Economists have a tendency to overlook data that is difficult to quantify. In the short term, a real estate agent may make more money by rushing a sale, but on a macro level, he does himself a disservice. Real estate agents need to become your friend and engender loyalty so that you'll recommend them and so that you'll use them again when you sell your new house. Every hour spent with a client and every dollar knocked off the final price is an investment in a long-term relationship that has the potential to net many more sales down the road. Protecting that stream of future work is much more important than rushing sales for short-term gain.
We sold a house last year. I had read Freakonomics so I thought I was going to outsmart everybody (which I knew was a stupid to think from the start, of course). Turns out most real estate agents (the ones we talked to at least) weren't even financially literate enough to even understand the concept. At some point I tried to explain to one the Freakonomics theory. He always kept saying 'the more I sell, the more commission' - the concept of 'time value' was completely foreign to him. Maybe he was just playing dumb, I don't know.
Anyway, in my experience, most agents are happy wasting a bunch of time on a sale - having coffee to discuss 'the status' (2 viewings scheduled for next week, the one from last Monday seemed genuine - could have send me a 2 line email. But hey, he could tell funny stories, so I don't mind having coffee); spending 45 minutes on discussing 'the strategy' on how to deal with an offer, ... I never got the impression they cared about a house being a few months longer in their inventory. It filled up their website and office windows, made them big and professional, and as long as their cash flow is OK, anything listed for under a year was OK (much longer than that makes them look weak, of course; also, the market is bad in my area anyway).
I have since reconsidered what I once thought was a plausible argument about real estate agents. Maybe it's sample bias, I don't know, but the ones I dealt with, weren't 'rational actors' in any sense an economist would need them to be to make their models work (and I work with economists and their models a lot).
This is very true - although I think the "non-rational actor" argument needs some thinking through.
The Freakonomics model completely misses the fact that most agents don't often have enough houses to sell for the time spent on each one to be a constraint.
Given that, in many circumstances it really does make sense for the agent to spent an extra few hours working on your house if it will get you another 10K, because they get a small amount of money from that. It's true the marginal gains aren't high, but often they simply have nothing else to do!
Additionally, "working on your house" often means meeting more people who are interested in buying. Very often, some of those people will be looking for an agent to sell their house, so the agent sees that as an advertising opportunity.
> He always kept saying 'the more I sell, the more commission' - the concept of 'time value' was completely foreign to him. Maybe he was just playing dumb, I don't know.
He probably wasn't. That having been said, the inability to understand abstract concepts like the time value of money and being a kickass salesman are not mutually exclusive. Some of the best agents I've met aren't what I'd call bright, but they're quite successful and have incredible sales skills that smarter agents lack.
> Anyway, in my experience, most agents are happy wasting a bunch of time on a sale - having coffee to discuss 'the status' (2 viewings scheduled for next week, the one from last Monday seemed genuine - could have send me a 2 line email.
This isn't remotely irrational -- you just don't understand his purpose. What he's doing by spending 45 minutes chatting with you, in leu of a 2 line email, is building a relationship with you and giving the transaction a more personal touch. These are the kind of soft sales skills that are critical to being a successful agent, since despite the existence of sites like Trulia or Zillow, the majority of your clients will come not from online advertising but from word of mouth. So sure, a 2 line email might have sufficed, but a 45 minute chat where he tells you funny stories is going to leave you feeling a lot better cared for (because, well, you are), and leaves you more inclined to recommend him to your friends in the future.
Plus, you said it's a bad market. It's probably not the case that he has clients banging down his doors, so he needs to make sure that his existing clients are well cared for to ensure future business.
Sure, he was building a relationship, which reinforces the point that he doesn't care about saving a few minutes on a sale, and that he'd rather go out of his way to talk to me/us more than necessary, instead of trying to move his 'dollars per minute' needle up.
Whether that's 'irrational' depends on your definition of 'irrational' - it surely is irrational from the point of view of pretty much every economic model out there.
You can't apply engineer logic here, which seems like what you're trying to do. It's a sales and customer service business. By spending extra time with you his short term dollars per minute needle might be less than it could be (though this is debatable; he might just legitimately have the spare time, since you said it's a slow market), but his long term dollars per minute needle with do better because of the high level of service he's giving you.
To use a tech analogy, this is like suggesting that Zappos customer service ought to be replace by a knowledge base and automatic responders, since spending all that time and money to have human representatives to make customers happy is inefficient and irrational when it could be done cheaper.
I think you're both saying the same thing -- he's just talking about how economist's models don't include this type of thought in their definitions of rationality because it's very difficult to quantify. Instead, they simplify down to money over time and pretend like that's the only valid formula for defining all behaviors.
This excludes more abstract, intangible elements of the exchange that are likely to lead to increased income down the road, but it also excludes behaviors that aren't geared toward maximizes income. It's totally possible that a person is behaving rationally with a different, more abstract goal in mind, prioritized above money over time, like building good friendships or having a flexible schedule. In fact, people make those kinds of tradeoffs where they explicitly prioritize an intangible, subjective quality of life measurement over raw income all the time, but economic models don't account for this.
If I remember correctly the meat of the argument in the book wasn't a just so story about consciously maximized incentives but an empirical look at time on the market for houses that agents sold on behalf of clients versus houses sold on their own behalf.
I haven't read Freakonomics in several years, but was that essay stating that real estate agents were acting dubiously by knowingly taking advantage of the misaligned incentives, or was it just stating that there were misaligned incentives?
I don't think too many agents are overly crass in their taking advantage of sellers by pushing lowball offers. I think most homeowners can develop a general idea of what their house is worth if they just do basic comparisons, and if they have a mortgage or other obligations they must pay out of the home sale, can develop a halfway decent bottom-line figure. Also, when homeowners meet with an agent, one of the first things they discuss after seeing the property is listing price. The agent is incentivized to provide a non-lowball listing price because the owner has yet to sign a contract at that point and could still be soliciting other agents.
I think the real leveraging of the agents commission structure comes on more borderline decisions. For a $300,000 house, maybe the owner won't accept $275,000, but if an offer for $290,000 comes in, the agent may advocate for that offer just to get the deal done, even if she think a $300,000 offer will come in a few weeks.
Seems like the classic "relationship business" vs "transaction business". I would hypothesize that higher net worth individuals and more affluent neighborhoods will promote relationship style brokers.
