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Comment No.: REW-0403
Received: 10/25/2005
Organization: University of California, Berkeley
Commenter: Hsieh, Chang-Tai
State: CA
Attachments: Presentation Figures (10/25/2005)


Comments:

The Tragedy of the Commission

Chang-Tai Hsieh University of California, Berkeley

  • Fixed 5-6 percent commission
      =>Commission increases one-to-one with price of house.
      => Highly unlikely that time spent on selling houses increases one-to-one with price.

Boston and Minneapolis in 1990

  • Cost of housing:
      - Boston: $200,000
      - Minneapolis: $100,000

  • Productivity of average real-estate agent:
      - Boston: 3.3 houses/agent
      - Minneapolis: 6.6 houses/agent

Boston and Minneapolis in 1980

  • Productivity of average real-estate agent:
      - Boston: 6 houses/agent
      - Minneapolis: 7 houses/agent

  • Cost of housing
      - Boston: $100,000
      - Minneapolis: $100,000

  • The tragedy of the commission
      - Real-estate agents in Boston are no better off

Empirical Evidence:

  • 282 Metropolitan areas
  • In cities where housing prices have increased:
    1. More real-estate agents
    2. Lower productivity (sales per agent)
    3. Real wages are the same

What do real-estate agents do?

  • Matching buyers and sellers
  • Prospecting
  • - door to door canvassing
    - cold calling
    - notepads with realtor's picture
    - calling on FSBOs
    - servicing a "farm"
    - free pumpkins

  • Prospecting is of marginal social value
  • Fraction of time spent on prospecting increases with number of other real-estate agents.

Do realtors in high cost cities provide higher "quality" service?

    - We compare the same cities over time.

    - Use only differences in housing costs due to price of land.

    - Direct measures of time spent by agents on "useful" activities.

    1. Time spent by realtors selling houses
    2. Time spent by realtors assisting buyers

How Much is the Social Waste?

    - Total Earnings in 1990: $16 billion
    - Benchmark City is Athens, GA
    - Waste is $8.2 billion

The Tragedy of the Commission

    - Price protection ultimately does not benefit price protectors.