Chad Syverson
Appearances
Freakonomics Radio
618. Are Realtors Having an Existential Crisis?
It ends up there's so many, the slice that any average person gets is really tiny. But I think that's one way to think about it is just a ton of money, super easy to get into. How easy is it? Here's Sonya Gilbook.
Freakonomics Radio
618. Are Realtors Having an Existential Crisis?
Additional information has radically changed a lot of industries. Going back a few decades, travel agency lost 60% of its revenue when people figured out they could buy airline tickets themselves online. And airlines figured out flyers were happy to do that. Basically, one of two things happened. Either... The industry does totally restructure itself.
Freakonomics Radio
618. Are Realtors Having an Existential Crisis?
That's kind of what happened with travel agency. Or it's a little bit of a squeezing the balloon thing like car sales where they've moved some of the obfuscation, for lack of a better word, to other parts of the transaction. Or they just try to make profit on other dimensions now through repair deals or whatever. So that tends to be how a lot of industries have responded.
Freakonomics Radio
618. Are Realtors Having an Existential Crisis?
Residential real estate has changed less, and I think it's because you have this two-sidedness of the deal. So it's not just one agent decides to do things differently and things start falling apart. If one starts doing things differently, the other one can say, oh, no, you don't, and here's what's going to happen if you do.
Freakonomics Radio
618. Are Realtors Having an Existential Crisis?
There's explicit collusion. the smoke-filled rooms where parties in an industry get together and say, hey, let's make a plan so we can monopolize this thing and make more money. I don't think there's ever been evidence of this happening widespread in real estate.
Freakonomics Radio
618. Are Realtors Having an Existential Crisis?
The kind of collusion that Steve and I talked about in the paper is what an economist might call tacit collusion, which is there's never an explicit agreement and no one's signed contracts of this form, which would be completely illegal. But there is a sense of, okay, we kind of all know how this thing works, wink, wink, and this thing works well for us. And if we just...
Freakonomics Radio
618. Are Realtors Having an Existential Crisis?
Don't rock the boat too hard. We can keep it together.
Freakonomics Radio
618. Are Realtors Having an Existential Crisis?
They do know the market better than most buyers or sellers. They deal with transactions all the time. That's exactly why you would hire them. That is Chad Severson. He's an economist at the University of Chicago. I'm mostly a microeconomist. And within that, my field is industrial organization, which is really just the economics of companies.
Freakonomics Radio
618. Are Realtors Having an Existential Crisis?
If I go out to dinner and the restaurant accidentally puts an extra thousand dollars on my bill, I'm incensed. But when it comes to selling a million dollars, it's a thousand here, a thousand there. I just want to finish this. What does it matter?
Freakonomics Radio
618. Are Realtors Having an Existential Crisis?
It's just the nature of the industry. All that happens when house prices go up is you get more agents. this structure now doesn't help the average agent. Maybe it helps the ones who do super duper well. It helps the brokerages because the more volume they get under their umbrella, the better they are. It helps the NAR because the more agents there are, the more dues and fees they collect.
Freakonomics Radio
618. Are Realtors Having an Existential Crisis?
But at the individual agent level, this structure isn't what's making what they think would be nice about the industry nice. You know, the flexibility, I can do this part-time, et cetera. You could do that in a world where you get paid by the hour too, right?
Freakonomics Radio
618. Are Realtors Having an Existential Crisis?
The current structure is completely allowable under the new settlement. It's just the way that that structure is agreed to has to be a little more explicit and there are more rules about how the communication of the commission rates are done. But if you follow those rules, you can still have, say, a 6% total commission split evenly between the buyer's agent and the seller's agent.
Freakonomics Radio
618. Are Realtors Having an Existential Crisis?
What might happen is the new rules give more leeway to agents who want to do things differently.
Freakonomics Radio
618. Are Realtors Having an Existential Crisis?
I think it makes a lot of sense just to start with an hourly fee. We hire a lot of professional services at an hourly rate. And the hourly rates are settable agent by agent. You want competition in this market, too. Certainly, you don't want any coordinated hourly rate. It doesn't solve all the problems. You're still going to have information gaps, and it'll create its own problem.
Freakonomics Radio
618. Are Realtors Having an Existential Crisis?
It's just hard not to say, man, these prices seem way higher than they need to be.
Freakonomics Radio
618. Are Realtors Having an Existential Crisis?
When you pay someone by the hour, you get a lot of hours that maybe you don't really need. So it's not a panacea.
Freakonomics Radio
618. Are Realtors Having an Existential Crisis?
I can see people trying it out on their own and not liking it, certainly. There's probably going to be a set of really sophisticated sellers and buyers who will just keep doing it by themselves. But I think what you described could happen, which is the typical house seller is like, geez, I might have the mechanism to do it, but I really don't know what I'm doing enough.
Freakonomics Radio
618. Are Realtors Having an Existential Crisis?
I don't have the time, et cetera, et cetera. And so they want to hire an agent. Again, there are reasons why agents are valuable, but if the structure of compensation falls apart and people do want to run back to agents and I understand why that would happen. I would hope the compensation structure doesn't reverse itself back to what we've got now.
Freakonomics Radio
618. Are Realtors Having an Existential Crisis?
I would consider doing a for sale by owner. If I did, I would, quote, cooperate with buyer's agents. In other words, if... The buyer's agent was expecting to be compensated through a split with the sell-side agent. I'd effectively pay money because I would know that if they weren't being compensated by their own client, they've got no incentive to bring their client to my house.
Freakonomics Radio
618. Are Realtors Having an Existential Crisis?
There are reasons to have a sell-side agent that are valuable, particularly in the neighborhood I live in. It's sort of a small niche market, and it's good to have that relationship pre-advertising component that having a sell-side agent can give you because they talk to other people in the market.
Freakonomics Radio
618. Are Realtors Having an Existential Crisis?
I think I could really handle the buy-side myself. The exception is If I thought the market were tight enough that having knowledge of sales to come was important, just tootling around on the internet myself, I'm not going to know a house is for sale until it's for sale. And in a hot market, it might be essentially gone by that point. So in that world, I might consider a buyer's agent.
Freakonomics Radio
618. Are Realtors Having an Existential Crisis?
But in a slower market, I think the agency component I would do myself.
Freakonomics Radio
618. Are Realtors Having an Existential Crisis?
Yeah, including some of my relatives, but it wasn't true hate in that case. I have a bone to pick with you, is a quote. What was the nature of these complaints, then? What did they say that you got wrong? It was usually more diffuse than that. It was just like, you're painting us in a bad light. I do care about my clients. I would never do something that's not in their best interest.
Freakonomics Radio
618. Are Realtors Having an Existential Crisis?
Well, both things can be true, though, correct?
Freakonomics Radio
618. Are Realtors Having an Existential Crisis?
I think that's totally right. And I am happy to think of this as a problem with the system rather than a problem with the people. In fact, I think that's the right way to think about it.
Freakonomics Radio
618. Are Realtors Having an Existential Crisis?
What's unusual about residential real estate is both sides have an agent at the same time. That's not totally unique, but it's atypical for agency-based businesses. purchase industries.
Freakonomics Radio
618. Are Realtors Having an Existential Crisis?
That's right. You've got two sides, and each side has their own representative. It is different from other agent-based, middleman-quote-type companies. purchases like buying insurance through an insurance agent or using a financial advisor to buy stocks or securities, there's only one party you're dealing with.
Freakonomics Radio
618. Are Realtors Having an Existential Crisis?
Whereas residential real estate, you've got your agent and the other side has their agent.
Freakonomics Radio
618. Are Realtors Having an Existential Crisis?
And in fact, quite likely in most markets, they might be familiar with each other and have worked together before and importantly, expect to work together again. Quite often, they actually work for the same company. They're actually sharing their compensation and the back office bits and their colleagues, which is not so typical in, say, law.
Freakonomics Radio
618. Are Realtors Having an Existential Crisis?
In fact, I think there are rules against that for lawyers where it's just a matter, of course, in residential real estate. In fact, every once in a while, you get two sides represented by the same agent. They're working both sides of the deal.
Freakonomics Radio
618. Are Realtors Having an Existential Crisis?
Yeah, I think you nailed it with that description. There could be good things in terms of understanding the market from both sides. But on the other hand, these frequent, repeated interactions between agents can lead to to this behavior of, hey, this is how it works in this industry and it works well. And if you want to do something different, I'm not sure we can keep working together.
Freakonomics Radio
618. Are Realtors Having an Existential Crisis?
You have the legal right to propose that. They have the legal right to take you up on it. But they choose not to. Now, why do they choose not to? Because they know if they start deviating from how things work and everyone starts doing that, then the system might fall apart. The NAR will tell you, of course, you always have the right to negotiate over commissions.
Freakonomics Radio
618. Are Realtors Having an Existential Crisis?
But your experience and the experience that I know other folks have had is when you try, you're often met with what you describe, which is, I'm sorry, that's just not how I do business.
Freakonomics Radio
618. Are Realtors Having an Existential Crisis?
Can you quantify that? That's the $64 billion question. There's some estimates out there. I'm not sure if anyone's agreed on how big it actually is. I can say that there are a lot of countries who have agent-mediated real estate transactions that end up with much lower effective transaction prices than the U.S. So the U.S.
Freakonomics Radio
618. Are Realtors Having an Existential Crisis?
historically has been up in this 5.5% to 6% commission rate, and there are other places down in the 1, the 1.5% effective rate. If you look at those other countries and say, are there reasons why selling houses should be fundamentally cheaper in those places? You would say no, and certainly not by a multiple factor that we've seen.
Freakonomics Radio
618. Are Realtors Having an Existential Crisis?
So it's just hard not to say that, man, these prices seem way higher than they need to be to get the job done.
Freakonomics Radio
618. Are Realtors Having an Existential Crisis?
There's nothing really you can look at in the costs of selling a house that would scale up one for one with the price of the house. It shouldn't be twice as expensive to sell a house that costs twice as much.
Freakonomics Radio
618. Are Realtors Having an Existential Crisis?
Okay, we all know how this thing works, wink, wink. And if we just don't rock the boat too hard, we can keep it together. Consider the boat rocked, starting now.
Freakonomics Radio
618. Are Realtors Having an Existential Crisis?
One way to think about it is just the gross pot of money involved is enormous. Total number of houses sold per year times average price times five and a half or six percent. That is billions and billions of dollars. If that's the pie and it is extremely low cost to get in and try to start slicing off a piece of that pie, you're going to have a lot of bakers trying to cut the pie. Now,