Skip to main content
SpringerLink
Log in

Market Strength and Brokerage Choice in Residential Housing

  • Published:
The Journal of Real Estate Finance and Economics Aims and scope Submit manuscript

Abstract

This study develops a theoretical model examining the relation between housing market strength and brokerage choice. Our model shows that although internal transactions (where both buyer and seller agents are either the same or work for the same firm) have the potential side benefits of higher commission rates and lower search costs, in a strong housing market, brokerage firms are more likely to engage external transactions because of the greater demand for housing. However, when the market weakens, external demand for housing decreases, and brokerage firms become more willing to conduct internal transactions. Furthermore, while an internal transaction tends to occur at the expense of lowering the selling price, we show that it could also be chosen by brokerage firms with higher in-house searching-matching efficiency. This higher in-house efficiency generates a (second-order) counterforce of increasing the price. Hence, our model demonstrates that the housing market has a (partial) self-correction mechanism for the principal-agent incentive misalignment problem, especially when the market strengthens. Conversely, when the market weakens, internal transactions increase and prices decline, which can further weaken the market. Therefore, the equilibrium brokerage choice creates a self-reinforcing mechanism for generating more extreme market conditions. Using the Doubly Robust (DR) estimation method, we present empirical evidence consistent with the model with multiple listing service data from Hampton Roads, Virginia.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2
Fig. 3
Fig. 4

Similar content being viewed by others

Notes

  1. See Table B.101 entitled “Balance Sheet of Households and Nonprofit Organizations” in the Federal Reserve’s Flow of Funds Report, which can be found at https://www.federalreserve.gov/releases/z1/20230309/z1.pdf.

  2. Internal transactions are sometimes referred to in the literature as dual agency transactions. However, because terms have historically varied widely, confusion in the current study is avoided by only referring to the three brokerage relationships described in the Introduction.

  3. We are not the first housing market paper to use doubly robust estimators. Several recent housing market research studies have already used this method. See Lutz and Buechler (2021) and Chen et al. (2022).

  4. This proxy is closely related to the realized version of arrival ratio, \(\frac{{k_{in}^{i}{N_{in}}}}{{k_{ex}^{i}{N_{ex}}}}\). Hence, a fair concern is whether a bigger realized ratio truly reflects the superior matching efficiency internally, which should, according to our theory, exhibit a positive price impact for internal transactions. Or does it simply relate to some other unobserved brokerage characteristics that are unrelated to its internal searching-matching ability? As will be shown in the next section, we find significant evidence that brokerage firms (agents) that have a higher internal/external ratio tend to deliver higher prices, especially when it engages in internal transactions.

  5. Some unobserved variables may cause the insignificant trade time coefficients. In the next section, we run a more robust empirical analysis (doubly robust estimator). The trade time coefficients are all positive and significant.

  6. Our two-stage bootstrap models indicate larger bootstrap standard errors than non-bootstrap standard errors, which implies a potential generated regressor issue in our original model.

  7. We thank one anonymous reviewer who pointed out this problem.

References

  • Anenberg, E. (2016). Information frictions and housing market dynamics. International Economic Review, 57(4), 1449–1479.

    Article  Google Scholar 

  • Arnold, M. A. (1999). Search, bargaining and optimal asking prices. Real Estate Economics, 27(3), 453–481.

    Article  Google Scholar 

  • Barwick, P. J., & Pathak, P. A. (2015). The costs of free entry: An empirical study of real estate agents in Greater Boston. RAND Journal of Economics, 46(1), 103–145.

    Article  Google Scholar 

  • Barwick, P. J., Pathak, P. A., & Wong, M. (2017). Conflicts of Interest and Steering in Residential Brokerage. American Economic Journal: Applied Economics, 9(3), 191–222.

    Google Scholar 

  • Bian, X., Waller, B. D., & Yavas, A. (2017). Commission splits in real estate transactions. The Journal of Real Estate Finance and Economics, 54(2), 165–187.

    Article  Google Scholar 

  • Bond, S. A., Hwang, S., Lin, Z., & Vandell, K. D. (2007). Marketing period risk in a portfolio context: Theory and empirical estimates from the UK commercial real estate market. Journal of Real Estate Finance and Economics, 34(4), 447–461.

    Article  Google Scholar 

  • Cameron, A. C., & Trivedi, P. K. (2022). Microeconometrics Using Stata (2nd ed.). College Station, TX: Stata Press.

    Google Scholar 

  • Cattaneo, M. D. (2010). Efficient semiparametric estimation of multi-valued treatment effects under ignorability. Journal of Econometrics, 155(2), 138–154.

    Article  Google Scholar 

  • Chen, J., Glaeser, E. & Wessel, D. (2022). JUE Insight: The (non-) effect of opportunity zones on housing prices. Journal of Urban Economics, 103451

  • Cheng, P., Lin, Z., & Liu, Y. (2008). A model of time on market and real estate price under sequential search with recall. Real Estate Economics, 36(4), 813–843.

    Article  Google Scholar 

  • DeFusco, A. A., Nathanson, C. G., & Zwick, E. (2022). Speculative dynamics of prices and volume. Journal of Financial Economics, 146(1), 205–229.

    Article  Google Scholar 

  • Diamond, D. W. (1989). Reputation acquisition in debt markets. Journal of Political Economy, 97(4), 828–862.

  • Evans, R., & Kolbe, P. (2005). Homeowners’ repeat-sale gains, dual agency and repeated use of the same agent. Journal of Real Estate Research, 27(3), 267-292.

  • Forgey, F. A., Rutherford, R. C., & Springer, T. M. (1996). Search and liquidity in single family housing. Real Estate Economics, 24(3), 273–292.

    Article  Google Scholar 

  • Fu, Y., & Qian, W. (2014). Speculators and price overreaction in the housing market. Real Estate Economics, 42(4), 977–1007.

    Article  Google Scholar 

  • Gardiner, J. N., Heisler, J., Kallberg, J. G., & Liu, C. H. (2007). The impact of dual agency. The Journal of Real Estate Finance and Economics, 35(1), 39–55.

    Article  Google Scholar 

  • Gardiner, N., Heisler, J., Kallberg, J., & Liu, C. (2007). The Impact of Dual Agency. Journal of Real Estate Finan Econ, 35, 39–55.

    Article  Google Scholar 

  • Garmaise, M. J., & Moskowitz, T. J. (2004). Confronting information asymmetries: Evidence from real estate markets. Review of Financial Studies, 17(2), 405–437.

    Article  Google Scholar 

  • Genesove, D., & Mayer, C. (2001). Loss aversion and seller behavior: Evidence from the housing market. Quarterly Journal of Economics, 116(4), 1233–1260.

    Article  Google Scholar 

  • Gilbukh, S., & Goldsmith-Pinkham, P. S. (2019). Heterogeneous Real Estate Agents and the Housing Cycle. SSRN 3436797

  • Goetzmann, W., & Peng, L. (2006). Estimating house price indexes in the presence of seller reservation prices. Review of Economics and statistics, 88(1), 100–112.

    Article  Google Scholar 

  • Gruber, J., & Owings, M. (1994). Physician financial incentives and cesarean section delivery (No. w4933). National Bureau of Economic Research.

  • Guren, A. M. (2018). House price momentum and strategic complementarity. Journal of Political Economy, 126(3), 1172–1218.

    Article  Google Scholar 

  • Hagiu, A., & Jullien, B. (2011). Why do intermediaries divert search? RAND Journal of Economics, 42(2), 337–362.

    Article  Google Scholar 

  • Han, L., & Hong, S. H. (2016). Understanding in-house transactions in the real estate brokerage industry. RAND Journal of Economics, 47(4), 1057–1086.

    Article  Google Scholar 

  • Head, A., Lloyd-Ellis, H., & Sun, H. (2014). Search, liquidity, and the dynamics of house prices and construction. American Economic Review, 104(4), 1172–1210.

    Article  Google Scholar 

  • Hendel, I., Nevo, A., & Ortalo-Magné, F. (2009). The relative performance of real estate marketing platforms: MLS versus FSBOMadison. com. American Economic Review, 99(5), 1878–98

  • Hong, H., & Stein, J. C. (1999). A unified theory of underreaction, momentum trading, and overreaction in asset markets. Journal of finance, 54(6), 2143–2184.

    Article  Google Scholar 

  • Hsieh, C. T., & Moretti, E. (2003). Can free entry be inefficient? Fixed commissions and social waste in the real estate industry. Journal of Political Economy, 111(5), 1076–1122.

    Article  Google Scholar 

  • Huang, J. C., & Palmquist, R. B. (2001). Environmental conditions, reservation prices, and time on the market for housing. Journal of Real Estate Finance and Economics, 22(2–3), 203–219.

    Article  Google Scholar 

  • Johnson, K. H., Lin, Z., & Xie, J. (2015). Dual agent distortions in real estate transactions. Real Estate Economics, 43(2), 507–536.

    Article  Google Scholar 

  • Kadiyali, V., Prince, J., & Simon, D. H. (2014). Is dual agency in real estate a cause for concern? Journal of Real Estate Finance and Economics, 48(1), 164–195.

    Article  Google Scholar 

  • Knight, J. R. (2002). Listing price, time on market, and ultimate selling price: Causes and effects of listing price changes. Real Estate Economics, 30(2), 213–237.

    Article  Google Scholar 

  • Li, Z., Li, Q., Sun, H., & Sun, L. (2022). Diffused effort, asset heterogeneity, and real estate brokerage. Real Estate Economics, 50(3), 707–742.

    Article  Google Scholar 

  • Lutz, E. C. & Buechler, S. (2021). The Local Effects of Relaxing Land Use Regulation on Housing Supply and Rents. MIT Center for Real Estate Research Paper, (21/18)

  • Mehran, H., & Stulz, R. M. (2007). The economics of conflicts of interest in financial institutions. Journal of Financial Economics, 85(2), 267–296.

    Article  Google Scholar 

  • Micelli, T., Pancak, K., & Sirmans, C. (2000). Restructuring agency relationships in the real estate brokerage industry: An economic analysis. Journal of Real Estate Research, 20(1–2), 31–47.

    Article  Google Scholar 

  • Ngai, L. R., & Tenreyro, S. (2014). Hot and cold seasons in the housing market. American Economic Review, 104(12), 3991–4026.

    Article  Google Scholar 

  • Patron, H. E., & Roskelley, K. D. (2008). The effect of reputation and competition on the advice of real estate agents. Journal of Real Estate Finance and Economics, 37(4), 387–399.

    Article  Google Scholar 

  • Richard, E., & Phillip, K. (2005). Homeowners’ Repeat-Sale Gains, Dual Agency and Repeated Use of the Same Agent. Journal of Real Estate Research, 27(3), 267–292.

    Article  Google Scholar 

  • Robins, J. M., & Hernán, M. A. (2009). Estimation of the causal effects of time-varying exposures. Longitudinal data analysis, 553, 599.

    Google Scholar 

  • Rosenbaum, P. R., & Rubin, D. B. (1983). Assessing sensitivity to an unobserved binary covariate in an observational study with binary outcome. Journal of the Royal Statistical Society: Series B (Methodological), 45(2), 212–218.

    Google Scholar 

  • Sant’Anna, P. H., & Zhao, J. (2020). Doubly robust difference-in-differences estimators. Journal of Econometrics, 219(1), 101–122.

    Article  Google Scholar 

  • Shapiro, C. (1982). Consumer information, product quality, and seller reputation. Bell Journal of Economics, 20–35

  • Shapiro, C. (1983). Premiums for high quality products as returns to reputations. Quarterly Journal of Economics, 98(4), 659–679.

    Article  Google Scholar 

  • Sirmans, C. F., Turnbull, G. K., & Benjamin, J. D. (1991). The markets for housing and real estate broker services. Journal of Housing Economics, 1(3), 207–17.

    Article  Google Scholar 

  • Słoczyński, T., & Wooldridge, J. M. (2018). A general double robustness result for estimating average treatment effects. Econometric Theory, 34(1), 112–133.

    Article  Google Scholar 

  • Turnbull, G. K., & Dombrow, J. (2006). Spatial competition and shopping externalities: Evidence from the housing market. Journal of Real Estate Finance and Economics, 32(4), 391–408.

    Article  Google Scholar 

  • Turnbull, G. K., Dombrow, J., & Sirmans, C. F. (2006). Big house, little house: Relative size and value. Real Estate Economics, 34(3), 439–456.

    Article  Google Scholar 

  • Wooldridge, J. M. (2010). Econometric analysis of cross section and panel data. MIT press

  • Yavas, A., & Yang, S. (1995). The strategic role of listing price in marketing real estate: Theory and evidence. Real Estate Economics, 23(3), 347–368.

    Article  Google Scholar 

  • Yinger, J. (1981). A search model of real estate broker behavior. American Economic Review, 71(4), 591–605.

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Industrial and Commercial Bank of China, Beijing, 100031, China

    Xiangou Deng

  2. Business School, Shandong University, Weihai, Shandong, 264209, China

    Zhaohui Li

  3. Department of Finance, College of William & Mary, Williamsburg, VA, 23187, USA

    Michael J. Seiler

  4. Department of Finance, Iowa State University, Ames, IA, 50011, USA

    Hua Sun

Authors
  1. Xiangou Deng
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Zhaohui Li
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Michael J. Seiler
    View author publications

    You can also search for this author in PubMed Google Scholar

  4. Hua Sun
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Zhaohui Li.

Ethics declarations

The authors did not receive support from any organization for the submitted work. The authors have no financial or proprietary interests in any material discussed in this article.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

We are grateful to the Real Estate Information Network Inc. (REIN) in Virginia Beach, VA, who provided the data for this study. We thank editor Brent Ambrose and two anonymous reviewers, who provided insights and expertise that greatly assisted the research. We also thank Sophia Gilbukh and Bertram Steininger, the participants of the 2018 RecapNet Conference and 2019 AREUEA-ASSA, for their suggestions for this project. All errors are our own.

Appendices

A Appendix 1

Here we present the results from the first stage of hedonic regression using the full sample of observations in Table 8.

Table 8 Hedonic regression
Full size table

B Appendix 2 Naive Regression Estimator from Outcome Model

We first present the results from a naive outcome regression model only. The estimation results are displayed in Table 9. Column 1 reflects internal transactions, whereas column 2 reports results for dual agent transactions.

Table 9 Impact of internal transactions on sale price
Full size table

Rights and permissions

Springer Nature or its licensor (e.g. a society or other partner) holds exclusive rights to this article under a publishing agreement with the author(s) or other rightsholder(s); author self-archiving of the accepted manuscript version of this article is solely governed by the terms of such publishing agreement and applicable law.

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Deng, X., Li, Z., Seiler, M.J. et al. Market Strength and Brokerage Choice in Residential Housing. J Real Estate Finan Econ (2023). https://doi.org/10.1007/s11146-023-09969-6

Download citation

  • Accepted:

  • Published:

  • DOI: https://doi.org/10.1007/s11146-023-09969-6

Keywords

JEL Classification

Search

Navigation