean, VA
Northern Virginia & D.C. Real Estate
JOHN:  A comparison with the KKK is definitely shocking and was obviously intended for the controversy and shock effect.  But when writing to a mass audience, I think this type of statement is provocative and irresponsible.  Thanks for your comments.
Sep 04, 2007 11:32 AM #6
Rainmaker
206,129
Shannon Lefevre
John R. Wood Properties - Naples, FL
Shannon Lefevre, PA Your Naples Smart Girl
Brian:  WOW!  That whole thing is really incomprehensible!  I didn't realize we were intimidating people into thinking they had to work with us.  If there wasn't such a gross spin about our industry, I might have been compelled to buy the book and read it...but if it's about unfounded opinions well, I can always read our local paper for that. :)
Sep 04, 2007 11:48 AM #7
Rainmaker
682,040
Brian Block
RE/MAX Allegiance, Managing Broker/Branch Vice President - McLean, VA
Northern Virginia & D.C. Real Estate
ENDEA:  Thank you for your comments.  While it is true that the KKK went "underground" after being exposed, I have to disagree with you on one thing.  The KKK are quickly disappearing and the organization thankfully represents a tiny remnant of its past prevalence.  Realtors on the other hand, despite challenges from the internet, new business models, banks, etc. are still for the most part thriving and will continue to thrive as long as people need to buy and sell houses.
Sep 04, 2007 12:10 PM #8
Rainer
274,445
Adam Waldman
Westcott Group Real Estate Company - Hauppauge, NY
Realtor - Long Island
BRIAN:  I don't have to read both to give you an answer.  Just watching these two idiots from Freakonomics in a TV interview made me want to throw my TV out the window.  I have never seen a more anti-REALTOR biased opinion than I have watching these morons.  If the other book is the opposite of them, I vote for Freedomnomics.  All of the things in Freedomnomics are true about real estate, and there is another compelling reason why we sell for more.  We realize that pricing it right will net us more money than overpricing and reducing.  We realize that most times the first offer is the best offer.  I have actually released listings because of their unwillingness to be flexible only to watch their home sit on the market for well beyond what the average time on market was.  Coincidence?  No.  They both overpriced their homes and decided on their minimum number regardless of what the market thinks.  I feel sorry for the people that buy into their special brand of....let's say....fertilizer.  I'd be shocked if any REALTOR read their comments and thought much of them.
Sep 04, 2007 01:23 PM #9
Rainmaker
682,040
Brian Block
RE/MAX Allegiance, Managing Broker/Branch Vice President - McLean, VA
Northern Virginia & D.C. Real Estate
PAMELA:  Thanks for your comments.  Now that both books are available, I would not read one without reading the other.  
Sep 04, 2007 02:25 PM #10
Ambassador
1,125,238
Jason Crouch
Austin Texas Homes, LLC - Austin, TX
Broker - Austin Texas Real Estate (512-796-7653)
Brian - I also read Freakonomics when it first came out.  It was actually a gift from my mom, who thought I would enjoy it.  I enjoyed parts of it, but I remember feeling overtly offended by a lot of the tripe they were trying to pass as research.  I need to pick up Freedomnomics.  Thanks very much for the suggestion. 
Sep 04, 2007 04:10 PM #11
Rainmaker
682,040
Brian Block
RE/MAX Allegiance, Managing Broker/Branch Vice President - McLean, VA
Northern Virginia & D.C. Real Estate
SHANNON:  Thanks for commenting.  I don't think we're intimidating people into working with us, and when you express it that way, maybe the author should have compared us to the Mafia instead of the KKK!  Anyways, I would recommend reading both books if you have the time -- it will give you an interesting perspective on how others view the industry and on what is being portrayed to the public.
Sep 04, 2007 10:27 PM #12
Rainmaker
682,040
Brian Block
RE/MAX Allegiance, Managing Broker/Branch Vice President - McLean, VA
Northern Virginia & D.C. Real Estate
ADAM:  Thanks for your comments.  I haven't seen any of the authors on TV, but I can imagine that the Freakonomics guys must have been even more cynical and degrading towards Realtors in their television appearance for you to feel so strongly.  By the way, a very cool thing happened yesterday.  Shortly after posting this blog , I got contacted by e-mail by John Lott, the author of Freedomnomics who appreciated my post and condensed review of his book and posted an excerpt of my blog post with a link on his website!
Sep 05, 2007 12:51 PM #13
Rainmaker
682,040
Brian Block
RE/MAX Allegiance, Managing Broker/Branch Vice President - McLean, VA
Northern Virginia & D.C. Real Estate
JASON:  Thanks for your comments.  Definitely pick up a copy of Freedomnomics.  I'd send you my copy, but I've promised to lend it to my father-in-law who was intrigued while I was reading it this past weekend.
Sep 05, 2007 01:12 PM #14
Rainer
18,684
Don Diltz
Coldwell Banker - Menlo Park, CA
DRE:01204965

Brian,

What a great job of focusing on the real estate piece.  I'm an economist by training and part of what I love about the real estate business is being able to provide information and analysis to my clients.  Levitt & Dubner didn't get it right....  thanks for spelling it out.

Sep 05, 2007 01:18 PM #15
Rainmaker
682,040
Brian Block
RE/MAX Allegiance, Managing Broker/Branch Vice President - McLean, VA
Northern Virginia & D.C. Real Estate
DON:  Thanks for your comments.  While I am not an economist, I do read a lot of books about economics and took several undergraduate Wharton classes while I was at Penn.  Additionally, most of my friends in college were Wharton finance majors.  Have you read Freedomnomics yet?
Sep 05, 2007 01:40 PM #16
Ambassador
1,125,238
Jason Crouch
Austin Texas Homes, LLC - Austin, TX
Broker - Austin Texas Real Estate (512-796-7653)
I will get a copy sometime soon.  Congrats on getting featured on the author's website.  I wish Malcolm Gladwell would do the same thing for me!
Sep 05, 2007 04:58 PM #17
Rainmaker
682,040
Brian Block
RE/MAX Allegiance, Managing Broker/Branch Vice President - McLean, VA
Northern Virginia & D.C. Real Estate
JASON:  Thanks again for your comments.  It was definitely a surprise and an honor to be contacted by the author. 
Sep 05, 2007 09:49 PM #18
Anonymous
Anonymous
Brian, Great post! I love the dog in the cape!
Sep 05, 2007 11:50 PM #19
Rainmaker
682,040
Brian Block
RE/MAX Allegiance, Managing Broker/Branch Vice President - McLean, VA
Northern Virginia & D.C. Real Estate
ANONYMOUS:  Thanks for your comments.  Cute photo isn't it?
Sep 06, 2007 10:52 AM #20
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