Posted by nithi.vivatrat on August 25, 2009
The paperback edition of Freakonomics went on sale today, and Levitt/Dubner posted on their blog the only new content in this edition, which is a Q&A with the authors derived from the wonderful Freakonomics blog. I thought you would find this excerpt interesting:
Q: Of the examples discussed in the book, which have gained the greatest traction in the popular/political discussion? — Rick Groves
A: There has been a lot of talk about the relationship between legalized abortion and the crime rate. And some governments have cited the low wages of street-level drug dealers as an incentive to young people to go legit. But on a day-to-day level, the part of the book that’s probably spurred the most change is our discussion of real-estate agents. The standard fixed-commission, full-service Realtor model is gradually melting away [emphasis added]. Even the White House weighed in, with the Real Estate Settlement Procedures Act, which is meant to increase transparency between Realtors and their customers.
In my posts, I have never claimed that the commission model will disappear (though it doesn’t hurt when the Freakonomics guys say so). I do, however, believe that the commission-free, fee-for-service model will be a popular option for an increasingly large segment of consumers. To each their own, as the saying goes…
Posted by nithi.vivatrat on August 24, 2009
In an opinion piece in yesterday’s Financial Times, NYU economics professor Nouriel Roubini took issue with the mainstream speculation of an imminent economic recovery, arguing that the recovery will be “U-shaped, anaemic and below trend for at least a couple of years, after a couple of quarters of rapid growth driven by the restocking of inventories and a recovery of production from near Depression levels.” He goes on to list seven systemic economic conditions dragging out a recovery.
Further, Roubini contends that, in fact, we could be facing a W-shaped, double-dip recession, caused by the Catch-22 of ending government bailout/stimulus programs (undermine recovery if they end, drive inflation risk and then interest rates if they don’t) as well as speculation on commodities.
Well-articulated, sobering analysis — must read for anyone seriously interested in planning for what’s ahead.
Posted by nithi.vivatrat on June 9, 2009
If you don’t read CalculatedRisk, you’re missing out on some valuable insights on financial and economic matters. There are two posts from the other day that I thought you might appreciate:
Enjoy!
Posted by nithi.vivatrat on April 8, 2009
When it comes to designing compensation programs, my good friend and experienced HR executive repeats this mantra: “compensation drives behavior.” As I talk to people about the incentives created by the traditional commission fee structure in real estate, this refrain often comes to mind. I thought of it again as I read the April 1 Washington Post article “Four Banks Are First to Return U.S. Aid,” discussing that, while returning taxpayer money would typically be viewed as a good thing, in this case it threatens to undermine the goal of increasing lending (so much irony here).
The primary reason these banks are rushing to repay this money?
“Banks seeking permission to repay the Treasury, however, argue that compensation restrictions are the real threat to lending. Neil M. Barofsky, the special inspector general who oversees the investment program, testified before Congress yesterday that a survey of nearly 400 aid recipients found widespread concern that limits on pay will hamper retention of top employees, putting aid recipients at a competitive disadvantage.”
It should not be surprising that executives at banks receiving TARP money, especially those that were not in bad shape, would prefer not to have constraints on their pay. Indeed, that same day, the House of Representatives approved the Pay for Performance Act of 2009 that prohibits “unreasonable or excessive” compensation or bonus payments that are “not directly based on performance-based measures” (it’s important for the Members to show the appropriate outrage to their constituents).
To recap: we got into this mess partly because certain people were getting highly compensated for making loans they shouldn’t have been making; now that we need lending to increase to stimulate the economy, we’re going to implement curbs on compensation to the executives at the banks that take federal funds intended to spur that lending. Anyone else confused/frustrated/angry?
In conclusion: never underestimate the unintended behaviors and outcomes that compensation methods can create.
Posted by nithi.vivatrat on March 2, 2009
Two key indicators were issued last week - the S&P/Case-Shiller national home price index and the Conference Board’s Consumer Confidence Index. Both appear grim. The S&P/Case-Shiller index set a new record for the largest one-year drop in its 21-year history, dipping 18.5% over the 12 months ending in December 2008. The Consumer Confidence Index fell to an all-time low to 25.0 (1985=100), plummeting from 37.4 in January. WAIT! There is more to read… read on »
Posted by nithi.vivatrat on January 24, 2009
In prior posts, I have argued how the commission model is an arbitrary method of calculating the fees to buy or sell your home with no direct connection to the value of services you were provided. Another major disadvantage of the commission model is that it impedes your ability to pick and choose, and only pay for, the specific services you want.
Consumers today are becoming more and more informed regarding real estate information, and many do their own homework when it comes to selling or buying a home. Yet today, those consumers will likely still end up having to use a real estate broker — and pay a considerable commission — to complete any transaction, even if they already did a substantial portion of the legwork. WAIT! There is more to read… read on »
Posted by nithi.vivatrat on January 21, 2009
Complicating the issue with real estate commissions is a widespread belief that only the seller pays the commission, not the buyer. Mark S. Nadel, a DC lawyer who writes on public policy issues, debunks this myth:
“Sellers who agree to pay a 6% commission to their real estate broker and to accept a bid of $500,000 for their home are, therefore, actually willing to settle for net proceeds of $470,000. Since the sellers’ broker has agreed to accept a net $15,000 commission for his or her own services, the sellers would accept a $485,000 bid from a buyer if there was no buyer’s agent to compensate. If, however, the buyer has an agent, and the sellers’ agent has promised half the $30,000 commission to that agent, then, to enable the sellers to clear $470,000, the seller must demand $15,000 more from the buyer. Thus, the commission to the buyer’s agent ultimately comes out of the buyer’s pocket.”
Let’s walk through this example step-by-step again for clarity. WAIT! There is more to read… read on »
Posted by nithi.vivatrat on January 19, 2009
You may be surprised by the how much real estate commissions are paid by consumers in a year — I know I was. In 2007, US consumers spent nearly $80 billion (yes, that’s a “B”) on real estate brokerage fees. The turmoil in the market is likely to put a dent in that — REALTrends believes that new and existing home sales in 2008 will be close to 5 million units, down from 5.65 million in 2007 and a sharp decline from mid-2008 forecasts — but even with, say, a 20% reduction, that’s still $64 billion in fees.
It’s common to see a commission rate on the order of 5-7% of the final sale price of a property split in some fashion between the seller’s and buyer’s brokers. A fixed commission rate is so commonplace that many consumers believe it is non-negotiable, though state law dictates that these fees are absolutely subject to negotiation. The relative lack of price competition (compared to other industries) has been well documented by the US GAO as well as the Justice Department Antitrust Division. But my concern goes beyond the level of competition in the marketplace — my issue is with the entire commission model itself.
WAIT! There is more to read… read on »
