The Broken Tower and the Ivory Tower

Stephen Dubner and Steven Levitt renew their argument that real estate brokers aren’t worth 6%, citing a study (PDF) conducted by Stanford economist B. Douglas Bernheim and one of his graduate students, Jonathan Meer, which shows that using a broker has no effect on a home’s average selling price.

We are an (online) broker ourselves, but have argued that consumers should be able to choose the real estate services for which they pay, so I’m not sure we have a dog in this fight. In the past, we have welcomed studies showing that buyers and sellers can get along without a broker, and argued that a client working with an online broker negotiates a better price. But in this case I was surprised that the Freakonomics team didn’t evaluate the Stanford economists’ methodology.Stanford University

The Stanford study only evaluated 800 homes sold on the Stanford campus, “the ownership of which is limited to Stanford faculty and a limited number of senior staff.” In such an environment, marketing is much easier because of the small number of potential buyers, trust is high because of the buyers’ affiliations with one another, and supply is extremely limited: many academics would kill, or even teach an extra freshman survey course, to live on the Stanford campus.

Moreover, there is no broker-operated MLS on the Stanford campus, and likely no other broker representing the buyer, so there is no rationale for buyers’ brokers to steer clients away from properties not paying a commission. It seems like a leap to draw conclusions from this data set for the typical consumer, who is probably selling a home in a larger market, with more competition, to strangers largely represented by brokers.

In real estate and in life, college is a smaller, more perfect vision of how the rest of the world could be. We thought it was interesting that the previous academic study on brokers’ effectiveness focused on Madison, Wisconsin, because this is also a small college community where alternative approaches to real estate have reached critical mass. Maybe these communities point the way to a post-brokerage world waiting for all us, where both sides abandon their brokers, where we can access information for ourselves online, where we can come to terms more easily and economically.

For now though, we should at least take such findings with a grain of salt, because the Stanford campus isn’t the Hobbesian jungle of, say, the Orange County real estate market. We revere the Freakonomics team, who inspired us to offer real estate e-commerce in the first place, but it seems a bit too credulous to present these findings without acknowledging that Stanford, far more even than Madison, is a different world.

Bonus link: a consumer reviews the best real estate search sites… photo credit: To Mr. “Leaning Right” on Flickr.

Also, the NYT obituary on William F. Buckley is unusually good:

“No other act can project simultaneous hints that he is in the act of playing Commodore of the Yacht Club, Joseph Goebbels, Robert Mitchum, Maverick, Savonarola, the nice prep school kid next door, and the snows of yesteryear,” Norman Mailer said in an interview with Harpers in 1967… For Murray Kempton, one of his many friends on the left, the Buckley press conference style called up “an Edwardian resident commissioner reading aloud the 39 articles of the Anglican establishment to a conscript of assembled Zulus.” A friend of mine was, as a teenager, once fundraising door-to-door in Buckley’s Stamford neighborhood, and William F. Buckley invited him in and held forth at length on obscure topics…


  • Greg Swann

    > many academics would kill, or even teach an extra freshman survey course, to live on the Stanford campus.

    You are too much too famous, Glenn Kelman. Your humor gets lost in the fog of controversy. Skepticism and wit — the art of the essay. Nicely done.

  • Pingback: The Broken Tower and the Ivory Tower | The Long List of Odysseus Medal Nominees | Realtors and real estate, mortgages, lending, investments

  • Benjamin

    I found it fairly dismissive of both Dubner and Levitt to their audience to use this research. If they’re exposing the “hidden side” of everything, why use such a narrow-lensed survey? Levitt was noted as an inspiration for the research itself, as someone who had “proven” similar findings previously. The reality is that real estate exists in a market. In markets, it takes a voluntary action of a consumer to consummate any transaction. That means a buyer rules. I’m a traditional broker in Colorado but I frankly love the Redfin stones that are consumer-emancipating… let’s not stand in the way of buyers buying and sellers selling. The reality that D&L don’t discuss is that buyers are the market, they determine values. Positioning and marketing help, sure, but as in anything, if the buyer doesn’t think it’s worth it, no dice.

    Glenn, your comment about a tenured prof willing to “teach an extra freshman survey course” is a cogent example describing the emotion that plays into buying and selling and the subjectivity of real estate values. When there is emotional motivation at play… yeah, there are multiple values for that.

  • Lenore Wilkas

    While Stanford University doesn’t have its own MLS the houses sitting on it are listed in the local MLS by local Realtors with the stipulation that the property can only be sold to a Stanford employee/professor. This is well known in our area.

    As for a study done with such a small sampling, well it’s easy to come to conclusions like they make. Try moving off the campus and looking at the entire Peninsula and then redo the study. They just might find something a bit different.

  • Glenn Kelman

    Thanks for your comment Lenore; I was basing my statement about Stanford and the MLS on what the study said: “the MLS plays no role in the Stanford housing market.”

    And Greg, thank you for your kind comment.

  • Pingback: Value of Brokerage « The Notorious R.O.B.

  • Phil

    Thanks for the shout-out, man. I am reading, and I do read to the end.

  • Dennis Calvert

    Glenn you better watch those 500 Realty guys. They are opening up offices everywhere it seems now. There model appears superior to Red Fin in every way but i doubt they have any VC or will be able to obtain any.

    I saw them at the Seattle Home Show with Mortgage Reps and quite a “cult” following. They said they just opened in August last year. I entered their database and I will keep you posted.

  • Glenn Kelman

    Hi Dennis, I assume this is an attempt at sarcasm. Why does it bother you so much that Redfin has raised venture capital when so many other online businesses, many in real estate, have as well? Whether we’ll succeed or fail is still very much an open question, but we certainly haven’t duped our investors or our customers.

  • Dennis Calvert

    “duped our investors or customers”

    I dont understand that statement. As a consumer I’m just pointing out what I researched from 500 Realty at the Home Show. They return 75% not 66%. They don’t charge for Home Tours and 500 to List. They don’t hit you with another 3500.00.

    Dollar for dollar they are a better value proposition with more offices to serve the customer. What am I missing? I’m sure you are ready for some form of competition. At the Home Show their agents love Red Fin and all the money they have put in to help educate the planet but I think those guys have nailed it on the head by having Mortgage Reps pay all their advertising and fund the operation.

  • Glenn Kelman

    Now I understand, sorry Dennis. I thought you were talking about 500 Realtors but you’re talking about a specific competitor; my mistake. We already have plenty of competition, but more won’t kill us.

  • Glenn Kelman

    And a post-script: thanks to our other commenter, Phil, for reading through, all the way to the end. You were the first-ever person to comment on our blog, which we all found enormously encouraging…