Critical on Real Estate Agents

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Critical Thinking|
Portfolio|
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Tiemen Leus|
29-10-2012|

Article information

Article: Market Distortions when Agents are Better Informed: The Value of Information in Real Estate

Authors: Steven D. Levitt & Chad Syverson

Summary of the article

Introduction
Because of specialization, individuals rely heavily on the advice of experts in making decisions. For activities as varied as medical treatment, automobile repair, legal matters, planning for retirement, or selling a home (to name just a few), there are experts with particular skills, knowledge, and experience willing to provide their services. A defining characteristic of transactions involving the hiring of an expert is the informational advantage enjoyed by the expert relative to the client seeking advice. As a result of this private information, expert agents may mislead their clients by exaggerating the costs or difficulty of a solution, providing unneeded services, or otherwise distorting the information to maximize the expert’s own payoff.

This research focuses on the relationship between a real estate agent (broker) and a home seller. The broker generally receives a fraction of the selling price of a house, but simultaneously captures many cost of sales (advertising, home visits, etc.). Leading to the pursuit of different goals of both parties: the brokers benefits from faster selling a house, even though the price is not optimal. This allows clients to quickly accept lower bids, because they don’t know the optimal price.

Research method and data collection
Unlike most experts (e.g. medical specialists), brokers use their expertise not only for their clients. They also sell their own house. When a broker sells his own house, he efforts to get the highest possible prize. In this study are the differences in ´sales price´ and the ´selling time´ examined between a broker who sells his/her own house and when he sells the house of a client. They used a data set of nearly 100.000 home sales, of which roughly 3.300 are agent-owned, they find that, even after controlling for a wide array of house and neighbourhood characteristics that agent-owned homes sell for about 3,7% (or roughly $7.600) more than comparable houses and stay on the market an extra 9,5 days (about 10%) longer.

The data they used, encompass nearly 127.000 home sales in suburban Cook County, Illinois (this county contains the city of Chicago). The source of the data is the Multiple Listing Service of Northern Illinois (MLSNI), the clearinghouse through which realtors in the Chicago metropolitan area notify other realtors (and more recently, the public) of properties for sale. These data cover virtually every house put up for sale in which a seller’s agent is hired, regardless of whether the house is eventually sold. Most of the analysis in the research is focused on homes that actually sell, but they also explored whether listed homes sell as a check on possible selection biases. The data contains extremely detailed information about every house on the market, including addresses, a wide range of housing characteristics, the list price and sale price of the home, a written description of the house’s attributes used by the real estate agent in marketing the house, whether the real estate agent has an ownership interest in the house and the key dates regarding to the home sale (such as when the house goes on the market or the date a contract is signed with a buyer). Their sample is made up of single-family homes that were listed for sale in 34 Cook County suburbs during the period 1992-2002. These suburbs are the 34 largest municipalities in the county in which the majority of properties listed for sale are detached single family homes. Their final sample consisted of 98,038 home sales because they dropped a number of home sales that were not useful for this research (for example: properties that have missing information or are listed twice in the...
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