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WOW there is this bizarre chicken and egg type conversation going on over at Bloodhound Blog

i’d like to offer some food for thought… consider the sale of a stock. The stock price is set by the market, what a seller is willing to sell for and what a buyer is willing to pay. The “broker” charges a commission over an beyond the underlying value of the security, to both sides, for the allowing the participants to use his access to the trading platform (NYSE, NASDAQ, Etc..) . Because there is a lot of liquidity in the market and the stocks as an asset class are uniform, the process of transfering ownership is standardized. The value of the broker here is access, of course they could provide some sort of guidance as to which stocks to buy but you’ll pay a premium for that.

with a home sale transaction, its more ambiguous, but both sides still pay, the market just incorporates the cost of the sale into the market price. If buyer buys a house that has a price of say 400k, that price is probably judged to be reasonable by the buyer (and his bank) based on properties in similar circumstances (comps) many of the properties had commissions paid from their proceeds. So the underlying value of the house doesn’t change as far as the market is concerned because the house is worth 400k even if their is no commission paid.

hmm why is this? its because the housing market is not as liquid as the stock market, price transperency is non-existance, and each asset is unique. You cannot price all homes the same, not even the ones on the same block. The “broker” adds value over and beyond access, they provide marketing and risk mitigation, much like a retailer adds to the value chain of selling vegatables. They provide conveinence and risk mitigation.

If a FSBO will sell his 400k house for 385k to a buyer without an agent, its because they are assuming the risks and the seller is assuming the cost of marketing (pricing included). They are removing elements of the value chain, if you grow your own food, that carrot costs less too…