Friday, January 06, 2006

Why the Real Estate Boom Isn't a Boom for Real Estate Agents

You might expect real estate agents to make out like bandits during a housing bubble. After all, as University of Chicago economist Austan Goolsbee points out in his Slate commentary, agents receive a fixed portion of the value on any house they help to buy or sell. As house prices boom, so to do the payouts to real estate agents. Well, as research by two Berkeley economists suggests, real estate agents haven't exactly made out like bandits in the housing bubble--but they have multiplied like bunnies. Read on to see why:

A Bubble in Real Estate Agents

Firms in competitive industries tend to earn zero economic profit over the long haul. That is, the owners earn just enough to keep them from shutting down and leaving the industry for their next best opportunity. The zero-profit condition holds in industries with low barriers to entry. Profitable firms in low entry barrier markets attract other firms hoping to grab a slice of the pie. With time, competition prevails and the zero profit condition holds. As Goolsbee points out, the market for real estate services shows the zero profit condition in action.

1. According to the article, what are the barriers to entry in the market for real estate services?

2. The housing boom generated higher realtor earnings per sale--but what's happening to the number of sales per realtor?

3. According to the study by Berkeley economists Enrico Moretti and Chiang-Tai Hsieh, what is the relationship between house prices and the productivity of real estate agents?

By Brandon Fuller


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