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.
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Notes
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.
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.
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.
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.
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.
We thank one anonymous reviewer who pointed out this problem.
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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.
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.
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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
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DOI: https://doi.org/10.1007/s11146-023-09969-6