How Real Estate Agents Keep Cities Segregated
A lot of factors contributed to the astronomical rise in real estate prices we saw in New York City and other cities like San Francisco, Los Angeles, Seattle, Denver, Miami, and Boston in the aftermath of the Great Recession: local factors like rezonings and tax breaks for developers, and national ones like the Fed lowering interest rates dramatically. What I found on the ground, is that real estate agents put these economic conditions to work in their interactions with buyers.
As you mentioned, buyers, even in New York City, don’t have a lot of experience in the housing market. Most people, if they ever buy a house, do it only once or twice in their lifetimes. So agents ended up being incredibly influential in many aspects of buyers’ decisions, including the prices they paid. Agents constantly reminded buyers how hot the market was and how great the current economic conditions were for buying. They would describe the Great Recession as a blip, and they’d talk about New York real estate as the perfect investment commodity that would never depreciate.
Agents would tell buyers that the only way to secure the kind of apartment the buyer wanted was to offer more than what the buyer had said they wanted to spend. With less wealthy buyers, this upselling was sometimes overt. Agents would say to less wealthy buyers, “You need to spend a little more than you thought you would to get your dream apartment — do it now!”
With very wealthy buyers, it tended to be a little subtler. When I say “wealthy buyers,” I mean buyers who said they wanted to spend millions of dollars on housing. Agents would show wealthy buyers apartments listed at or around their stated price ceilings, but the agents would trash talk these apartments. They would disparage architectural or design elements of the building, or say the view wasn’t that great, or that the apartment was too far away from the subway. And these wealthy buyers would say, “Maybe you’re right. What else is there?” Then the agents would take these wealthy buyers to apartments listed at amounts far above the buyers’ initially stated price ceilings.
For example, one buyer had an initially stated price ceiling of $2.9 million, and his agent showed him a handful of apartments at that price. They talked mostly about the things they didn’t like about these units, and so the agent started showing him apartments listed at over $3.5 million. And at open houses for these pricier places, the agent would say, “This place is more your style, isn’t it?” and he would talk about how much better the more expensive listings were than the ones they had previously seen. And this buyer ends up making an offer on one of these more expensive apartments for $3.9 million, spending almost 35 percent more than his initially stated price ceiling.
This upselling is related to what the economist Robert Shiller calls “irrational exuberance” or extreme confidence in markets. Agents fervently believed that prices would continue to rise, and they convinced buyers of this as well. What happens in the aggregate is that real estate becomes more and more valorized and commands higher and higher prices, particularly in already high-priced neighborhoods.
To put it another way, agents are helping to sustain demand for astronomically priced housing in the fanciest parts of New York and other cities. I actually see some good evidence of this when I look at neighborhoods with more real estate agents and find that they have higher price increases over time.
This content was originally published here.