Thursday, September 30, 2010

Career Synergies: Do Celebrities Who Become Real Estate Agents Earn More?

This LA Times Article tells an interesting story providing three examples of "B-List" Hollywood stars who are now successful real estate agents. The article says that these individuals (including a Seinfeld Girl and a surgeon from the soap opera "General Hospital)  have used their fame to attract more people to hire them as agents. 

A few years ago, Enrico Moretti and  Chang-Tai Hsieh published an important paper on the entry of real estate agents into selling homes in markets experiencing rising prices.  In their setup, it is easy to become a real estate agent and during a boom time, people enter this market to sell homes.  Perhaps the Los Angeles celebrity status for real estate agents creates an efficient barrier to entry? After all, not all of us are famous.  If a "nobody" knows that he is not famous and won't be able to get clients if he enters the LA market --- because the home buyers seek a star agent -- then he is less likely to enter.  So, my point is that Celebrities are good for our economy! 

Here is their paper's abstract

"Real estate agents in the US typically charge a 6 percent commission, regardless of the price

of the house sold. As a consequence, the commission fee from selling a house will differ

dramatically across cities depending on the average price of housing, although the effort necessary

to match buyers and sellers may not be that different. We use a simple economic model and crosscity

data to measure the effect of the fixed commission rate on market entry by real-estate agents.

We show that if the commission rate does not vary and if there are low barriers to entry to the realestate

brokerage business, the entry of real-estate agents into cities with high housing prices is

socially inefficient. Consistent with our model, we find that when the average price of land in a city

increases, (1) the fraction of real-estate brokers in a city increases; (2) the productivity of an average

real-estate agent (houses sold per hour worked) falls; and (3) the real wage of a typical real-estate

agent remains unchanged. We can not completely rule out the alternative explanation that these

results reflect unmeasured differences in the quality of broker services. However, we present

evidence that as the average price of housing in a city increases, there is only a small increase in the

amount of time a buyer spends searching for a house, and the average time a house for sale stays on

the market falls."