Discount Brokerage in Residential Real Estate Markets

Transaction costs are thought to affect asset prices and market liquidity, but the direction and magnitude of these effects continue to be the subject of debate. In the single‐family residential market, discount brokers offer to list a house for a lower price and thus reduce the transaction costs associated with obtaining a match. In this article we obtain empirical estimates of the price and liquidity impact of a seller selecting a discount broker to market a single‐family residential property. The unique data set allows for the identification of residential properties that were listed by a discount brokerage firm. The empirical results confirm the predictions of our theoretical model. Using a sample of 318,221 listings and 243,625 sales, we find that houses listed by discount brokers sell at prices similar to non‐discount brokerage listings, but are less likely to sell, and when they do sell, take approximately three days longer to sell. The results indicate that lower transaction costs do not impact housing prices in this market, but that they are related to asset liquidity.     

Residential Real Estate Brokerage Efficiency and the Implications of Franchising: A Bayesian Approach

This paper provides substantial evidence that real estate brokerage firms choosing to franchise are more cost-efficient than firms that remain independent. It uses 1995 cost data obtained from a nationwide survey of real estate brokerages to analyze the differences in firm efficiency across firm type—franchised and independent. We estimate a single stochastic cost frontier using Bayesian statistics and measure firm efficiency relative to that frontier conditional on firm type. The results indicate that real estate brokerages are relatively efficient, implying a competitive market, but franchised brokerages are substantially more efficient than their independent counterparts.     

The Principal-Agent Relationship in Real Estate Brokerage Services

This article investigates the principal-agent relationship between the owner of a house and her real estate broker. The principal's (owner's) problem is to design a contract that induces the agent (broker) to adopt a selling strategy that maximizes the owner's expected return. A sequential search model is utilized to analyze this principal-agent relationship. Three different systems for paying the broker are considered: fixed-percentage commission, flat-fee, and consignment. Both the discount factors of the owner and the broker and the net costs of ownership incurred while attempting to sell the house play a central role in determining the nature of the optimal contract. The analysis demonstrates that the fixed-percentage commission system is the only one of the three systems considered that can induce a first-best, incentive-compatible contract. A numerical analysis provides insights regarding the effect of the fixed-percentage commission system on competition in the real estate brokerage industry.     

The Real Estate Brokerage Market: A Critical Reevaluation

This paper presents an analysis of the theories and evidence regarding the structure and performance of the market for real estate brokerage services. Some of the theoretical models found in the literature appear to suffer from logical inconsistencies, while others lack empirical support for their underlying assumptions and/or their predictions of market inefficiencies. Moreover, several important legal and institutional changes that have occurred recently have not been given sufficient attention in the existing literature.
Although some new evidence on this market is presented here, additional empirical research is warranted in at least two areas: the current pricing structure and the underlying production and cost functions of the real estate brokerage industry.     

美国房地产经纪市场运行效率综述

房地产经纪市场的运行效率是房地产市场发展水平的重要标志,也是衡量其是否成熟的主要标准,研究房地产经纪市场的运行效率具有重要的意义。由于目前对我国房地产经纪市场运行效率的研究基本上处于空白,借鉴美国房地产经纪市场运行效率的研究成果,可以为开展我国房地产经纪市场运行效率的研究提供指导。     

A Test of Weak-Form Efficiency in Residential Real Estate Returns

This paper tests weak-form efficiency of residential real estate returns for the city of Memphis, Tennessee. The database for the study is comprised of the population of all sales of single-unit residential property over a fifteen-year period, 1970–1984. The city was divided into ten submarkets based on Memphis City Planning Commission planning districts. An analysis of variance procedure was utilized to stabilize the variance both within and across submarkets and nonmarket financing was partially controlled by eliminating transactions with loan-to-value ratios greater than 95%. The remaining transactions were then used to generate a mean return series. The advantage of the mean over the single transaction series used by Gau is that it represents the most likely outcome for the investor trying to duplicate investment performance since "property unique" features would be expected to cancel. Seven of the ten submarkets exhibited time patterns; however, after adjusting for transaction costs, all ten submarkets were determined weak-form efficient for the period 1970–1984. This was not true for the short horizon holding period, 1970–1975. In four sub-markets an asymmetric version of Alexander's filter rule was able to outperform a buy-and-hold, even for round- trip transaction costs as high as 10%.     

Market Share in the Real Estate Brokerage Industry

This paper is concerned with the factors that determine the market share of listings and the market share of sales for brokerage firms. Models are developed and tested in a SMSA that conveniently corresponds exactly to a particular Multiple Listing Service area. Indices of firm specialization and market concentration were computed in addition to more conventional characterizations of the market and the data used in the study.
The regression results reveal a small degree of consistency in the impacts of the explanatory variables over the two years of the study and over the listing and sales markets. The number of salespeople is the most consistently significant variable. Indeed, market share per salesperson appears to be a non-monotonic function of the number of salespeople. The presence of a franchise and the quantity of display advertising are occasionally significant. Classified advertising, Yellow Pages advertising, and open houses all do not significantly affect market share per salesperson.     

Price Behavior and Capital Gains on Residential Real Estate: The Case of Sweden*

During most of the postwar period the increase of the prices of single-family homes in Sweden have exceeded the general inflation, while for several years the opposite is true of apartment houses. We discuss the reasons and present estimates of capital gains attached to this price behavior. It turns out that apartment houses have often yielded nominal but no real capital gains. Single-family homes have yielded real accrued capital gains amounting to approximately 3% of GNP during the period 1963–1976. We also present a rough indirect method of estimating realized capital gains, first disregarding, and then including the effects of loans.     

Non-Uniform Percentage Brokerage Commissions and Real Estate Market Performance

The effect of non-uniform commissions on the market duration of residential properties is ambiguous. While the broker's search effort is positively related to the size of the percentage commission, so is the seller's reservation price. Each of these relationships imply a time-on-market effect in the opposite direction of the other. A powerful statistical technique, survival regression, is employed to determine which relationship dominates. Because the probability that a property will sell at any given point in time is inversely related to the size of the percentage commission, we conclude that the negative search effects associated with low commission rates are more than offset by the positive reservation price effects.     

Equilibrium of Housing and Real Estate Brokerage Markets Under Uncertainty

The purpose of this paper is to develop a model of the real estate brokerage and housing markets with imperfect information. The paper considers general equilibrium in these markets with and without a multiple listing service. Input prices are found to affect the equilibrium housing price, brokerage commission, and split factor. The introduction of a multiple listing service is found to have several important effects. The MLS causes housing value to increase, but its effect on the commission rate is indeterminate. Contrary to the results of another paper, MLS brokers, on average, will likely undertake more search for both buyers and listings than will a non-MLS broker. The primary reasons are related to the greater efficiency of search in the MLS context.     

Measuring Residential Real Estate Liquidity

There are many factors, other than price alone, that may affect the liquidity of real estate. This study develops a liquidity measure based on the Cox proportional hazard technique, a statistical model widely used in the epidemiologic and social sciences. The odds ratio, along with an estimate of market value for a home, are used to construct a liquidity measure. This measure can extract from the data a rich statistical profile of the variables that affect liquidity.     

The Effect of State Licensing Regulations on the Real Estate Brokerage Industry

An argument is often made that occupational licensure protects members of the regulated industry by limiting supply and raising earnings. The purpose of this study is to examine entry barriers within the real estate brokerage industry and to determine the effect of differing state entry requirements on the supply of practitioners, earnings, and quality of service provided. A simultaneous system of equations is developed where the number of licensees per capita, earnings, and quality are jointly estimated. Two-stage least squares results support the premise that the consumer rather than the industry benefits from real estate prelicensing regulation with a higher quality of service. Significant evidence is not found to support the idea that the real estate industry regulations are self-serving.     

The Real Estate Brokerage Market and the Decision to Disclose Property Condition Defects

This article presents a theoretical model of the decision to disclose property condition defects by a real estate broker. The model introduces the costs and benefits of disclosure into the broker's profit function. The comparative static results of the model show that a number of factors will have a deterministic influence on the broker's expected profit and, hence, the broker's decision to disclose. Whether voluntary disclosure occurs depends upon the costs of repairing the defect, prevailing market conditions, commission rates and the legal environment in which the broker operates.     

Economies of Scope and Density in the Market for Real Estate Brokerage Services

Using a multiproduct translog cost function, this paper examines the case for economies of scope and density in the market for residential real estate brokerage services. Earlier research that treated output as a homogeneous commodity reported modest economies of scale for this industry. The results of this study suggest that the composition of output is an important source of these scale economies, rather than simply the size of the firm. The economies of scope which we find imply that a balanced mix of listing and sales is the least costly type of operation, a result borne out by the product mix found in our sample. The results also show product-specific diseconomies of scale, suggesting that specialization in either listing or sales may be sub-optimal under the current institutional arrangements present in the market. Finally, market density appears to be, at best, only a nominal source of savings for real estate brokerage firms.     

Real Estate and Economies of Scale: The Case of REITs

Building on past research in the economies-of-scale debate, we test for scale economies in real estate investment trusts (REITs) by examining growth prospects, revenue and expense measures, profitability ratios, systematic risk and capital costs. Overall, we find that large REITs are increasing growth prospects while succeeding at lowering costs, leading to a direct relationship between firm profitability and firm size. Additionally, we find an inverse relationship between equity betas and firm size, and for all cost of capital measures we find significant scale economies. Further evidence from the stochastic frontier analysis suggests efficiency opportunities appear possible through continued growth and consolidation in REITs.     

The Timeline Estimation of Bubbles: The Case of Real Estate

We develop and then apply a new recursive regression methodology with a two‐direction searching process for initialization. The methodology improves the reliability of existing models when estimating a bubble's timeline. We apply our proposed methodology to estimate bubbles in U.S. home prices as well as in simulated scenarios. Our results confirm the improvement in reliability of the proposed methodology in obtaining consistent estimators with varying samples. Moreover, we verify the presence of bubbles in the U.S. aggregate data and seven of the eight cities in our study prior to the subprime crisis and find evidence of the bubble's reemergence since October 2013.     

The Welfare Effects of Non-Price Competition Among Real Estate Brokers

This paper examines the role of brokers in economizing on transaction costs in the housing market. By lowering the cost of transactions, brokers create welfare gains compared to a market in which buyers and sellers transact on their own. However, if brokers engage in unproductive, non-price competition to acquire a larger share of available listings, then some of the welfare gains are dissipated. Using a partial equilibrium model, this paper shows how an excessive commission rate can lead to this result.     

Real Estate Brokers and the Market for Residential Housing

This study explores the role of the real estate broker in the housing market. A model of the demand for broker services by both sellers and buyers is developed and conditional logit estimates are presented. Evidence relating to the effects of the brokerage industry on housing market transactions also is presented. Brokers do not seem to affect the prices of the houses they sell. But they do influence the level of housing consumption by buyers.     

Economic Depreciation of Residential Real Estate: Microlevel Space and Time Analysis

Three elements in the study of real estate depreciation that warrant further consideration are uncovered: the spatial variation of depreciation on a micro scale, the variability of depreciation within a single market across time and the recognition of land value as an influence in modeling real property prices. Taken together, these three dimensions provide an opportunity to further expand the understanding of residential economic depreciation while enhancing the predictive power of real estate market models. The analytical results, utilizing a land-value-adjusted hedonic model, indicate that both the intramarket location and the year in which the property sold have significant impacts on the observed rate of economic depreciation. Such information is vitally important to policymakers and others interested in accurate modeling of real estate markets.