Friday, April 07, 2006

The Real Estate Agent Bubble Reloaded

In the closing weeks of 2005, Chang-Tai Hsieh received nearly a dozen calendars and refrigerator magnets from real-estate agents eager to represent him the next time he buys or sells a home. Just before Halloween, two agents left pumpkins on his doorstep.

Mr. Hsieh, an associate professor of economics at the University of California, Berkeley, thinks all this free stuff helps explain what's wrong with America's real-estate brokerage business: Rather than competing on the price of their services, agents tend to spend heavily on marketing gimmicks -- and pass that cost to the consumer.

As home prices soared in recent years, so did the percentage-based commissions charged by agents. Residential real-estate commissions in the U.S. totaled $61 billion in 2004, up 42% from 2000, estimates Real Trends, an industry publication. That's bad news for people who buy or sell homes. But isn't this trend at least making Realtors happy?

Alas, no. The number of real-estate agents has grown even faster than total commissions. Membership in the National Association of Realtors, the dominant trade group, totals about 1.25 million, up 63% since 2000.

As a result, there's not even close to enough commission income to keep all those agents in Porsches. The median annual income of real-estate sales agents in 2004 was only $37,600, down from $39,300 in 2002, according to the Realtors. Even that figure overstates agents' well-being. Because most agents are independent contractors rather than employees of the firms where they work, they need to pay out of their own pockets for such things as health insurance, pension plans, driving customers to see homes, and even pumpkins.

Of course, some agents do get rich. Those most successful at selling luxury housing can earn more than $1 million a year. Even in average neighborhoods, the best-known agents tend to get the bulk of the listings because homeowners want a proven performer. In 2004, Realtors with 26 years of experience or more had median income of $92,600, up 37% from two years before.

The chance of joining the million-dollar club attracts hordes of greenhorns, though. A 2003 study by Mr. Hsieh and Enrico Moretti, a fellow associate professor of economics at Berkeley, found that when home prices go up in a city, more people become agents. Their productivity -- the number of transactions completed per agent -- then declines. The result is that income for the typical agent remains low, even though some top performers earn six-figure incomes


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