The Economist magazine thinks American consumers are cartel-ridden suckers when it comes to housing. Really?
In a recent article called American Property: The great rip-off we get once again a fine example of sensationalism passing itself off as journalism. Or worse, as journalism about economics. We aren’t too surprised. It’s always been easy to pick on real estate agents. So, when times are tough and nobody’s paying your advertisers, pick a scapegoat and start kicking.
Read the article for yourself, but it boils down to three claims: First, American real estate agents charge double what British ones do, so there must be something nefarious at work. Second, real estate agents are crooks: why else use a picture and reference to Glengarry Glen Ross? Third, economists somewhere are baffled as to how the industry still gets away with it, especially after years of the all-powerful internet cutting out middlemen. Thus, there must be a rip-off happening somewhere.
The argument turns on a single – and massively – mistaken claim: That real estate agents are simple middlemen.
“Economists are baffled. The internet has squelched inefficient middlemen in other industries, from insurance brokers to travel agents. Why not American realtors?” After all, the quoted economist claims American brokers cause “social waste” of about $8 billion dollars in “overcharging and inefficiency.”
Yet somehow, nobody has noticed all this evil-doing, especially American regulators, who love to charge companies with all sorts of wrongdoing. (Remember the famous antitrust lawsuit against Microsoft for making its internet browser free?) Regulators have somehow missed this perennial boondoggle of defenseless homeowners. It’s possible, they argue, that the “industry has captured its regulators.” That would mean fifty state regulators, industry watchdogs, the U.S. Department of Justice and perhaps the most lawyers per-capita on the planet are all in on the deal. Makes sense to us.
Oh, there are theories, says the Economist, in a kind of Monty Python wink-wink nod-nod sort of way. American consumers might just be suckers (how did we knew PT Barnum would somehow be referenced?). Possibly the industry is hugely inefficient and magically resistant to power of the internet. The first part is often true, but for all industries. But the idea that real estate is impervious to innovation dismisses a record of twenty years of technology, sales and marketing innovations.
From an economics standpoint, the article fails to mention how quickly and efficiently the U.S. industry purges inefficient agents and brokers. From our experience working with brokers since 1991, nearly 60% of new agents don’t last a year in the business. Nearly 90% don’t make it past five years. Seems like a fairly good track record for getting rid of waste and incompetence quickly.
So, the article settles upon the cartel theory, a perennial favorite catch-all justification. The massive waste and high costs occur because American brokers are in collusion with each other. Interdependent, is the word they use, but you can read between the lines. Since it’s common for all parties to be represented by a broker, the brokers have designed a system to pay each other off with fees from both sides of the deal. In fact, they won’t work with each other unless there’s a fee to be had, a system of discrimination which the Economist claims exists but is hard to prove. How convenient.
Ironically, the article makes note that most brokers get business from their personal sphere of influence. So, reputation is a critical component to the business. Just how long does the Economist think a broker’s reputation would last if she refused to show clients certain homes (which they saw on the internet beforehand, of course) because the other broker wasn’t offering them a fee? Clearly, the Economist hasn’t really talked to any buyers’ brokers here in the States.
Likewise, the Economist overlooks the essentials of the free market system. Nobody is required to use a broker. Consumers can try to sell on their own; about 10% do each year. Most choose to work with a broker. In any case, all payments are entirely voluntarily. Is the Economist arguing that Americans choose to waste their own money?
It might surprise the Economist to learn that American brokers don’t just get a fee for doing nothing.
Then again, the Economist doesn’t bother to examine what brokers actually do – on either side of the pond. We’re simply supposed to take their word that it’s equal, and not worth more than 2 or 3% of a property’s value. Without an honest comparison of the kinds, degree and level of services that brokers in different countries provide, the claim of overcharging rings hollow. American consumers demand very high levels of service, especially marketing, including professional photography, video, internet marketing and print media. All of these drive up costs, at the consumer’s own choosing, perhaps higher than the expectations or demands of consumers in other countries. The Economist would have done a greater service had they examined the cost-of-production factors that go into fees, such as training, marketing, technology, management, data systems and trade associations. It’s silly to argue that Mercedes Benz owners in London were “duped” into paying more, or there’s some sort of auto-cartel at work, because Indian consumers can buy an inexpensive Tata, even though both are “cars.”
There’s even the possibility that British consumers are getting less service because their brokers don’t (for whatever reason, perhaps regulatory) charge higher fees. Maybe the cost to be a broker in Britain is less than the cost to be one in America. Doesn’t the Economist regularly remind us how expensive American health care is compared to theirs? There’s often a non-nefarious economic reason behind the fees that entrepreneurs charge to make a living in any country.
It’s also simply more expensive because – gasp! – there are more brokers in America and therefore more competition for consumers!
But then, you really wouldn’t have a news story, would you, if it were all costs and margins?
We fully admit that we’re only armchair economists. But we believe that American consumers – the people who put those travel agents, book sellers and insurance brokers out of business, by the way – are quite able to Google-up a discount if they really want one. In fact, buyers and sellers negotiate their commission all the time.
Don’t get us wrong: There are plenty of places where the U.S. industry could be more efficient and create cost savings for consumers. Plenty of brokers are focused on doing just that. The housing market is huge, diversified and very cost sensitive. And it’s filled with plenty of hardworking, dedicated and value-oriented agents who would take serious offense at being compared to Glen Ross.
Often stone throwers fail to notice their own windows.The Economist might want to ask why it hasn’t lowered the fee for their magazine, despite the internet challenging news middleman. Last time we looked, a copy of the Economist was about $7. For some reason we still paid for it. Maybe that argues for Americans being suckers after all. Or maybe there are times when consumers are willing to pay a little more if they seek something more than discounted value… a claim we might have to re-examine ourselves, if the Economist keeps churning out articles like this one.