It's hard to feel sorry for residential real estate agents in Los Angeles, right? Even though the market's cooling now, you'd think agents were the New York Yankees or maybe oil-company stockholders since they had such a great run for such a long time.
Just imagine how the commission on the sale of a typical $1 million L.A. house is so much more bountiful than on a comparable $300,000 house in proverbial Peoria. You probably think the average L.A. agent traded in his d & #233;class & #233; Mercedes-Benz years ago and now is on his third Maserati.
Well, not so fast. Maybe we shouldn't blithely dismiss the plight of the agent.
Agents' pay can be weighed down a surprising amount by a little something that pundits and journalists and lots of average people tend to forget about. It's called competition.
Think about it. Since home selling is a relatively easy profession to get into what economists call a low barrier to entry many jump into the business when the business is hot.
How many times have you heard this, or said it yourself: "Hey, I can start selling homes! If I sell just two million-dollar homes a year, I'll earn $120,000. And I'll bet I could sell three or four, or maybe eight or nine."
Well, lots of people not only think that but do it. As a result, you'd find so many agents chasing the same commission that you'd be lucky to sell two houses. In fact, the competition is so sharp that agents in areas with high-priced homes usually end up earning surprise! about the same income as agents in low-priced areas.
Two academics, Chang-Tai Hsieh and Enrico Moretti, did a study about this in 2002. They looked at sales activity for agents in Boston and Minneapolis. At the time of the study, Boston homes sold for twice as much as comparable homes in Minneapolis.
"If this is all there is to the story, real estate agents in Boston would simply earn twice as much as their counterparts in Minneapolis," they wrote. But because there's a low barrier to entry, agents flooded Boston and they split the business in finer pieces. As a result, agents in Boston sold an average of 3.3 houses a year while their counterparts in Minneapolis sold exactly twice as many, 6.6.
In other words, agents in high-cost Boston could expect to earn the same amount as agents in much lower-cost Minneapolis.
And how much would those earnings be? Well, certainly top agents can hit the $1 million mark, but the average is far more modest. According to the National Association of Realtors, the median annual income of real-estate sales agents in 2004 was only $37,600, and that's down from $39,300 in 2002. They can thank competition for that little drop.
And in California, with its high-price homes, the number of licensed Realtors has roughly doubled in the last five years, as you can read in the article at the top of Page 1 in this week's issue. As a result, agents are handling less than half as many sales as they did in 2000.
So, when times are good, real estate agents face commission-chopping competition, and when times are bad, corporate bloodletting. It's OK to feel for them.
But at least it's a good reminder that competition works.
Charles Crumpley is editor of the Business Journal. He can be reached at email@example.com .
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