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Rent Exhaustion in Real Estate Brokerage May 4, 2007

Posted by federalist in Real Estate.
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“Rent exhaustion” refers to a situation where opportunities for large windfalls attract many competitors, who by massing around it essentially destroy the value of the windfall.  Tim Harford gives one classic example:

Rent exhaustion is no economists’ fantasy – go to any place with rich tourists and poor locals (Dar es Salaam, the first African city I visited, fits the description nicely), and you’ll see lots of people waiting for the one generous tip or overpriced taxi fare. If the tourists become more generous or gullible, the local guides don’t get richer, they just multiply. The bigger paydays become less frequent.

Like beggars, Realtors have driven the cartel rents of the real estate brokerage industry to the point of exhaustion.  The cartel has largely maintained the tradition of a 6% sales fee per house transaction.  With houses routinely selling for seven figures there are enormous windfalls — a good year’s salary — to be had from selling even one house.  An article in the Feb 7 WSJ explains,

Although it is difficult to make a good living as an agent, many stay active in the business at least part time, handling transactions for friends and family or hoping to hit the jackpot with one big transaction.

In a normal market price competition would drive the sales fees down to more reasonable levels.  But in this case the cartel has held its grip on the market and, predictably, hordes of salesmen have flocked to the industry, overwhelming the opportunities and wasting a lot of time that would more productively be spent elsewhere.

Though finally, the WSJ reports, “The long-awaited shakeout among real-estate agents is finally happening — much to the relief of those who are sticking with the business and prefer a bit less competition. … Even before sales slowed, people in the industry said far too many agents were chasing too few deals.”

Consumers would have benefited much more if sales fees had come down, instead of rent exhaustion driving out competing salesmen.

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