Why the real estate business is due for a collapse

I don't have anything against realtors and, were I planning to stay in the country for more than 6 months, I would be working towards getting my license. But I still think the industry is headed for a major shakedown, and let me explain why.

Loss of their information monopoly. It used to be that the only resource for real estate information was through a real estate agent. However as more and more listings appear online and more and more websites appear to centralize this data, it becomes a lot easier for buyers to locate homes on their own. While real estate agents used to be the only people who knew enough about the recent comparable sales to evaluate a property, new tools like Zillow make it easy for anyone to access that information. And while most people will only make a few real estate transactions in their lifetime (thus they rationalize the need for an "expert"), columnists and blogs (like this one) are demystifying the purchasing process, and showing how it's no more difficult to buy a home than a car (and you don't have agents help you find cars).

In addition on the selling side, marketing has constantly gotten better and cheaper through the advent of the internet. With on-line postings getting such a wide audience, the need for a specialist to do this for you has shrunk considerably.

The flood of inexperienced agents over saturating the market. The one thing that real estate agents had going for them was the moniker of "expert on buying and selling homes". However with insane numbers of people becoming agents, this is rapidly losing it's credibility. In Miami there is one realtor for every 17 people! The result is that many buyers and sellers get stuck with terrible "experts". When Biff and I bought our first property we were saddled with a terrible agent. Not only did our agent do a terrible job at locating properties we'd be interested in (we ended up finding the house on our own) but she made some really stupid mistakes, like trying to use white-out to alter a typo in a legal document! Biff made her go make a fresh print of the document. And she still got her cut of the purchase.

Ethical considerations. Most real estate agents will go crazy at this one. They swear up and down that they are acting strictly in the best interests of their clients, especially the buyer's agents who get more money if their client spends more. But no one believes them because evidence to the contrary comes out all the time.

In the Detroit suburb of Commerce Township, seller Courtney Tursi is offering a two-year lease on a BMW X3 SUV to the agent who finds a buyer for her contemporary, two-level, four-bedroom, 3.5-bath lakeside home at the end of a private street....... "I said, 'You know what, Courtney, this will get more people to look at the house,'" Waquad says.

If agents were truly looking out for their clients interests, incentives for buying agents (like larger commissions or a BMW lease) wouldn't increase the chance of selling a property. But research shows time and time again that these incentive do work. (In the above example the house in question recieved more inquiries, though not more visits)

In the book Freakanomics, Stephen Levitt ran some numbers to see if real estate agents sold their homes the same way they sold other peoples. According to his research, realtors hold their own homes for 10 days longer than average and sell for 3% more than average (not to mention they keep their 3% commission). His explanation was simple, holding out longer for the bigger price is typically only worth a couple of hundred extra bucks for the realtor (and therefore not worth the delay), even though it could result in tens of thousands of dollars for the seller.

Real estate agents are rapidly on their way to becoming the next used-car salesmen. No one likes them, everyone distrusts them, and no one wants their kid to grow up and become one. An industry based on information brokering can only last for so long when the public doesn't trust them.

Now all of this doesn't mean that I think real estate agents are going away. But I think that their roles will be changing and their fee structures will be going down like the Titanic. Right now that's near impossible given the sheer number of agents who milked the boom dry. But the next couple of years, with the sales going way down, will hopefully wean most of the weak agents off the market. And then the industry can move towards the future.