Market Distortions When Agents Are Better Informed: The Value of Information in Real Estate Transactions

Abstract

Agents are often better informed than the clients who hire them and may exploit this informational advantage. Real estate agents have an incentive to convince clients to sell their houses too cheaply and too quickly. We test these predictions by comparing home sales in which real estate agents are hired to when an agent sells his own home. Consistent with the theory, we find homes owned by real estate agents sell for 3.7% more than other houses and stay on the market 9.5 days longer, controlling for observables. Greater information asymmetry leads to larger distortions. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Home Bias and the Real Estate Prices

“…Many literature have proven that Information asymmetry seriously exists in real estate markets (Cooper, et al 2000;Cutts and Order 2005;Firoozi et al 2006;Garmaise and Moskowitz 2004;Green 2008;Levitt and Syverson 2008;Rutherford et al 2007;Wong et al 2012). The asymmetry of information with respect to property prices comes from two sources.…”

A Pricing Model for Residential Homes with Poisson Arrivals and a Sales Deadline

“…In our model it is sufficient to receive exactly one offer to sell the house; in this case, on [0,t], P{N t ≥1} =1 -P{N t =0}=1 -e -λt , with 1/λ being the expected time for an offer to arrive. In real-world applications, we would set the arrival rate accordingly, for example, Levitt and Syverson (2008) indicate, for their local data, a mean time on the market of 111 days, for which we would have λ=0.009009.…”

“…This simple logic, however, is flawed. As Levitt and Syverson (2008) point out, there are a number of costs to the selling agent that increase over time, such as hosting open houses and placing advertisements. Since the agent receives only a small fraction of the selling price, a marginal increase in the price is perhaps not worth the extra effort and therefore a selling agent will have incentive to sell the house quickly, and for less money than the house might eventually bring.…”

“…The friction between owners and agents has been studied in Williams (1998) and Fisher and Yavas (2008). Contrary to the later empirical work of Levitt and Syverson (2008) and Rutherford et al (2005), Williams provides an agency model in which there is an efficient solution, that is, for which each owner will select the same reservation price that the agent would for an equivalent asset, and where the agent will spend the same amount of time on the client's assets that she would spend on her own. In this model, however, the agents expend selling effort solely on their own contracted properties and not other MLS listings.…”

Efficiency in the California Real Estate Labor Market

“…It has been shown that real estate markets are not always efficient. For example, Levitt and Syverson (2008); Miceli (1992) and Turnbull (1996) show that the existence of asymmetric information between home sellers and real estate agents leads to lower prices and more rapid sales when agents represent home sellers compared to when the agents sell their own homes. Clayton (1998);Crockett (1982) and Goolsby and Childs (1988) finds strong evidence against efficient markets in the condominium market in Vancouver.…”