Steven Landsburg points to an economic riddle about real estate commissions:
"In many real estate markets (including the one where I’m currently shopping), the agent’s commission is equal to a fixed percentage of the sale price. (Typically it’s 6%, though this is split evenly between the buyer’s and seller’s agents, each of whom gives a cut to their respective agencies, so either agent’s take-home is more on the order of 2%).
This means that if you sell a million-dollar house, you earn TEN TIMES the commission of your identical twin who sold a hundred-thousand-dollar house, though I doubt very much that you did ten times the work or bore ten times the expense.
Now, plenty of hundred-thousand-dollar houses are being sold, which means that plenty of agents are settling for the relatively dinky commissions. Question: Why are those agents not attempting to steal some of the high-end business by offering to accept a smaller percentage? After all, 1% of a million is still a lot more than 2% of a hundred thousand.
You might say that the agencies collude to restrain them — but what stops a rogue agency from busting the cartel?
So what’s going on? I see something that looks a lot like a competitive labor market where different workers receive substantially different wages for doing pretty much the same thing. Economic theory says that under very general circumstances, that can’t happen. Why is this market different from all other markets?"
Here are some related questions/puzzles:
1. Why is the 6% real estate commission typically fixed, regardless of whether the house sells in the first hour or day after being listed, or is sold only after a year of marketing, advertising, holding numerous open houses, etc.?
2. Why is the 6% real estate commission typically fixed, regardless of whether two agents are involved (one working with the buyer and one representing the seller), or whether a single agent is involved, e.g. selling a home at an open house to buyers who are not represented by a real estate agent, in which case one agent gets to "hog" both sides of the commission?
So I guess the basic question is: In a competitive market, and especially during a slow market like during the last three years, why don't we see more competitive and creative fee arrangements that might include adjustments for: a) the price of the house, b) the time it takes to sell the house, and c) whether one or two agents are involved in the transaction?
Some of the commenters on Steve Landsburg's blog point out that there are typically two agents involved in a transaction, and if the listing agent agrees to a commission below 6%, the agents working with buyers might be reluctant to show those houses. That seems plausible, but I thought I'd add some additional questions, and see what CD readers have to say. Perhaps there are some companies out there with fee arrangements challenging the status quo?
This means that if you sell a million-dollar house, you earn TEN TIMES the commission of your identical twin who sold a hundred-thousand-dollar house, though I doubt very much that you did ten times the work or bore ten times the expense.
Now, plenty of hundred-thousand-dollar houses are being sold, which means that plenty of agents are settling for the relatively dinky commissions. Question: Why are those agents not attempting to steal some of the high-end business by offering to accept a smaller percentage? After all, 1% of a million is still a lot more than 2% of a hundred thousand.
You might say that the agencies collude to restrain them — but what stops a rogue agency from busting the cartel?
So what’s going on? I see something that looks a lot like a competitive labor market where different workers receive substantially different wages for doing pretty much the same thing. Economic theory says that under very general circumstances, that can’t happen. Why is this market different from all other markets?"
Here are some related questions/puzzles:
1. Why is the 6% real estate commission typically fixed, regardless of whether the house sells in the first hour or day after being listed, or is sold only after a year of marketing, advertising, holding numerous open houses, etc.?
2. Why is the 6% real estate commission typically fixed, regardless of whether two agents are involved (one working with the buyer and one representing the seller), or whether a single agent is involved, e.g. selling a home at an open house to buyers who are not represented by a real estate agent, in which case one agent gets to "hog" both sides of the commission?
So I guess the basic question is: In a competitive market, and especially during a slow market like during the last three years, why don't we see more competitive and creative fee arrangements that might include adjustments for: a) the price of the house, b) the time it takes to sell the house, and c) whether one or two agents are involved in the transaction?
Some of the commenters on Steve Landsburg's blog point out that there are typically two agents involved in a transaction, and if the listing agent agrees to a commission below 6%, the agents working with buyers might be reluctant to show those houses. That seems plausible, but I thought I'd add some additional questions, and see what CD readers have to say. Perhaps there are some companies out there with fee arrangements challenging the status quo?
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