NAR Responds to Erroneous Statements Made on Today Show(June 17, 2005) — On June 16, guests on the Today Show made several erroneous statements about the real estate transaction process and real estate agents. In response, the NATIONAL ASSOCIATION OF REALTORS® wrote a letter to the Today Show’s executive producer, Tom Toucher, to set the record straight.
The full text of NAR’s response follows, and is available in PDF.
June 16, 2005
Mr. Tom Toucher
Executive Producer, Today Show
NBC News
30 Rockefeller Plaza, Suite 374E
New York, NY 10112-0002
Dear Mr. Toucher:
On the June 16th Today Show, Professors Dubner and Levitt reached some conclusions that are based on false assumptions about the real estate industry.
Speaking of erroneous, Professor Dubner will be glad to hear about his new title. His alma mater did recently ask him to give the commencement address next year. Maybe that confused the letter writer.
They assume that real estate sales are a one-time transaction in which real estate agents don’t have to go the extra mile. That’s simply not the case. Most clients are obtained through referrals and many buyers will hire the same Realtor for repeat business. Home transactions are not in fact a one-time affair. People move once every seven years on average, and referrals and repeat business are an important source of business for real estate agents. It’s in an agent’s economic self-interest to look beyond the immediate profit to a long-term relationship.
We don’t assume anything about one-time transactions. What we did was look at 100,000 real estate transactions, and the data say that realtors get 3-4% more for their own houses and leave their own houses on the market 10% longer. This suggests to us that at least some agents do not share the views of the NAR that it is in their own self interest to look beyond immediate profit opportunities.
They also said that agents often advise sellers to accept an early, unnecessarily low offer to close the sale quickly so the agent can move on to other properties, but that agents tend to hold out for better prices when selling their own property. However, in the case of the average consumer transaction, it’s frequently to the advantage of the consumer to make a transaction in a timely manner, due to family and personal factors. It is a fact that price concessions often become deeper the longer a home stays on the market. Sellers needing to move may have to make a price concession with each passing week. In the practical world, if agents were trying to make a higher commission, seems to me they’d leave the property on the market longer to get the higher price Levitt thinks is forthcoming.
This last sentence suggests the letter writer doesn’t understand our basic argument, which is that the agent’s cut is so low that waiting longer is not worthwhile when weighed against the time and cost of marketing a home. And if it is to the advantage of the client to sell in a timely manner due to family and personal factors, why not to the advantage of the real estate agent when selling his or her own home?
Professor Levitt may have misunderstood the real reasons why real estate agent-owned properties - a very tiny portion of the home sales market - tend to stay on the market for a longer period than owner-occupants’ properties. It is a common acceptance that a majority of homes owned by real estate agents are second or investor homes. With investor properties, the seller can usually wait for the best price and not worry about factors such as job transfers or school year timing. In that kind of sale, the type of home, not the status of the owners, is driving the results.
It is interesting that the National Association of Realtors would write this letter without closely reading the academic research first, in which we clearly state that we eliminate from our sample any home that sells twice in any three year period, precisely to avoid investor properties.
Professor Levitt overlooks the obligation of real estate agents to exercise due diligence on behalf of clients. Doing due diligence is an agent’s legal obligation, as well as a moral and professional one. In fact, the National Association of Realtors was one of the first trade associations to adopt a code of ethics. NAR members are required to receive training in our Code of Ethics and review this subject matter on a periodic basis. A major emphasis in this Code is the obligation of due diligence which the agent owes to clients.
Seems to me if real estate agents were so honest, there would be no need for a code of ethics, training in the code, and periodic reviews. And let’s not forget that sumo wrestling has thousands of years of honor bound ritual going for it, but that hasn’t stopped cheating there either.
Professor Levitt’s rush to endorse reduced service and discounted sales models overlooks the reason sales by full-service brokers remain so popular, an omission that misleads your viewers There are a large number of reduced service and reduced fee discount sales approaches, and it is a fact that most are soon replaced or discontinued, due to flaws in their business model. In a market economy, a better business model survives over the long run. If the services provided by real estate professionals are not valuable, then the demand for them would surely diminish over time. The fact that owner-facilitated and limited, flat-fee sales cannot gain market share is itself a confirmation that agents are providing value-added services.
My “rush?” Who’s rushing? I’ve thought hard about this for roughly five years and personally used flat-fee agents to sell three houses. I use www.chubin.com. they are absolutely fantastic, by the way. If the full-service model is so superior to flat-fee, why the need to write this letter protesting? Clients of flat-fee realtors will be sorely dissapointed and quickly return to the fold.
In light of the importance of these issues to millions of your viewers, we would like to offer the Today Show our chief economist, David Lereah, or our president, Al Mansell, to discuss them.
Sincerely,
Stephen K. Cook
Vice President, Public Affairs
From 1 to 25 of 39 Comments
Wow, angry agents at last. How did I know?
— DomoThe truth hurts.
— MikeExcellent rebuttal. I just started reading the book a few days ago, and even I was able to see through the thin arguments of the NAR.
In reading the book, some things did occur to me regarding real estate agents getting a better price for their homes that have I have not seen addressed.
1) Could the reason the agents get better price be that they know their own houses better, particularly the strengths and more details about the house and the neighborhood?
2) Could they just take a little more care taking the picture of the house, maybe waiting for the best lighting, trimming the hedges, etc.?
3) Points #1 and #2 don’t explain the extra 10 days the agents house spend on the market (which is assumed to be the source of the 3-4% price advantage). Could the reason for the delay be that during prime house-touring hours, the agents are busy working and showing their client’s houses. Thus, the agents have less time to show their own houses?
I don’t se where the public data would cover this (besides looking at all the photos and judging them for quality). For point #3, you might have to check how many other houses an agent sold while their own house was on the market, relative to when it was not.
Just curious.
— David DianoI say go back on the Today Show with their “chief economist” and give them the drubbing they deserve.
— CrazyThe evidence you find that realtors do better for themselves than for their clients is not evidence that commission based realtors are not worth hiring. The comparison has to be whether the average homeowner can do better on the flat fee system than on the commission system. That you did better under the flat fee system also is not very strong evidence since you are not the average homeowner.
— Jonathan SchwartzSnicker.
Well, this is totally expected. . .you just caused many, many consumers to pause and think and say “well. . .really. . .maybe we could use a flat fee realtor”.
They’ve got to come back with SOMETHING. I just wish they’d taken more time and effort with it, because this letter is indignant but doesn’t have any arguments of substance to refute the basic argument.
Congrats on riling up the hornet’s nest with questions and concerns they (apparently) can’t answer!
— AnonymousTo Jonathan Schwartz,
You are absolutely right. Real estate agents know something and it is valuable to consumers. Our message is mostly about being aware that they have different incentives than their clients.
I’m not even sure I did better myself using a flat-fee agent. It is always incredibly hard to tell in real-estate transactions how well you did…you don’t get to see the counterfactual in which you took the other course, e.g. hiring a full-service agent.
— Steven D. LevittStephen K. Cook
Vice President, Public Affairs
What is your Process for selling a house from beginning to end (please provide detailed end-to-end-flowchart)? What Method do you use to improve this process?
Unfortunately most agents work off commission that leads them to budget their money month to month.
Numerical goals are expected by each agent to make money and keep their jobs. What Method determines the goals? Do they put the agent at a disadvantage so that she/he must pass on distorted facts to the home buyer (customer)?
Just this pass week I had an agent provide me an assessment of my home. He showed stats for six homes in my area as an example to how he came up with the Range and Average. The highest being $290,000 and the lowest $205,000. I asked him for the “Median” price. He said, “I take the six figures add them up and divide by six.” No, I replied, that’s the Mean (average). When you have a wide range between lowest and highest it would help to know the Median, Mode and Mean.
He concentrated on the low end ($220,000) with me; my data (mean, mode, median ->Central Tendency) indicated $235,000.
From the agents view by listing my house on the market at the lower price (more chance to sell) it would only cost him $900 ($13,200 @ 6%) in commission. For me (remember I’m the customer) it would be $15,000, or about the price of the agents commission ($14,100).
Ethics is important and most employees will follow the rules until their livelihood is at stake, especially when its process and goal is numerically driven.
Why not give them a base by which to live month to month? I suppose ethics might have something to do with it since the Owner probably believes the agents will become lazy slackers.
P/S - Re: Loyalty - If you think my agent will remain at the same place for seven years without changing; it’s my perception based on the fact for the past twenty years when I buy/lease a car my salesperson each time has moved on to a new location.
Perhaps Dr. Levitt and Mr. Dubner could find the facts on how often a Realtor changes jobs/locations.
Sincerely,
qualityg
— qualityg saysSeems like the truth hurts! :)
— DaldianusFYI, I am waiting for you to say something about teachers on TV or on your blog. In fact, I can hardly wait, which is partly why I check back so often. Go ahead, make my day. ;-)
— Princess LeiaSeems to me if real estate agents were so honest, there would be no need for a code of ethics, training in the code, and periodic reviews. This is an unworthy cheap shot. Ethics codes and training — and many businesses and professions have them, more all the time — are certainly not magic. But I have trouble with counting their existence against the group in question, whether the rules are entirely self-generated or government mandated.
— Ken D.Steven - a friend recommended your book to me the week it came out. As the president of a real estate advertising company (discount/flat-fee), I read the chapter about real estate agents and the KKK with great intrigue.
Your findings are marvelous, and correct. Many people have known for a long time, intuitively, what you just proved with hard numbers.
I’m borderline ecstatic about seeing more and more people, like you, rocking the boat and questioning the status quo of this industry.
And in retort to the NAR’s comment that flat-fee models are flawed:
The truth is that most flat-fee models aren’t flawed. Most traditional real estate agents will black-ball / boycott anyone who tries anything that will jeopardize the high commissions they’ve fallen so in love with. They won’t show the discount company’s listings, and they’ll do everything in their power to sink the competing company or individual. This is illegal, especially when coordinated on a large scale. That would explain why the Dept. of Justice is investigating NAR for anti-trust activities.
Not only that, but when you have a political lobby as strong as the NAR (1+ million members strong), you can (and do) get laws made to protect your interests. We see this being accomplished in states around the country as we speak - Oklahoma, Texas, and Alabama to name a few.
Then on top of all that, the sheer spending power the NAR has to market and spin the truth is daunting.
All these things combine to make a very hostile environment for competitive real estate models. In a free market economy, the models would actually work. But they have a difficult time surviving in this world with a virtual NAR monopoly.
That said, many discount/flat-fee models ARE working and flourishing - contrary to what NAR would have you believe from their letter. Talk about “false assumptions.” In the south, we call those lies.
I know many of the people and companies that have had to go out of business with their discount model — we’ve been the one to assume ownership, in some cases. And the problem is not the models. It’s the fact that nobody has given mainstram credibility to the concept by questioning the current system, until recently.
Quite honestly, nobody has been able to beat NAR.
Hallelujah, and thank you for your excellent work, Dr. Levitt. The truth will prevail, and it will set people free.
~Michael R. Poythress
— Michael PoythressI was going to make the same comment ken d made.
A code of professional conduct is a good idea regardless of whether you think you are guiding honest or dishonest people. Wouldn’t the economist suggest that a code of conduct that has enforceable policing is a good market signal?
— KJAccording to various media reports, Tom Touchet (not Toucher) hasn’t been executive producer of the Today show since last April.
— AnonymousCrooks.
— Buccaneer 9Must not be convinced of his own arguments, as nary an exclamation point was used.
— Anonymousguys, come on. i LOVE your book, and i am all about being self-congratulatory, but posting your NY TIMES review? i mean are you really surprised they liked it, given the amount of money they’ve made off you, and your publisher? gesh.
— davidDavid - I’m sure Prof. Levitt and Mr. Dubner appreciate you trying to keep them in check, but on the same token, this is a Freakonomics blog and us readers are presumably interested in reading everything and anything that appears in the press about this book. Not everyone subscribes to the NYT and is able to read the reviews in hard-copy format. Thus providing us with the appropriate links is very helpful in staying update on the buzz.
— mhertzI appreciate the thought-out and thorough rebuttal to NAR’s letter. I appreciate that you couldn’t constructively say it in your reply, but I’d like you to know as someone who read the book and understood your arguments, my response to the NAR rep was “you slimy, daft, prick… at least take the time to try and understand the argument that you’re trying to reply to.”
That said, I do think you were off base on at least one remark: the comment that if incentives were aligned properly than a code of ethics wouldn’t be needed.
As you pointed out in your book, ethics can be a powerful “incentive” for influencing behavior. Ethics standards can and should play a role–they’re more “efficient”/effective than a variety of other incentives.
Instead the critique shouldn’t be against the code of ethics, but instead that those ethics should be taken seriously enough to have a system of incentives and checks in place that is congruent with them and supports them.
— Anonymous“Freakonomics: A Rogue Economist Explores The Hidden Side Of Everything has been successfully deleted from your amazon wish list.” Although I planned to buy your book, this posting reveals your true colors as shameless hucksters out for the quick buck. I guess since its not PC to stigmatize & stereotype entire races or religions anymore, why not entire professions and industries? What’s next: ‘lawyers are liars’ and ’sports agents are greedy’? Thank you for putting out garbage like this before I spend my hard-earned money on your book.
— Anonymousthe prior commentor should actually take a moment to read the book, or at least browse the relevant chapter. There’s nothing peculiar, nasty, or stigmatizing toward realtors in it.
The chapter simply points out that realtors have an economic incentive structure that’s somewhat counter ot the interests of the seller and that would lead you to expect them getting suboptimal prices for the houses in the interest of expediency/sales volume. They check that with realty, and sure enough, realtors seem to follow the incentives.
They show a variety of professions where this is the case, where when ethics and incentives pull at opposite directions, there will be a trend toward following the incentives. Realtors are unique or at all demonized in that or any sense.
So prior commentor: if you want to look at an example of making defamatory and nasty remarks without grounding, I’m afraid you have only yourself as an example.
— AnonymousCant email from work, but check this out:
— Anonymoushttp://p2pnet.net/story/5285
Maybe some ideas can be made about music piracy!
To be fair, I think the NAR has a point that some real estate agents work hard to get repeat business. But obviously the data shows that some do not….
personally, I sincerely hope consumers get together and fight for their right to choose. not all real estate agents do this, but taking advantage of the ignorance of others is not a career to be proud of.
— AnonymousI also agree with NAR’s point that agents have an incentive for generating good will from their clients, somewhat for repeat business, and certainly for referrals.
BUT, is there any reason to believe that clients are particularly aware of and hence disgruntled by the sub-optimal prices that their agents are gettings for them? I don’t think so.
Moreover, we see the same situation with car salespeople all the time. While repeat business is an incentive for good customer care, that doesn’t suddenly stop them from following their own bargaining incentives.
“Repeat business” may be a push to help ally agent/client incentives, but it isn’t a trumping one, both intuitively and based on the home price data.
— AnonymousThe NAR’s comments regarding goodwill and repeat business are pedantic at best. They overlook the most obvious factors driving the “sell quickly” motivation. The opportunity cost of passing on a deal and leaving a house on the market for 10 extra days of work for a total potential upside of $150 (using the example from the book) is enormous. There is always a chance that the deal will dissapear and the agent will lose out on any commision whatsoever, and thus the risk of leaving the house on the market for the mere “potential” of repeat business seven years down the road is far too great for the average realtor to stomach.
— JDiddy