Freak or Freedom: Realtors Wearing Capes?

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."