Academic journal article Cityscape

The Market for Real Estate Brokerage Services in Low- and High-Income Neighborhoods: A Six-City Study

Academic journal article Cityscape

The Market for Real Estate Brokerage Services in Low- and High-Income Neighborhoods: A Six-City Study

Article excerpt

Abstract

In this article, we examine the market structure for real estate brokerage services across six large metropolitan statistical areas (MSAs) to see whether low-income neighborhoods, or neighborhoods where house pnces are low, are as well served by real estate professionals as higher income or higher priced neighborhoods. We collect more than 300,000 real estate listings and compute the Herfindahl-Hirschman Index for each ZIP Code neighborhood in each MSA. When we divide neighborhoods based on income, house value, and race, we find no evidence that access is worse in disadvantaged areas; that is, the market structure for brokerage services is at least as competitive in less advantaged neighborhoods. We also analyze market leaders in the six MSAs and find that some firms, however, specialize in particular market segments.

Introduction

Residents of low-income or minority neighborhoods pay higher prices and have fewer choices for a variety of products and services. Underserved sectors include supermarkets, banks, and large drug stores,1 credit cards,2 gasoline retailing,3 and insurance.4 Allegations of "retail redlining" have led to lawsuits against companies such as General Motors Company, Wal-Mart Stores, Inc., and Burger King Corporation.5 Although differences in the performance of housing markets in low-income or minority neighborhoods have been extensively studied, most of the attention has been focused on possible redlining practices by mortgage lenders.6 Little attention has been paid to real estate middlemen - brokers and agents - in assessing the performance of urban real estate markets.7

This lack of attention is surprising, given that housing market outcomes vary greatly. Homeownership rates differ among various economic and demographic groups. Two dimensions that have probably attracted the most attention are income and race. Very low-income households have homeownership rates that are 37 percentage points lower than the rate for high-income households, whereas homeownership rates for minority households lag behind those of White households by 24 percentage points (Bunce and Reeder, 2007). Some evidence suggests that house prices paid also differ across groups. In a study of four cities, Bayer et al. (2012) found that African-American and Hispanic homebuyers paid a premium of 3 percent - a difference not explained by variation in buyer income, wealth, or access to credit.

The type and degree of services demanded by buyers and sellers differ for low- versus high-priced houses. Real estate markets tend to be thicker in lower price ranges. Product heterogeneity tends to be greater in higher price ranges. Broad agreement also exists that real estate markets are local and not national in geographic scope. Real estate brokers and agents thus compete in local markets. In large metropolitan areas, most agents and many brokers tend to specialize even more and compete in submarkets and neighborhoods within the larger metropolitan market area. This outcome is not surprising, because sellers and buyers value the localized knowledge that agents and brokers bring to the transaction.

Given all these aspects of housing markets, the question that naturally arises is, "Are the residents of low-income neighborhoods as well served by real estate agents and brokers as the residents of high-income neighborhoods?" In light of Hsieh and Moretti's (2003) finding that when the average price of land in a city increases the fraction of real estate brokers relative to population increases and the productivity of a typical real estate agent falls, one can imagine that even in areas that are geographically proximate, different neighborhoods have different clienteles and are ripe for specialization, which may result in lower income neighborhoods being differentially served by real estate brokers and agents.

For this reason, we investigate whether submarkets within broader metropolitan markets face different levels of competitiveness among real estate brokers. …

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