618. Are Realtors Having an Existential Crisis?
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Today's episode is about an industry that, like many industries, often talks about how competitive it is and how that competition is good for customers.
The free market is working, and I think the consumer is benefiting while still receiving professional representation.
But if you ask most economists, they have a different view of this industry.
It's just hard not to say, man, these prices seem way higher than they need to be.
This is an industry that most of us interact with rarely. But when you do, the stakes are high.
It's a really important decision financially, emotionally. You need a little bit more hand-holding.
But is your hand being held or is it being forced?
I take great offense at that characterization.
Offense noted. But also worth noting, the National Association of Realtors, the NAR, just settled an antitrust lawsuit that requires it to pay hundreds of millions of dollars in damages and change the way realtors charge their customers. Today on Freakonomics Radio, we speak with the president of the NAR as well as its chief economist.
The real estate profession is one of the most competitive out there. It's almost like economic textbook definition of perfect competition.
And we hear from two other economists who don't see much competition, but instead what looks more like collusion.
Okay, we all know how this thing works, wink, wink. And if we just don't rock the boat too hard, we can keep it together. Consider the boat rocked, starting now.
This is Freakonomics Radio, the podcast that explores the hidden side of everything with your host, Stephen Dubner.
The National Association of Realtors, which is headquartered in Chicago, is the largest trade organization in America with more than 1.5 million members. There are real estate agents who are not realtors with a capital R, but the NAR is where the action is. The organization has endured a variety of scandals, especially among their leadership. Allegations of sexual misbehavior, financial misbehavior, monopolistic behavior. There's quite a list. In the past few years, presidents of the organization have come and gone as quickly as the cookies at an open house. Another big problem? There just isn't as much business as there used to be. In 2023, only 4 million existing homes were sold, the fewest in 30 years.
There are a variety of reasons for this slump. The COVID pandemic had produced a spike in sales that has since receded. Mortgage rates are still relatively high, and there's been a lot of political and economic uncertainty. There's also the simple fact that buying or selling a home can be stressful and complicated and confusing to the point of intimidation. But that's where the real estate agent comes in. Real estate agents are there to help you.
They do know the market better than most buyers or sellers. They deal with transactions all the time. That's exactly why you would hire them. That is Chad Severson. He's an economist at the University of Chicago. I'm mostly a microeconomist. And within that, my field is industrial organization, which is really just the economics of companies.
Severson started out as a mechanical engineer, so he understands how something like a house is built. As an economist, his job is to understand how houses are bought and sold. And part of that is understanding the incentives of the players involved. Some years back, Severson co-authored a research paper, along with my Freakonomics friend and co-author Steve Levitt, which found that real estate agents do not necessarily act in the best interests of their clients. They argued that when you are selling a home, an agent may push you to accept the first decent offer rather than hold out for a better price. Most agents work on commission, which means they are only paid when there is a sale. Historically, the commission has been roughly 6%. which is split between the seller's agent and the buyer's agent. And then each of those agents often kick back half of their fee to their brokerage, which means that the seller's agent earns roughly one and a half percent of the sale.
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