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About Freakonomics
Stephen J. Dubner is an author and journalist who lives in New York City.
Steven D. Levitt is a professor of economics at the University of Chicago.
Their book Freakonomics has sold 3 million copies worldwide. This blog, begun in 2005, is meant to keep the conversation going. Recurring guest bloggers include Ian Ayres, Jessica Hagy, Daniel Hamermesh, Sudhir Venkatesh, and Justin Wolfers.
Annika Mengisen is the site editor.
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Freakonomics: A Rogue Economist Explores the Hidden Side of Everything
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November 18
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Would a Market for Organs Punish the Poor More Than They Are Already Punished?
Below is a fascinating statement issued by Physicians for a National Health Program, “a membership organization of over 15,000 physicians [which] supports a single-payer national health insurance program.”
You should read the whole thing but, in a nutshell: The people who receive donated organs in the U.S. nearly always have health insurance, while a significant fraction [...]
November 18
(19 comments)
Larry Summers for Treasury Secretary
Larry Summers
There is a lot of speculation about whether President-elect Barack Obama will choose Larry Summers to be his Treasury Secretary. But some people are openly opposing Summers’s appointment, in part because of controversial comments he made about women in science.
It’s a close question, but I’m hoping that Obama appoints Summers. I have three reasons:
First, [...]
November 18
(7 comments)
Boston Legal Way Classier Than Beauty and the Geek?
Thanks to all the readers who wrote in last week with news that Freakonomics was mentioned on the TV show Boston Legal.
It happened at the end, when the William Shatner character and the James Spader character were having their ritual end-of-the-episode scotch, musing about law and the world.
Alan Shore (Spader): Well, it’s possible [...]
November 18
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Is France Due for Riots?
Photo: cicilief
In my last post, I offered several reasons why the urban riot has gone out of style in the U.S.
However, France will not be spared the sword. I predict that the world will watch French cities light up in youth unrest in 2009, 2010 at the latest … 2011 for sure.
I have been [...]
November 18
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A Beet Paradox
Photo: Darwin Bell
Beets are the new broccoli. Or at least they will be after Obama takes office on January 20, as the president-elect recently revealed his distaste for this vitamin-laden root vegetable. And Obama is not alone: Even as beet salads have become popular in trendy eateries, most American kids I know also reject the [...]
Stuff We Weren't Paid to Endorse
1. Go to Hulu.com. 2. Choose Arrested Development. 3. Start with Season 1 and then watch every episode of all three seasons. 4. You can thank me later. (SJD)
I can scarcely tell a scarlet tanager from Scarlett O’Hara, but The Life of the Skies had me transfixed from the first page. Jonathan Rosen -- who happens to be a friend of mine -- writes with astounding insight, wit, and compassion. The story he tells here is the best kind of odyssey, an outward journey that ends up highlighting the beauty and daring that live inside of us. Here's a Times review of the book, and here's an earlier blog post about the book and the power of suggestion. (SJD)
Even if you don’t have a son fighting in Iraq, even if you don’t read poetry, even if you think you are immune to the power of a mother’s lament – pick up The Warrior and read it right away. Fran Richey has written some of the most powerful stories I’ve ever encountered. It is obvious that her life was changed by living these poems; yours may well be changed by reading them. (SJD)
From the Opinion Blogs
Necessary Steps
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In his last walk of the series, the author manages to avoid stepping out into thin air.
Abstract City
New York Cheat Sheets
All New Yorkers develop tricks that allow them to stay ahead of the pack in daily life. Here I offer some of mine in a couple of handy charts.
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I’ve posted about this several times, exploring:
· The agency-risk problem (Who works for whom?
— David A. Smith· The threat of by-owner-via-internet market emergence (Brokerage’s baby bang,
· The auto-valuation (The valbots are coming:
Additionally, I’d particularly like to call your attention to a demographic-economic-political hypothesis:
Are Democrats zoning themselves to a structural electoral minority?
The reasoning behind this is in Blue in the states? .
The posts may be found at http://www.affordablehousinginstitute.org/blogs/us/index.html, for the following dates:
— David A. Smith3/1 (Blue in the States)
2/28 (Auto-valuation)
1/18 (Brokerage’s baby bang)
2/20/05 (Who works for whom?)
Mr. Smith -
1) Your link with a superfluous comma appended goes 404. You won’t get a lot of readers that way.
2) Correlation is not causation. Correlation is not causation. Correlation is not causation. Do I make myself clear?
— wcwSomehow I get the feeling that I may be stepping out in front of an 18 wheeler on a foggy night but I think a pretty much one sided slam on my industry deserves comment.
I am one of the many that entered real estate during the boom of the last few years. It is unfortunate that the barriers to entry are so low that just about anyone can enter the industry. Those that fail (and are bound to) give the rest of us who work (by choice) six or seven days a week a bad name. I entered real estate armed with an MBA, previous construction and management experience, studied which firm (Prudential Northwest Properties) was the best fit for me and went at it full time.
A Realtor that averages 3.3 transactions a year is not a happy Realtor in most markets! We don’t get paid until the transaction closes so it is entirely possible to invest the 40 hrs cited in the article or realistically even more time, and not get a dime in return for the time or expense of the work involved. A good Realtor can hold a doomed transaction together (providing it should be saved) but there are times when deals just die.
Our industry is evolving. We work for a full service brokerage but are not running scared with the likes of Zillow or other market entrants. Consumers have a choice and they should make informed choices based on their needs. We’re all free to defend ourselves in court and pull out our own rotted teeth. It may work for some but not everyone.
We pride ourselves on personal professional service. That’s something that the discount brokers and websites cannot or chose not to provide. There’s nothing wrong with that. You can get clothes at Target or Nordstrom and people have distinct reasons for choosing which one to patronize.
Charles Turner
— cturnerhttp://www.PortlandRealEstateBlog.com
Showing that free entry is not economically efficient in real estate reminds me of the classic tourist-trap model of imperfect information where free entry ate up profits by increasing the relative share of the fixed cost and thus increasing the dead-weight loss. I suppose we should just generalize to free entry being inefficient whenever competition is not value-based (price- or quality-based).
— C64KI just finished your article entitled “Endangered Species”. “Freakonomics” is a great name for that section, however, perhaps “Morononics” would be a more appropriate title. I assume you must be kidding or perhaps the meth problem that I read about sweeping the nation has landed on your stoop, or maybe you have been making up articles not unlike other New York Times “journalists” have been know to do, or maybe just trying to create controversy. In all likelyhood it’s a combination of all those things.
Anyway, I think your article has quite a few holes in it. In all candor I would easily be able to challenge (probably quite successfully) almost every sentence in your article and would be happy to do so at any time given a few minutes of your valuable time, given you are so generous assuming my time is worth $100 an hour, it’s safe to say your time is worth that or less.. In fact, I can even pay to for your time, it would make me feel better.
- It does costs much much more to sell and market a $800k house vs. a $200k one, we have listings that have cost $15,000 to advertise and market, which makes the $4,750 that you seem to think is fair not work out too well. A $10,000 loss seems steep for me, perhaps that works for your line of work?
- 40 hours of work, go ahead and double or triple that. Don’t forget costs real world costs like rent, copiers, insurance, our small office of 6 costs about $20,000 a month to keep open.
- I know you say “most” however, I would say 99% of my time is spent working with my clients and listings, I wish I have this fictitious time that you claim is 95% percent of my time to “chase” clients. Our clients come from referrals, which come from happy clients, happy clients come from working hard, doing a good job and earning respect!
- With the 30-50 pages of paperwork that ends up in the state of California real estate (where I work) I don’t think most attorneys, let alone home Buyers or Sellers could fill out properly or even understand the implications of what they are signing. I can site numerous examples of attorneys that needed our help understanding the contracts. Then you add the liability and law suits that could and work result of people trying to do this transactions on their own. Sure there are online websites for attorneys, but I am pretty sure the Internet hasn’t put them out of business. Why do you think this is, it would be curious to hear? The same is true for doctors and just about any other profession or service business.
- I can do most things myself, however it doesn’t make sense for me to be an expert in everything and I don’t have the time to do so. This is why there are different occupations, let the experts do what they do best. There is a reason for different fields, we can’t all do everything.
- Most FSBO’s list their house for too little or too much, why? Most transactions I see with FSBO’s have litigation and a plethora of problems, why?
- Negotiations and closing is where the real expertise comes in, a monkey or even my dog could show a home (if I could just get my canine friend to drive better), it’s the rest that’s the hard part. I would be happy to show you my files, most are two- three inches thick of paperwork. Oh, $250 for negotiations and closing, let’s see, that’s 40 hours or more right there, that comes out to $6.25 an hour, tough to spend $10,000 a month on advertising listings on $6.25 an hour.
- Why don’t you put all your books online for free, better yet why don’t I just scan them and put them online for everybody, oh wait, are you trying to sell them, that seems quite greedy of you. Are you a hustler or a shark or maybe just an unimaginative opportunist trying to pocket money by creating controversy?
I do apologize for this being so poorly written, I confess I am not a journalist or author, just a hardworking real estate agent that provides a service that people value.
— jeremyFreakonimics Takes on Real Estate
The authors of Freakonomics had a story published in the New York Times Magazine on Sunday. Basicly a shot at all Realtors. Lumping us all into one incompitant and overpaid lot. I have to take issue with it as many
— Portland Real Estate BlogJeremy, I’m not a realtor, but I’m married to one. For long enough to know that some of what you say doesn’t hold true.
Yes, you might spend $15K of advertising for a single listing. But since only about 2% of people who respond to an ad actual purchase the house (based on numbers from Prudential) , the real reason for advertising is for the realtor to gain clientele. If not, then spending $15K on advertising for a $40K commission (which is actually $20K when split) one time in fifty is not economically wise.
The ‘real-world’ costs of $20K per month aren’t so real for most brokers. If you have an office of 6, then you’ve been successful enough to create your own staff. Most brokers don’t get to that point (certainly not at 3.3 sales per year…or even 6.6). Certainly my wife hasn’t. So the monthly costs aren’t close to that.
The same comment applies to your “99% of my time is spent with clients and listings”. You have been successful enough to get enough business from referrals. Neither my wife, nor most of the people that she knows, can get sufficient business from referrals to not spend most of their time trolling for clients. In fact, in the market that we’re in (a wealthy suburb of around 150,000 near a major metropolitan area in Canada), there are around 700-800 agents. I would suggest the fewer than 20-30 survive just on their referrals.
I will absolutely grant that the major value offered by a realtor is their knowledge of the legalities surrounding a home purchase. That, and their negotiating skills, is the reason for engaging an agent. And if they, like attorneys, doctors and other service professionals, charged by the hour, I can guarantee that the wouldn’t earn the equivalent of 2.5% of the purchase price for most homes.
Finally, I’m still trying to figure out the meaning behind your ‘put all your books online for free’ comment. Are you suggesting that authors are hustlers or sharks? Are you suggesting that, like the National Association of Realtors, authors will sue people to keep the information that the authors have inaccessible? Somehow I don’t think you want to be comparing yourself to authors who are willing to part with their insider knowledge for a one-time fee. The comparison won’t be that flattering.
— BruceJohnsonAgency will save our business! My name is Martin; I sell real estate in Boulder, CO, and I manage 25 agents. I came to real estate after earning an MBA in finance 4 years ago.
Agency versus Brokerage may be the saving grace for our business. Stock traders, travel agents, and even mortgage brokers, all got beat up by the internet and all saw their numbers and their margins shrink as their businesses became more transparent. I’ve never considered any of the people listed above as advocates for my interest, but as sales people selling commodities and trying to fit their fee into the deal. The emotion involved in buying or selling a home, the infrequency of the experience, the variability of condition and location of every home all tend toward having someone involved to participate in the process. Colorado and probably many other places have moved to an agency model where old-line transaction brokerage is what has become the endangered species. As an agent on the buyer side or the seller side, I have a fiduciary responsibility to prosecute the interests and goals of my clients. As an agent I use the data and all of my sales and negotiating skills to my client’s best advantage. Just because lexis-nexis lets us look up legal precedent doesn’t mean we’re all equipped to research our own cases, defend ourselves in court, and negotiate our sentences. Similarly, just because Zillow says a property is worth “X” based on their black box algorithm, and just because graig’s list has some house listings, doesn’t mean every regular Joe should be negotiating the purchase of his next home.
If you want to succeed in this business, become a fierce advocate for your clients, give them all the data they can handle, use your sales, negotiating, and analysis skills to their advantage.
Finally, before Freakonomics came out Wired Magazine (May ‘05) ran an article culled from the real estate chapter of the book. I copy the article and give it to every one of my clients. It’s a great way to bury any broker you might be competing with for the listing.
— Martin AndersonUsing Prof. Levitt’s article about agents receiving more for their homes than the homes they sell for others is a fantastic way to attract and reassure clients,(you see, WE’RE NOT LIKE THIS) and I also provided all the agents I work with copies of Levitt’s findings.
I have my doubts that homes sold twice in a 3 year period eliminates all investment purchases, though, and believe it probably tends to eliminate fixer uppers bought for investment purposes. If an agent has superior knowledge of a given market, then he doesn’t necessarily have to buy a house that needs work, he can more clearly see an underpriced home that’s underpriced for other reasons.
Additionally, I’m skeptical of how well the variables could be held constant by using the written descriptions of various houses, because my anecdotal experience tells me that those descriptions and reality vary, sometimes wildly.
Finally, “pushing someone to take the first decent offer that comes along” is fiction, not reality, regardless of what happened with A. or K. or whomever the author is friends with. In a market as strong as the current one, it would be absolutely insane to do that, because the negative word of mouth advertising would be atrocious.(I wanted 200K for my house, but my realtor talked me into settling for 190K, which, incidentally, was my first offer.)Of course that doesn’t disprove the 3.7% price differential,it just suggests that the selling tactics are more subtle.
Professor Levitt’s prediction about agents becoming extinct or nearly extinct is very interesting, although it was comforting to see that he thinks some full service brokers will thrive. I guess we’ll see.
— KDWhile there is only so much an author can do when writing for a newspaper to include every pertinent detail, I find a shocking lack of balance in the referenced article.
It seems intentional to me.
Of the many examples is the cite on the menu brokerage wherein the broker offers to list the property on the MLS for $750.
What was not disclosed in the writing was the discussion on the commission offered to tbe Buyer’s Agency. I am not against any brokerage using a flat listing fee. I do find fault with deceit in failing to mention that the seller is then asked how much additional they will pay the Buyer’s Agency, as shown on the MLS.
The referenced article by Freakonomics is deceitful.
They have lost all of my confidence. The problem is, a good part of the public is hungry for the disillusionment offered by the Freakonomics MAGIC PILL of useless information. Thes same people belly up to the growing hog trough of MAGIC PILLS of bad information being facilitated by the net.
— REsourceA much cheaper way of selling your home would be to just spend 250-350 (depending on where you live) dollars getting it appraised and then 750 (ish) more to get it listed.
If you want to attract more buyers… just drop the price of the home by a little bit.
There are other fees associated with selling your home (title transfer and whatnot), but you can sell your own home far better than a real estate agent could.
— penxvI do find fault with deceit in failing to mention that the seller is then asked how much additional they will pay the Buyer’s Agency, as shown on the MLS.
Could you please explain this again? I don’t understand how you got from the commission for the home buyer’s agent to a growing hog trough.
— KuzYour right, my numbers do not hold true for everyone, but it is true for me and my situation. The costs of doing business are high in this area. Given the costs to start a buiness there is no “FREE ENTRY” in my world.
As far as the book part, I was merely trying to show that everyone needs to make an income and we can’t work for free, authors sell their books just as we sell our services. Authors could choose to just post their prose online, but it probably wouldn’t be economically feasble. I enjoy reading books and respect authors very much. However, I don’t like being degrated by an article that I don’t believe to be true or accurate, that makes gross generalzations about over one million people in this country that make their living selling homes.
It is my job to be an expert in my field, to do that I need to have a good understanding of finance, tax codes, 1031 exchanges, building codes and practices, architecture, design, contract law etc. If it were that easy to be successfull in this field more people would be doing it, making more money and $50k a year and selling more than 3.3 homes a year.
— jeremyDear Kuz:
The menu-style brokerages that I am aware of require, in addition to the menu prices, a seller-stated commission amount to be offered to the Buyer’s Agency through the MLS. Most menu style agencies are up-front about the Buyer’s Agency Commission (BAC). For example….
“I’ll list your house on the MLS for $300. I’ll show the house for $50 per hour, and I’ll help negotiate each offer for a flat fee of $200.” Then, the brokerage asks the seller, “How much do you agree to pay the Buyer’s Agency?” And, “We will include that number on the Listing Agreement and on the MLS.”
In the above example, the seller must decide how much to offer the Buyer’s Agency. If the norm in that area is 2.8%, then offering any less makes the property non-competative. Offering more makes the property more competative. Offering zero, or anything less than the area norm, defeats the purpose of listing on the MLS, which is to expose the property to more prospects. Buyer’s Agents will not show a home that will not pay them.
The said article is deceitful because it does not even mention this “little detail.”
There are many variations on the theme of discount brokerages, from actual licensed agencies offering decent discount packages, to non-licensed assistance-style businesses that help with yard signs and flyers (but are blocked by law from anything that smacks of practiing real estate, which requires a state license.)
There are problems that arise from such practices which require a knowledgable consumer; which most consumers are not.
1) The consumer employing the discount broker may not make the right choices from the menu of services, diminishing the benefit of the savings.
2) The unlicensed assitance provider may in error start “practicing agency” giving advice that they are unlicensed and unqualified to give. The customer, believing they are working with an expert, follows bad advice, diminishing the benefit of the savings.
The last example just occured in El Paso, TX, where an assitance business provided
signs and flyers, and valuation advice. The home didn’t sell for a few weeks and the assistance provider offered to buy the property. The assitance provider then listed the property with a Realtor (to get the broad exposure) at a price $35,000 over the purchase price, and sold the property within 6 weeks. The old owner got wind of this, sued, and the assistance business was found to be unlawfully practicing unlicensed real estate.
Most consumers, savvy people or not, could easily fall into these problems simply because they do not know all they need to know to make an informed decision.
Just going to a Realtor does not guaranty
that you will not have problems; you must do due dilligence and find a competent agent.
I hope that this helps.
— REsourceJeremy, someone who admits to being such a bad writer should not measure the value of his work by the amount of paperwork he produces.
The anonymous rantings posted on this page likely do more to discredit real estate agents than anything Dubner or Levitt have written. Surely most people in this business have websites. Where are all the links that show us how to get in touch with you? Charles and Martin, the two commentors who identify themselves, make easily the most coherent defenses of the industry. These are people I could see myself trusting enough to sell my home.
REsource, show some of your clients or prospective clients your post about “MAGIC PILLS.” It’s the one where you describe the studies by one of America’s top economists as “useless information.” That would be good for business.
angryman
— angryman“Buyer’s Agents will not show a home that will not pay them.”
Yet another reason why many people consider the entire real estate agent system a crock. The agent representing the seller has incentive to do a worse job for the seller. The agent representing the buyer has incentive to do a worse job for the buyer. Percentage of price commissions are seriously flawed. It’s a compelling argument for just paying real estate agents a flat or hourly fee.
— Alan De Smet“Buyer’s Agents will not show a home that will not pay them.”
I bought my home with the help of a buyer’s agent, and had an excellent experience. The contract I signed, which I suspect is standard among buyer’s agencies, required me to provide a 3% commission to my agent. If the home I purchased had been listed with a smaller commission, it would’ve been my problem to make up the difference. And if my agent found a ‘rebate’ or higher-commission situation, the excess would be refunded to me.
In my situation (relatively young, first-time home buyer), I feel like I got great value for the money I invested. A more experienced buyer, who knew the local market and the legalese, might be better off with an hourly fee.
“Why don’t you put all your books online for free, better yet why don’t I just scan them and put them online for everybody, oh wait, are you trying to sell them, that seems quite greedy of you.”
Um… I’m reading this blog for free, and I read the referenced article for free also. I’m guessing that this free content is intended to provide ‘eyeballs’ and readers who can later be turned into book sales. It may not be a business model that makes sense to jeremy, but it’s worked for plenty of other companies before.
— ScottWIt should be noted that not showing a house based on the offered buyer’s commission alone is against the law! It is the real estate agents that ignore this that give the rest of us a bad name. Smart buyer’s agents, like ScottW’s, have a way of getting paid if the commission is lower than desired.
We used to be able to say that “the seller pays commissions.” That isn’t always true in today’s market. The industry is evolving. Evolve or become extinct.
Charles Turner
— cturnerhttp://www.PortlandRealEstateBlog.com
Angryman, I didn’t write one word about a “magic pill”.
— jeremyin order…
Dear angryman: I don’t know if these are “top economists” or not. I only know that they are drumming up money for themselves by publishing useless information.
Dear Alan De Smet: I say “Alan, please pick me up at my hotel, spend the day driving me around showing homes, buy me lunch, spend a few hours getting ready for our little outing, and, by the way, don’t expect to be paid for your services.” Then, “Repeat the process for a few days until I decide I’m not moving to your town or buying from a FSBO.” Yes, Alan, agents expect to be paid for their efforts and advice, don’t you expect the same for yourself in your work? Flat fee? Fine with me.
Dear cturner: Show me the licensing law that states a licensee must show a property even if it offers zero commission.
I’ll save you the time, there is no such law. There is a law (in most states) that defines fiduciary responsibility to the client if used in the agent-client relationship, but I do not belive that the law, or any court in the world, would hold an agent neglegent for not showing property for which the agent will either not be paid or will be paid far below the norms. In this country, the law cannot force anyone to work for nothing. Maybe you live somewhere else? The “bad name” you refer to Mr. Turner may just be “dope”
if you spend your time showing homes for nothing.
Dear jeremy: angryman was refering to me.
I wish you all peace.
— REsourceFiducaury responsibilty to your client implies that you show them what is best for them, not for you.
Guess “Law” might be overstepping bounds a little, contact your attorney for clarification.
We are Realtors (trademarked) not just real estate agents, thus we adhear to the Realtor Code of Ethics. You have to go as far as the first Article to see what I am talking about. No mention of your best interests:
Article 1
When representing a buyer, seller, landlord, tenant, or other client as an agent, REALTORS® pledge themselves to protect and promote the interests of their client. This obligation to the client is primary, but it does not relieve REALTORS® of their obligation to treat all parties honestly. When serving a buyer, seller, landlord, tenant or other party in a non-agency capacity, REALTORS® remain obligated to treat all parties honestly. (Amended 1/01)
This is our law.
In fact, I belive this is one of the reasons our industry is being investigated by Dept. of Justice- because agents were boycotting low commission listings.
This whole thread also underscores the client’s need to know if they are working with a Realtor® or a real estate agent. Their is a difference.
Charles Turner
— cturnerhttp://www.PortlandRealEstateBlog.com
Sorry about the switch to bold in my last comment (and misspelling fiduciary). Can’t fix it now.
A quick word on Realtor® versus real estate agent: in Portland, our MLS and local board require us to be members of the National Association of Realtors so all of us involved in real estate are Realtors and real estate agents.
This is not the case everywhere. A Realtor is an agent but an agent does not have to be a Realtor.
— cturnerDear cturner:
“…promote the interests of the client.”
To me this means that I am allowed to earn enough to eat so that I may live to serve my clients.
Excuse my directness, but I think that you are defending an indefensable position. Neither the law, nor the Realtor(r) Code of Ethics requires a Realtor to work for nothing.
Portland is the same as everywhere else. A licensee may chose not to join the trade association called NAR, but then they do not have access to Realtor(r) Association features such as the MLS, code of ethics, and training.
— REsourceGet a Buyer/Broker agreement and you know how you are getting paid. It would be plain stupid to work for nothing.
Money.com:
“While boycotting the listings of discounters is generally considered an antitrust violation — if undisclosed, it’s also a breach of fiduciary duty to clients — industry insiders are well aware that boycotting goes on, even if they claim not to condone it.”
http://money.cnn.com/2005/04/22/real_estate/justice_realestate/
— cturner