An economist gets "naked", down and dirty.

There are plenty of situations in which we must hire someone whose incentives are similar but not identical to our own...Take real estate agents, a particular breed of scoundrel who purport to have your best interest at stake but may not...The agent graciously shows you lots of houses and eventually you find one that is just right...Now it is time to bargain with the seller over the purchase price, often with your agent as your chief advisor.  Yet your real estate agent will be paid a percentage of the eventual purchase price.  The more you are willing to pay, the more your agent makes and the less time the whole process will take.

There are problems on the sell side, too...The better price you get for your house, the more money your agent will make...But the incentives are still not perfectly aligned.  Suppose you are selling a house in the $300,000 range.  Your agent can list the house for $280,000 and sell it in about twenty minutes.  Or she could list it for $320,000 and wait for a buyer who really loves the place.  The benefit to you of pricing the house high is huge: $40,000.  Your real estate agent may see things differently.  Listing high would mean many weeks of showing the house, holding open houses...Assuming a 3 percent commission, your agent can make $8,400 for doing virtually nothing or $9,600 for doing many weeks of work.  Which would you chose?  On the buy or the sell side, your agent's most powerful incentive is to get the deal done, whether it is at a price favorable to you or not.

                                                                       Charles Wheelan, Naked Economics:  Undressing the Dismal Science

I saw it coming. 

There I was, meandering through an illuminating illustration of "principal-agent problems" and learning why Una Mas is so anxious I get a receipt that the next meal's on them if I don't.  But then I heard warning bells.  Because I knew that a topic like "principal-agent problems" was an opening a mile wide for any ambitious writer looking to lay a few licks on that always-saleable ever-popular whipping boy, the real estate agent. 

Throughout Naked Economics  I'd faintly detected the odor of opportunistic Freakonomics.  Young sassy economist you didn't know they existed  sexes up economics you didn't know it could be done  for the ostensible purpose of debunking conventional wisdom and demystifying the dismal science.  And ends up confirming that we really don't want to see economics running around naked. 

"A fun and breezy tour of the economic world around us", warns the book jacket.  Translation:  batten down the hatches boys. 

Debunking conventional wisdom is a wunnerful wunnerful thing, just as long as it doesn't pander to the knee-jerk prejudices of the lowest common denominator willing to shove $14.95 across the counter for a book.  John Kenneth Galbraith, in his best-selling The Affluent Society  fifty years ago, also upset the apple cart, but he did so with the gravitas you look for in your economists.  It was in that book that he coined the phrase "conventional wisdom".  Admittedly, Galbraith could get too learnedly cute for his own good, like a precocious five-year-old with a new parlor trick, but then so could his intellectual co-conspirator, Thorstein Veblen. 

Wheelan will never, on the strength of his Naked  performance, stand accused of gravitas.  His tone is a forced folksiness that stops just short of nursery rhymes in its calculated attempt to disarm the skeptic and convince the enquiring mind.

It's telling that Wheelan thinks he can get away with calling real estate agents that "particular breed of scoundrel" without adding one of the footnotes he sprinkles throughout his book or by citing personal experience.  Wheelan seems to know that no documentation is necessary when applying tar and feathers to the agent, because now he's operating on the firm ground of conventional wisdom—which raises the question as to whether Naked  was written to challenge conventional wisdom or cash in on it.  Which, in a weird way, is kind of a shame because, had he looked, Wheelan would have found at least one study confirming his claim of agent perfidy.  Someday if I ever acquire a full copy of that study I'll look at its methodology, which I suspect is suspect, but for now let's look at the short-comings of the agent betrayal theory that should be blindingly obvious, even to a fun and breezy economist.

The basis for the theory that your agent wants you to sell your home too quickly is the belief that the longer your home is on the market, the higher the price it'll sell for.  Just keep your home on the market for months or years, while you wait patiently for the credulous fool sorry, "buyer who really loves the place" preferably a buyer from out of town or, better yet, from outer space, who obviously doesn't know local values and who'll pay you far more than anyone else for your home.

Never mind that, taken to its illogical and peer-reviewed conclusion, this theory requires you to keep your home on the market forever, because this is the only way you'll be sure to snag that one "perfect buyer".  So here's a proactive approach to getting top dollar for your home, one recommended by nine out of ten fun and breezy economists:  put a For Sale sign in front of your house the day you move in, so that by the time you're ready to move twenty years later you'll get a good price.  Make your agent work for his commission! 

Also never mind that, to my knowledge, no study has ever explicitly shown a positive correlation between longer time on market and higher sales price.  On the contrary, Coldwell Banker claims to have research proving a negative correlation.  I've never seen it and don't need to because, like all accurate real estate research, it simply tells us what any real estate consumer, in this case any buyer, would tell us:  that the longer your home is on the market past the time it takes most homes in your area get into contract (which in my area is about two weeks): 

Buyers know this.  Agents know this.  Economists don't know this and never will, because reality can't break through the halls of academe.  Deluded sellers discover this the hard way, although by then it's always their agent's fault.

Now let's look at the other side of the coin, the contention that agents routinely betray buyers.  This ties in neatly with one of the bubble blogs' favorite shibboleths, that the skyrocketing prices of the recent real estate boom were solely the result of agents encouraging their buyers to pay too much.  But bubbleheads, like economists, are out of touch with the realities of the market.  Otherwise they'd know that real buyers—not bubbleheads, not economists—are the market.  And because they are the market, real buyers—not bubbleheads, not economists—know market value. 

Since they are the market, real buyers know market value in a changing market before their agents do.  Agents work with yesterday's data, while buyers work with today's emotions.  Are prices going down?  Real buyers know this just by looking into their hearts, because it's their pessimism that's driving down prices.  Are home prices going up?  Real buyers know this too, because now their optimism is driving the market onward, upward and beyond.

Buyers may not know where the market will be tomorrow—no one does—but they definitely know where the market is today, and they'll put on the brakes if they think they're being led in the wrong direction.  Agents find this out, as buyers drag them hither and yon over the hills and dales of market cycles.  Economists never find this out.  Bubbleheads may or may not find this out but, still, everything will be the real estate industry's fault.

But if buyers sense changes in market value before their agents do, how do they determine market value in a stable market?  Aren't buyers then at the mercy of guidance from mercenary agents?  In fact, isn't that guidance on market value one of the alleged benefits of working with an agent? 

One of the necessary components of the agent betrayal theory is that buyers are sheep, without the sense or independence to question the direction in which their agents goad them.  But as any agent or buyer can tell you, the agent-buyer relationship is a chain of links made of agent advice and buyer resistance.  Sometimes buyer resistance is subtle and passive, sometimes not.  Sometimes buyers gradually discover that they can learn something from their agents, and sometimes they never learn.  Sometimes buyers ease into homeownership relatively quickly and easily, while some buyers turn homebuying into a head-butting contest with their agent and the real estate market. 

The agent has far less influence over the outcome, whatever it is, than anyone outside the agent-client relationship knows.  Buyers, not agents, have the power.  Buyers, not agents, decide to make offers at market value—or not.  This doesn't mean that the agent won't make a handy scapegoat later on.  But the reality is that buyers can't be pressured into making decisions of this magnitude.   

Buyers know this.  Agents find this out.  You can understand why bubbleheads don't know this, since for most the sum total of their homebuying experience is an occasional five minutes kicking tires and matching wits at an open house.  And either economists aren't paid enough to buy homes or they must think that they're the only buyers capable of questioning whatever their agents tell them.

Which brings us to another necessary component of the agent betrayal theory, the belief that everyone in the real estate marketplace is an idiot who needs protection from him- or herself.  This is compelling to the people outside the marketplace—the bubbleheads, the economists—who watch the proceedings from a safe distance with a curious mixture of condescension and fascinated horror.  And you know what?  I'll agree with them that something—inertia, grad school—separates them from the herd.  I just won't agree that inertia or grad school elevates them above the herd.

Which brings us back to one Charles Wheelan, fun and breezy author of Naked Economics, alert Midwest correspondent for The Economist, spell-binding adjunct lecturer at Northwestern University and Johnny-on-the-spot economics correspondent for WBEZ Chicago Public Radio.  Yes, Chuck is what I call an Explainer, one of those media types with impeccable credentials Burton Malkiel wrote my forward!  who explain this complicated ol' world to plain folks like you and me.  Yes, Chuck has a multitude of platforms from which to enlighten us dumb hicks. 

So consider yourself warned.  But it's a shame Chuck slipped so easily on the banana peel of real estate.  Because I wanted him to explain economics to me, fun and breezy-like, and now he can't.  Because after the passage I quoted above, Chuck would start explaining something and I'd recall that just a few pages before I'd caught him trying to hand me left-over down-and-dirty instead of fresh wholesome truth. 

I also found myself wondering who the real "scoundrels" are. 

Meanwhile I'm going to go flagellate myself for accepting fun and breezy answers to complex questions.  From now on, it's a steady diet of Galbraith whap!  Veblen whap!  and Keynes whap! whap!

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