Estimating a Realtor's Value Added

     In the wake of the subprime fallout that has been rocking the housing market and the entire U.S. economy, a realtor’s value added is probably the last thing on anyone’s mind. For the (hopefully) brighter days ahead, however, Stanford economists B. Douglas Bernheim and Jonathan Meer’s 2008 study entitled “How Much Value Do Real Estate Brokers Add?” could prove instructive.

     In the same vein as the “monkeys v. mutual fund managers” debate, Bernheim and Meer use a straightforward multiple regression analysis to estimate whether the 6% commission charged by most realtors adds a value that the average home-owner would be unable to provide by himself. Real estate brokers essentially provide the following: promotional services, assistance with negotiations, screening of prospective buyers, access to the Multiple Listing Service (MLS), market information and recommendations, and assistance with paperwork and legal matters. In 2004, homeowners paid a hefty $61 billion for these services. The last four – MLS access, market info and legal assistance, can be acquired from other sources for around $1400. Clearly then, the value lies in the more elusive question of whether, through their activities, realtors sell homes faster or for higher prices.

     Using a sample of homes on Stanford University’s campus (around 680 observations), the authors tested the effect of brokers on selling prices, initial asking prices and time on the market. With regard to selling prices, brokered homes initially sold for an average of 32% more than non-brokered homes, but when controlling for effects like home size and lot acreage, as well as more fixed effects like location, views and architectural design, the increase falls to close to zero. This suggests that the 32% figure reflects the inherent quality/desirability of the homes sold by the realtors, not the realtors’ skills themselves.

     On a more positive note, the authors found that, contrary to a broker’s incentives to sell a house for a lower price in order to get it off the market faster, initial asking prices were not found to be adversely affected by the use of a broker. The incentive to get a higher price (and a higher commission) thus appears to outweigh the desire to increase housing turnover, although one should probably control for the fact that these observations were taken in the 1980s and 1990s, which were largely buoyant economic times.

     That said, Bernheim and Meer did find that at least in their Stanford sample, brokered homes sold an average of 42% faster than non-brokered homes, when housing fixed effects were included in the study. Most of the time is saved within the first two months, where brokers are most likely to increase the probability of sale.

     In this community at least, the average commission weighed in at around $34,000 – a “steep price to pay” in the authors’ estimation. Perhaps this is true for tenured academics rooted in their universities, but for those sellers needing to move to a new job or requiring immediate cash in the bank, perhaps a realtor is worth paying for after all.