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Brokers As Endangered Species: Freaking Out On The Boston-Minneapolis Hypothesis

In the Freakonomics column Endangered Species [NYT] [1] the article talks about the negative image protrayed by the brokerage community (who does the NAR pr?) but makes the case that there should be sympathy toward the brokerage profession for a few reasons:

Brokers did not benefit from the boom as much as sellers and developers – Why? Because there are too many of them. The idea is that when there is a low barrier to entry in a profession, supply responds almost immediately to opportunity. In the research paper Can Free Entry Be Inefficient [pdf] [2] Chang-Tai Hsieh and Enrico Moretti, economists at the University of California looked at real estate brokers incomes in 282 metro areas to relate price to commissions.

The Freakonomics columnists extracted Boston and Minneapolis as most illustrative of the research results since the populations were about the same size and both have similar demographics. The result: Housing in Boston is twice as much as Minneapolis but the brokers in Minneapolis sold twice the number of houses as in Boston resulting in about the same income. In fact, the NAR reports that median incomes of all brokers actually fell from 2002 to 2004, during the housing boom.

They contend that the real estate brokerage profession is an endangered species. As evidence, they look at the travel agency business before and after the internet. While I agree in principle, I think that this is an overly simplistic comparison simply due to the importance of the dollar amount of the transaction. Booking a trip to Hawaii does not take the same weight in someone’s life as ownership of their home. While its clear there are too many real estate brokers (just ask any veteran brokers that question), there will always be a niche for full service brokerage firms. However, like network television and American cars, their market share will likely decline unless they change strategies or partner with other service firms.

The pace of new service offerings (in fact you could say that we are going through a real estate tech boom right now) are likely to slow if the economy cools and there is less funding available. But these technologies and the changes they have initiated, are here to stay.

These aren’t the only points laid out by the Frekonomics authors – its worth the read.