Steven D. Levitt and Chad Syverson investigate if real estate agents use the information gap between themselves and their clients to exploit clients. Using data from home listings in Illinois suburbs, they find that when an agent sells his own home, it sells for 3.7% more (roughly $ 7,700) and stays on the market for 10 days longer than that agent’s clients. The authors examine three possible scenarios that could change the information gap such as heterogeneity of housing, the internet, and presences of a buyer’s agents.
Although home owners contract real estate agents to help receive the best offer, the agent does not have the same objectives due to the circumstances of the commission. Real estate agents receive about six percent commission, which is split between the buyer’s and seller’s agents. The remaining 3 % is split between the agent and the agency, leaving 1.5% of the sale proceeds to the agent. As sales price of a few thousand dollars makes a difference a 94% difference to the owner, but only a 1.5% difference to the agent. Thus, Levitt and Syverson theorize that agents want to sell quickly and accept lower prices than they would for their own homes.
Levitt and Syverson use data of 98,000 home sales between 1992 and 2002 from the Multiple Listing Service of Northern Illinois. All the sales included were from the 34 largest towns in a suburban area called Cook County. The data includes detailed descriptions about the houses and whether the real estate agent owned the house. In 3.4% of the transactions, or 3,300 homes, real estate agents sold houses they owned.
Levitt and Syverson find that agents sell their own homes for 3.7% more and keep them on the market for 10 days longer. The authors control for a number of variables in a regression that influence house price, such as square footage, neighborhood effects, housing characteristics like fireplaces and key words in the description of the house. Although controlling for these variables lowered the price and market time gap, the findings of a higher selling price and longer time on the market for agents’ homes remained. Agents’ houses were generally newer, had more modern amenities, more square footage and contained better “key words” in the descriptions, such as maple and granite, instead of abstract negatives like quiet, fantastic. These attributes would lead one to think the agent’s houses would sell quicker, because there are more attractive buys, but this is not the case.
Next, three scenarios are examined that could show the agent’s influence on prices: heterogeneity of housing stock, the internet and presence of a buyer’s agent. Looking into how the similarity or differences of houses on one block changed the price gap, the authors required at least three houses for the block and placed the houses into styles. Sale prices were the most different on blocks where houses were the most diverse. The more dissimilar the houses, the more the agent could use his better knowledge to receive a better price. The time on the market parallels the price gap, with almost no time difference for similar houses and the time gap increasing as diversity increases.
The advent of the internet has altered the information gap by making information on housing prices more accessible to buyers and sellers The authors run the same regression on three different periods: 1992-1995, 1996-1999 and 2000-2002. The price gap decreased in each time period, showing that as buyers and sellers gained more knowledge, agents lost their advantage and ability to exploit.
The last variable that could change the information gap is the presence of a buyer’s agent. Running a regression that accounted for whether the buyer had an agent and if the seller was also the realtor. When the buyer had no agent, the 3.7% difference in prices still existed. When the realtor was selling and the buyer had no agent, the selling realtor gained 2% in sale price.
A home is usually the largest piece of equity a person owns. Thus, it is amazing that such an inefficient method arose for selling homes. The goals of the agent and the home owner need to be aligned more closely. However, this seems hard to accomplish because the standard 6% commission rate for both agents and agencies has homeowners cringing. Perhaps evidence of this problem will prompt people to question their agents more. The advent of the internet will aid homeowners in researching a reasonable price range, as Levitt showed in his paper. As the sites on the internet become better at comparing houses and more people use the internet, I suspect the gap in prices will continue to decrease. However, I doubt the real estate agents will become obsolete because they do offer a service people want.