Research Highlights Featured Chart

July 19, 2017

Buyer beware

A paper in the American Economic Journal: Applied Economics explores whether real estate agents steer their clients to properties with higher commissions.

Bigstock

There are myriad questions that come up when someone is buying a home. Yet, the bulk of the answers are provided by just one person: the real estate agent.

These salespeople are supposed to be the experts who represent buyers' interests, but it is an arrangement that often puts clients' financial well-being at odds with agents' desire for a bigger payday.

In a paper that appears in the July issue of the American Economic Journal: Applied Economics, researchers Panle Jia Barwick, Parag Pathak, and Maisy Wong take a look at the phenomenon of “steering” in residential real estate. This is a practice where buyer agents will “steer” their clients toward properties with a higher commission for the agent.

The authors collected data from 653,475 residential listings in Massachusetts from 1998-2011 and found that properties with lower commission rates fared worse.

Figure 3 from Barwick et al. (2017)

Figure 3 shows the length of time that low-commission properties spent on the market compared to homes that brought a high commission for the agent. And it shows that high commission properties sold much faster than the less lucrative deals.

The authors also note that real estate firms with the highest market share buy a disproportionately smaller fraction of low-commission properties, discouraging sellers from listing their properties at low commissions. All of this is likely to counteract competitive pricing pressures that are brought by technological innovation and new firms coming into a market, keeping commission rates high.

The findings come as some states ban rebates to buyers and impose minimum service requirements, and suggest that such regulations could actually dampen competition in many markets.