Home Economics: Real Estate Exchanges and the Future of Homebuying

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Join us as Richard Epstein and Michael Toth discuss how digital innovation is changing the way U.S. consumers buy and sell homes. Amid a V shaped recovery in housing, that has led to a surge in mobility and home prices across the U.S., Epstein and Toth will review emerging real estate marketplaces and how these platforms compare with other efforts to disrupt traditional industries through exchanges. Epstein is the Laurence A. Tisch Professor of Law, at New York University, the Peter and Kirstin Senior Fellow at the Hoover Institution , and the James Parker Hall Distinguished Service Professor Emeritus and Senior Lecturer, the University of Chicago. Toth is SVP of REX, an Austin-based real estate technology company delivering a full-service online platform for residential real estate buyers and sellers. 


Prof. Richard A. Epstein, Laurence A. Tisch Professor of Law and Director, Classical Liberal Institute, New York University School of Law

Michael Toth, Senior Vice President for Public Policy and Special Counsel, REX


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Event Transcript



Dean Reuter:  Welcome to Teleforum, a podcast of The Federalist Society's Practice Groups. I’m Dean Reuter, Vice President, General Counsel, and Director of Practice Groups at The Federalist Society. For exclusive access to live recordings of Practice Group Teleforum calls, become a Federalist Society member today at fedsoc.org.



Greg Walsh:  Welcome to The Federalist Society's Teleforum Conference call. This afternoon's topic is titled, "Home Economics: Real Estate Exchanges and the Future of Homebuying."

      My name is Greg Walsh, and I am Assistant Director of Practice Groups at The Federalist Society.


      As always, please note that all expressions of opinion are those of the experts on today's call.


      Today, we are fortunate to have with us Professor Richard A. Epstein, the Laurence A. Tisch Professor of Law and Director of the Classical Liberal Institute at the New York University School of Law, and Mr. Michael Toth, a Senior Vice President for Public Policy and Special Counsel at REX.


      After our speakers give their opening remarks, we will go to audience Q&A. Thank you all for sharing with us today. Mike, the floor is yours.  


Michael Toth:  Great. Thank you so much, Greg, and thank you to everyone from The Federalist Society for organizing today's Teleforum and inviting me to participate. And right off the bat, I would be remiss if I also didn't note what an honor it is to appear alongside Professor Richard Epstein.


Appearing alongside Professor Epstein reminds me of a remark that a fellow lieutenant said to me on the day that we graduated from Officer Candidate School, and we were looking around at all these senior officers and square-jawed type senior enlisted. And he said to me, "Toth, if you can't be the best, just be around the best." And I feel as though today, I've at least accomplished the latter of those two things. Professor Epstein is truly the best of the best, one of the great giants of American legal education over the past half century.


So, Richard, it's great to be with you today. And Richard and I thought that the way to divvy up our time before we turn to your questions would be for me to talk a little bit about the real estate market as a whole and give some base line numbers and some base line points. And then talk about what I would call some problems or challenges in this market.


And then I'm going to turn to and spend about five or so minutes on the topic at hand after setting the table of the new markets, the new platforms, and the new exchanges, the new dynamics with digital technology, and the internet that are starting to emerge and take hold in the real estate market. And then I'll turn it to Richard for some further theoretical commentary and some additional points, and then we'll take some questions. 


      So to begin with the first aspect of this, why does the real estate market as a whole, why does it matter? Why is this an important conversation? Why does this merit our time on a Thursday afternoon? And I think the simple answer is just the sheer size of it.


      If we add up the total value of every single home in the United States, it comes to almost $34 trillion, and that's a pre-COVID number. $34 trillion, which is an absolutely enormous amount. Just to put that number in perspective, it's as much as the gross domestic product of the United States and China combined. And that's not including commercial or retail properties, that's just residential, equal to the GDP of the U.S. and China combined.


      And then, of course, if we move from the macro to the micro and we think about consumers—and this could be all of us on this call or most of us or some of us on this call—and we think about the transactions that we've gone through, the home purchase or sale is for sure the single largest transaction or among the single largest transactions until the next time that we buy or sell a home, at which point with asset appreciation and other factors, that transaction probably becomes the largest.


      But turning to the problems or the challenges in the market, I think a clear point is that the size of the real estate market in the United States has not automatically translated into efficiency. In fact, if we look into the real estate market, it's really one of the last sectors of the U.S. economy to be meaningly transformed by advances in technology and communications.


      What do I mean by that? Let's start with the cost of transactions. So if you own a home worth around $400,000, a little bit north of the median home price in the United states, and you go ahead and sell that home, you won't net the full proceeds of the sale, the $400,000 that you sell your home for. It cost on average between five and six percent just in brokerage commissions to sell that home.


      So on that $400,000 home, you'll pay anywhere from $20-24,000 right off the top in brokerage fees. And that doesn't take into account other closing and transactional costs. So that brokerage commission alone to sell the home amounts essentially to the purchase of a new car. Or to put this another way, if the median homeowner in the State of New York were to sell their home, the commissions would equal to 40 percent of that person's annual income. It's a jaw-dropping amount, according to a recent article in the Economist, and it stands out in several ways.


      First and most obviously, if we think about the transactional costs associated with real estate sales and we compare them with the transactional costs associated with sales of any other asset class, stocks, bonds, mutual funds, ETFs, the homes are the great outlier. In fact, if you go to TheWallStreetJournal.com right now, you'll see front and center an article on Robinhood and Charles Schwab and other online platforms and apps that have essentially brought commission free trading to the palm of the hand all over the world.


      And a trend that we've seen in investments of commissions going down, down, down to zero or close to zero has mimicked a larger movement towards streamlined commissions in marketplaces from travel to insurance to groceries, even dating. And yet, the transaction costs on U.S. homes remains at the same five to six percent level that they were decades ago, according to academic research in the 1970s, in the 1980s, in the years before the internet revolution and the advent of widespread digital technology.


      The second anomaly about these high transaction costs is when we compare them to global rates. As the Economist Magazine recently pointed out, transaction cost of five to six percent of the value of a property in the U.S. puts us two to three times higher, in terms of transaction costs, than the transaction costs in comparable international markets.


      So why should we care? It's not just because about $1.5 trillion changes hands in home sales every single year, meaning about 75 billion, with a B, in commissions. So that's, of course, a sufficient enough reason to care. There are other important knock-on economic and social consequences.


      First off, just on the sales of homes themselves, from the year 2000 to the year 2018, sales of new and existing homes stayed flat at around six million sales despite an increase in GDP and an over 20 percent increase in the number of households. We know the less something costs, the greater the demand. With high transaction costs, we're seeing flatline home sales.


      The other factor that's very important here are the knock-on economic effects that come with home sales. With fewer home sales, relative to population, we're also seeing a dampened growth in services that routinely accompany home transactions, from construction to maintenance to mortgage financing, moving, and storage. And there's data that suggests that transaction costs are a reason why Americans stay locked into their homes or a reason why some Americans can't afford a home in the first place.


      For every $1,000 of additional mortgage or property tax, household mobility is reduced by 10 to 16 percent according to one recent study. And just as you're listening to this, think about an interesting thought experiment. Call it the Southwest thought experiment after the airline. Imagine a world in which there was a zero percent commission to buy or sell a home. In the words of Southwest, you'd be free to move around the country. Whether you bought or leased really would be a capital markets decision determined by the price of capital and not by the transaction costs of getting in or out of an asset.


      In my company, and I'll talk about our platform in a bit as one of these new models, our research shows that if we reduce the transaction cost of getting to a home by just one percentage point, more than 250,000 Americans could afford the median home. And 700,000 more Americans could afford it if we reduce that rate by two percent.


      So what is it about the real estate market that has created these high transaction costs? The real estate marketplace is currently structured, it has several important features, some of which are standard across different industries and some of which are a bit anomalist.


      First, the standard process of selling a home involves engaging an agent. Nothing is particularly out of place with this arrangement as many industries feature principal agency relationships around asset sales. Further, in the standard arrangement, the seller agrees to pay the seller's agent a percentage of the sale price. Again, nothing radically out of the ordinary here. At a minimum, there's interest alignment at a basic level between the seller's agent and the seller. The more the home sells for, the happier the seller is—they're getting more sale proceeds—and also the happier the seller's agent is. Their incentives and interests align.


      But then comes the anomaly. In the standard arrangement, the seller also agrees to pay the buyer's agent. When it comes to price, the interest of the seller and buyer, of course, diverge, and yet, their agents are paid by the same party. This is highly uncommon, to say the least. How many defense counsel or plaintiff counsel on this call are paid by an agent on the other side of the case?


      Further, the buyer's agent, like the seller's agent, is also paid percentage of the total sale price. So the higher the sell price, the more the buyer agent makes. But it's in the buyer's interest to pay less, and yet, the buyer's agent is paid more when the buyer pays more. Again, this is not the normal agent principle dynamic.


      Finally, when we dive into the standard platform for buying and selling homes, the anomalies become still larger. With the vast bulk of homes that are sold in the U.S., buyer agents can see the commissions they will collect if their buyer purchased a listed home. And these commissions tend to be five to six percent but evenly between agents on opposite sides of the deal.


      So the typical commission paid to the buyer's agent is somewhere between two and a half to three percent, not as substantial. A three percent commission of that $400,000 home mentioned earlier is around $12,000.


      So as the buyer's agent can see the size of the commission, another perverse incentive exists, and that's to steer the client to the home that meets the agent's preferences for a higher commission. Adding to this steering problem is yet another anomaly. The size of the commission that the buyer's agent will collect is visible to the buyer's agent but not to the buyer directly.


      The common platform does not publicly disclose dealer fees like Carvana does on its very popular platform, purchaser of cars. But I'll turn to the new market forces that are bringing innovation and cost efficiencies in the real estate market in a second. Let me just close this section on the issues with the real estate market by noting that the anomalies in the incumbent market has been shown to have a real impact on high commissions according to recent econometric work by Cornell and Wharton economists Panle Barwick and Maisy Wong.


      Barwick and Wong looked at 650,000 home sales in a single region over a decade plus. They concluded that steering the higher commission's properties cause properties that offered less than the two and a half percent buyer's agent commission to take longer to sell, which means a higher carrying cost on the part of the owner, or to sell at lower rates. So it's putting an upward pressure on rates.


      There's a number of factors that are putting pressure on this incumbent market. Among them, there's a number of recently filed lawsuits. My company's not a party to any of these suits, and I won't spend time discussing them. Instead, I'd like to focus more on what's happening organically in the marketplace through new market solutions, innovation, and the process of trial and error that is beginning to take hold in the real estate market, and that's the new exchanges, the new markets solutions, as I call them.


      At my company, which is called REX, we replicate much of what is standard in the real estate market but innovate on a few key pain points that have artificially driven up commissions. First, we use a machine learn unit, artificial intelligence techniques, to find buyers and sellers. We market to sellers who are interested in selling their home in a modern fashion without paying commission rates that no longer make sense in many home transactions.


      When sellers engage us, we gather the necessary information about the home, we take pictures, we film virtual tours now. With COVID, that's become a hot demand item. And we work with the seller to price the home. We then market the home directly to buyers, also by harnessing digital technology.


      In over thousands of transactions since our company's founding, we see two general outcomes from our platform. Both of these bimodal outcomes produce and show far lower commissions. In many cases, as a result of our technology, we match buyers and sellers directly. When this occurs, we charge a seller as low as two percent and nothing, zero percent, to the buyer. Thus, the five to six percent commission falls as much as 70 percent to 2 percent.


      Now, there are cases, and I wanted to spend a minute talking about this because this is a real new development in real estate markets, where the buyer interested in purchasing a home from one of our sellers engages an agent who's not from REX, who's not from the company that I work at. What we do here is allow standard negotiation and price discovery to occur around the commission.


      We create, essentially, a new market, a new kind of exchange and new negotiation dynamic. When we find a buyer directly, as mentioned, we represent the buyer for zero. When the buyer chooses to negotiate an agent from outside the company, our sellers and the interested buyers are free to negotiate. Our platform does not mandate that sellers make a preset commission offer of two and a half or three percent for the buyer's agent.


      Rather, we seek to put the value where it belongs. And we ask the buyer to make an offer that reflects what the buyer is willing to pay for that agent's service. It may be a percent of the sale price, one percent, two percent, or the full three percent. Or it may not be stated at all in percent terms. Why can't buyers offer a fixed amount of money for the services provided?


We appraise many things that way. If I asked a person how much something costs, often times the answer if $1,000, $500, $10, $10,000, not always a percentage of something else. And it may be that the amount the buyer offers is simply based on an hourly rate, the same way that lawyers and many professional service providers bill. In any case, it's up to the buyer to work out with the buyer's agent with the sale price.


So how is the buyer's agent actually paid? Again, we allow the free choice of consumers to dictate the outcome. Buyers can pay their agents themselves at closing, or they can ask the seller to deduct the amount from the seller's proceeds. In the latter case, the seller may counter and ask the buyer to pay more for the home or not accept an offer, which does not begin precipitation proceeds. But the buyer has some leverage because as we know, a bird in hand, buyers there with an offer, feeds two in the bush.


So why is structure exchanged this way? For a couple reasons. One is that it brings necessary price transparency to the process of commission, which as I mentioned earlier is a $75 billion industry in the United States real estate market, $75 billion. The price of a buyer's agent is made visible to the buyer.


Second, it leverages the power of technology. And this is an issue that we've touched on, but I haven't fully dived into. With technology, the process by which home buyers go about looking for their next home is changed radically. There's a drastic increase in the amount that homebuyers themselves rather than their agents are searching for homes. The internet has moved home searching online and given consumers the ability to search for properties, and not just properties but schools, essential services, and amenities. Buyers now have all this information at the fingertips.


Despite the huge fall in labor inputs on the buy side with technology shifting the work to the buyers, the buy side's fees on the traditional market have not fallen. So we've sought to update the marketplace in light of technology and allow these fees to readjust in light of who's doing the work and how the work is being done.


So our platform allows buyers and sellers and buyer's agents to arrive at a fair price for work done. And what we've learned from our platform is that when we have outside agents involved, buyers and sellers are willing to pay around one and half percent. And this is the other aspect of the bimodal, the bimodality of our platform. It either produces zero percent on the buy side or one a half percent. But in either case, it's substantially lower than the traditional marketplace.


      I'm going to wrap up in a second before I turn this over to Richard. But I did want to say a couple words about other platforms as well as the kinds of customers that we're seeing on these new platforms, as I think it is relevant to some of the work that Richard has done on behavioral economics.


      First, on the other platforms. We have seen over the past several years a burgeoning of new approaches to residential real estate sales. Again, I think commonly driven by the size of the marketplace and an acknowledgement across the industry that it needs to change in light of communications in modern computing and digital technologies.


      So we've seen eye buyers enter the scene, who buy homes directly. They maximize on convenience. The home seller can move out today, doesn't have to wait for the end buyer to show up.


      It also, interestingly during the COVID environment, has optimized around safety. From the end buyer perspective, the actual consumer, you can purchase and look at an unoccupied home. The seller has already left. And it's the eye buyer or eye broker, in a sense, who is the owner for that period of time.


      We've also seen brokerages start to get to work with buyers -- work with sellers, rather, without actually purchasing the asset by funding repairs and trying to get on the same side of the upside that comes from those repairs. And we've seen discounters on both sides of the equation.


In our market, the marketplace that we've created, what we've seen is that it lends itself particularly well to experienced home buyers and home sellers. And I think that dovetails very nicely with a point that Richard made in a recent article about behavioral economics.


Richard's point is that we learn. We're rational, at the same time we live in community. We seek the advice of others. We learn through trial and error, through the learnings of our friends and our colleagues and our families, and we adjust. But we're seeing a lot of adjustments in the real estate market.


And all of these adjustments require new approaches, and it requires both the consumer as well as the platforms, like ours, to adjust to the information that we receive as we take these new approaches. So the directions that consumers are going to continue to take and the directions that the platforms like ours really depends on these adjustments that we're making day to day based on the preferences that we receive.


And also, I'll end with this. These adjustments hold the key for the long-awaited transformation of the realty market. Thank you.


Prof. Richard A. Epstein:  Well, I guess I'm supposed to speak now. That was terrific, Michael. Let me see if I can pick up and put this in sort of a kind of a larger social context. And I think a very nice place to begin is with his last remark about behavioral law and economics.


There are two ways in which to look at this. One of them is to treat it as a discipline, which explains why rational behavior never seems to take place. And there is a school of cognitive bias thoughts and so forth which starts to give you a series of experiments that are given to school children and to university students. And it turns out that      quite often, they get these results wrong. And so what they do is they conclude that a degree of irrationality is associated with the market.


      But I think the better way to understand law and economics and behavioral stuff is exactly the opposite. What happens is it turns out that we are not machines, that we tend not to do things by deductions from former models in order to figure out what the optimal point it. Instead, the pattern of behavior that is commonly observed across the board in all these situations is marginal adjustments.


      To start at the very beginning, if you start to look at the way animal behavior takes place, one of my favorite subjects, and you see the way in which a animal, which is a predator, decides whether or not to chase after a prey, what you do is it takes one take, and if it turns out it's too easy, then the next time it's willing to go a little bit further. If it turns out it can't reach it, then it becomes more selective.


      And so what happens is that the world is filled with incremental adjustments, success of approximation. And living life at the margin is essentially the way in which everybody starts to do. And the real question about rationality is a question which asks this very simple question, how rapidly, when you start making these marginal adjustments, do you get yourself to something like a social optimum?


      And what Michael said is clearly true. If you turn out you're dealing with experienced buyers and sellers in these markets, their approximations come much more quickly so that the delay essentially is going to be small and the rate of transactions that take place is going to be more rapid. And there is no question that the services that Michael offers are essentially more barebone services than those which are offered by a traditional broker.


And he therefore is probably telling you the exactly the right thing when he says that his customers tend to be a little bit more savvy than everybody else. What he's saying in effect is we can do more of the work by ourselves that we will substitute into a firm that gives us the essentials for the way in which this particular problem goes.


      Now for the larger theory that we're talking about here is, again, something that he exemplified, which is that when you're dealing with markets and you're trying to figure out how you shake them up, the single most powerful solvent with respect to the way in which they go is through new entry and often from people who are not in the same line of business with the same methodology as everybody else.


      There's a long theory in economics about when goods become novel and have very high rates of return, and then when they become customary, they become commoditized so that virtually everybody can do these things. And it turns out that as a consumer, you'd love to be able to be in a well-serviced commoditized market because your prices are going to be relatively low, and the transactions are going to move.


      But if you're an entrepreneur, what you try to do is to go into a space where nobody has gone and to figure out the way in which this is done. And one of the ways in which you can find out how this is going to happen is you start looking at markets that have themselves high transaction costs.


      So many years ago, at the passage of the Durbin amendment, there was a real question about how much should we charge for interchange fees, that is the amount of money that has to be paid to the agents of the buyer, the agent of the seller, and the money transactional lender, the borrower, the platform operator, and so forth. And these numbers were very, very high. One might've thought well over one percent for a straight financial transaction.


      And so what happens is there's two ways you can try to solve this. One is you can start to put caps on fees. And in the brokerage market, that would be to say okay, traditional brokers, you can only charge four percent buyer and seller, no matter what the contract provides, which will result in a massive form of dislocation.


      Or what you can say is have new entry and if it turns out that the price structure is simply too high, the new entries will start to pull away individuals into these markets. So the question is how is that particular process going to work in the kinds of markets that Michael has started to talk about?


      Now, when we had our little private conversation by way of prep talk, what we did is we discussed which end of the market is going to be likely to have the most receptive situation for his barebone, highly efficient kind of approach. And he said, as he said on this show, generally speaking, it turns out that that part of the market is at prices that are somewhat above the median but that really high-end properties, for the most part, have not been sold under his system.


      And so the question that you have to then ask is what is it that is supplied at the high end that requires more standardized or more intensive services that have not neutered the middle man? And it's not all that obvious to figure this out. But essentially, as customers become richer and they become more picky, oftentimes what they want to do is have more intensive services.


What they do is they have a broker who not only lists the property one way or another, but they actively solicit customers one time or another. They join multiple listing services. They start to give you constant updates about the way in which thing goes. They give you all sorts of advice about how it is that you ought to prep your home in order to make it more amenable for sale. They give you a lot of information about how the way in which this thing ought to be priced and so forth.


And so it turns out that if you look at this situation, it's not as though the new technology has just come in in the form that Michael has mentioned it, has managed to displace the entire business everywhere else. What has happened is it's taken a set of the market transactions that are most amenable to the things that he's talking about and has given a challenge to defend its services.


But even today, I think the shares of his company or that kind of services in the markets are about two or three percent. I am sure that it will grow larger as the platforms become more skilled and experienced, become better known and all the rest of that stuff. But you have to then ask but what is it about the real estate markets, particularly at the high end, that make them relatively immune to what's going on?


And here, I want to sort of talk about this in two ways. One is what Michael said is that the commissions that you start to see in the real estate markets are at five or six percent with some degree of flexibility in price but not that much. And these are much higher than they are for other kinds of services in domestic markets.


And they're also higher by a fairly good margin over the amount of money that's charged in real estate transactions in overseas markets when you're talking about comparable pies of property. So what's the reason why we have these sorts of difficulty? Well, I think a lot of what you have to understand is that real estate is not only the largest asset that anybody has, but it's also one of the assets that is most difficult to price.


And so if you're talking about a commission which is, say two to three percent, what you have to do is compare that commission with the era that comes if your price your property too high by I think two or three percent. Then I think you can't move it. So you have all the heavy cost of keeping it. Or essentially, what you do is you price it at two or three percent too low so that what happens is you manage to get on net less money than you would have if you had hired a broker who can bring in other customers by a set of techniques and marketing and for sale and persuasions and so forth that you can't possibly have.


Now, why is it that this is going to be particularly important in a real estate market? Well, if you start to figure out what the transactions cost in these no commission models, the Schwab's and the fidelities and so forth, essentially, these are perfectly valued commoditized assets to the tenth of a penny exactly what they're worth. You know exactly the other source of payments that companies can get from the financial stocks or the reserves that customers keep with them.


But in a real estate market, what happens is you cannot have an instantaneous transaction. You typically have two stages of the transaction. First, you negotiate until you get to a contract. And that's the pre-statute of fraud situation because you want a written contract for this to be enforceable. And there's a lot of search on both sides of the market to try to match properties and so forth.


But then once you enter into a contract, there are other kinds of problems that you have to save which one of them is the standard problem of what kinds of adjustments have to be made to the standard price when you start to discover flaws or don't discover flaws in connection with the property that's being sold.


So you have to examine this in two particular ways. And this has been true since Roman days. One of them is you have to really figure out what the state of the title is. That's kind of obvious with the share of stock, but it's not so obvious when you start having a piece of land on which there may be an undisclosed lien. There may be some tax obligations associated with it. There may be some easements or some restrictive incumbents that you can't do. And so you're going to have to think about a title search as being very much a part of the way in which the situation goes.


And then there's also the condition of premises. So when I've sold recently two houses through the traditional devices in the, say, to last ten years. The first one, it turned out, the inspection was very serious because the mantle over the window wasn't quite right, and somebody had to make estimates as to the amount that was going to be required for repair. And what happens is you get two brokers working together on this who are experienced, generally speaking when it comes to these second tier negotiations that take place, they're more likely to be able to do it without the kind of acrimony and inexperience that are going to take place when homeowners start to do it for themselves.


And so people often want to hire brokers with their greater set of contexts in order to have those benefits. Let me give you another example in which the same thing starts to take place. I'm being very autobiographical now, but when we tried to sell our home, which we did successfully, my wife and I, and this would've been now about 40 years ago. We found the buyer, but the buyer could not find the mortgage and at that time, it was very common in contracts for sale to have mortgage and contingency clauses in which first the buyer would start to go out to the market to get a mortgage and if the buyer failed, the seller was allowed to go out and to get a mortgage within certain specified parameters, has to be for certain number of years, has to be below a certain interest rate and so forth.


Well, as a potential homeowner, I couldn't figure out how to do that, but Diane Silverman could. And so what you did is you found out them, and she went to the banks that she had been custom at doing it, managed to get them to believe that the property was worth what it said through assessments and so forth, and the deal was saved by the intervention with respect to a broker.


And so when you have those kinds of added situations built on to a case, people are willing to pay a lot more for the kinds of services they have. They correct for errors in pricing, and they allow for the second-tier kinds of re-negotiations that start to take play. And it's a very, very important set of skill.


And frankly, the reason that Michael said what people often with homes don't like to do it themselves is they don't know very, very much. And what you can do is you can kind of guess that certain parts of the market are going to be more amenable to the services that he owns, kinds of property that's involved, the experience of the brokers, experience of the individuals, and all of those things come into the mix.


Now, the second part of the problem that he talked about under these circumstances had to do with the question of why are American markets different from foreign markets? And this is a very complicated kind of problem because the brokerage fees are only one part of the overall picture. There are also various other kinds of issues that you have to worry about.


And so in the United States, for example, I can still recall every time I've had to sell a property or buy a property, it's not a question of just selling or buying, there's some lawyer or title insurance executive gives you a stack of papers which is a half a mile high, and what you have to do is to sign all of these things about disclosures, warranties, radon in the building and whatever it is. You just go through one form after another after another after another.


And so what happens is that the kind of the transaction costs that are involved in these transactions through regulation may be considerably higher than they are in certain kinds of other countries where the system of regulation isn't there.


The other thing, of course, that may well happen is that some of the course associated with these projects may not be handled through the broker but may be handled directly in some other way so that the commissions may go down, but other things start to go up.


So for example, in the United States for the most part, title considerations are not a dominant situation. But if you start going over to many undeveloped countries and so forth, and you try to figure out what it is that somebody actually owns, if they're small properties of lands in which they've been inherited, complications and so forth, it may take a great deal of money to figure out what it is that is the assets that is going to be sold. And then it's going to take a great deal of money to figure out when you do all of this stuff as to whether or not you got this right.


And so the question about comparing this stuff apples to apples, what you have to do is to ask the question, which I'm not confident to answer but I'm confident to ask, is what set of services above and beyond those that bide by brokers are going to be necessary under various countries in order to supply these kinds of services? And it may well be that the huge difference in prices are going to be accounted for in two ways.


One is that there are other professionals who work in different overseas market. And two, it may well be that the regulatory burdens that have to be negotiated in the United States could be more than perhaps even less than they are in other countries. So you have to be able to do all this.


So I'm just going to sum up at this particular point and make the following kind of observation. One of the things that I am as an armchair economist is I believe in the following principle. If I know more about one thing than everybody else does and I know less about other things than everybody does, I'm very confident in my judgement that with my own limited knowledge that new entry is in effect the way by which it turns out that both large and small innovations are going to start to take play.


And just to illustrate the point. What Michael did is he pointed out the novel ways in which his firm does business, but if you start looking at traditional brokerage firms and see the way in which they do business, it is completely transformed from what is was 10 or 15 years ago with the multiple listing services, with the online tours, with the photography, and with everything else.


So the rest of the industry, to some extent, has been evolving as well, which is exactly what we would expect. And so you're in the best of all possible worlds within our regulatory constraints so that different modes of behavior can start to go into competition with one another.


And so along this line, one thing that Michael did not mention which is worth mentioning here is there's also another way in which you could sell properties today. You could just put them up to auction and what you do is you have a set of opportunities for people to inspect. Then you have bids that have to be essentially in secure. And what you then do is when the auctions over, the cash is paid and the property is transmitted, and it's essentially no backsies or hold.


The thing is done in a very efficient fashion and that's, of course, a way in which banks, for example, deal with the sale of property which they obtain in foreclosure because unlike ordinary individuals, they have no particular use for occupying the property and they're very sensitive to the waste that takes place and the deterioration in property that takes place. It's been with the original tenants have been forced out and it turns out that nobody's in possession.


So you get all of these kinds of variations and the sign of a good market is that everybody's always shaking up everybody else. And to the extent that Michael has basically a change agent,  his behavior is not only going to influence the conduct of the individuals, the four or five percent of the market that he takes over, but there's going to be imitation in other parts of the market which are not amenable to take over by his client, will probably change, incorporating some of the same techniques that he has used.


So I think what you really want to do is to say the reason why dynamic markets work is not because individuals have perfect information and understand perfect model. It works because essentially this constant practice of incremental adjustments at the margin with entrepreneurs on the one hand and customers on the other hand, what we do is we have a dynamic process.


It is not our job as an analyst to predict the exact way in which this market will evolve. That's the people who are buying and selling stocks and so forth. But it is as an academic analyst our job to say that by and large, this is a benevolent kind of behavior. We ought to encourage it and we ought to say that market forces are much more durable, notwithstanding imperfect information, and that regulators are much to ham footed to make any of the system work.


And so the kind of old high Hayekian insights about decentralized markets work as much with respect to real estate as they do with anything else. And so, Michael, if you have a couple of comments to make about this, we should then open it up to the audience.


Michael Toth:  Thank you, Richard. Again, that was as brilliant as always with your combination of theoretical, conceptual clarity and practical wisdom. And I appreciated the autobiographical details as well.


      I'll just add two or three thoughts around an issue that I think we touched on in both Richard's comments and my own, which is as rational actors, how do we assess our own preferences? And I think oftentimes in literature, there's a tendency to give a very narrow view of where individuals find value.


      And I think what we've seen in this conversation, what we see in the real estate market is that consumer preferences and where we deem value to be transcends the mere material. And I'll talk about that just in closing in three different ways.


      First, Richard brought up the premium market. Our market is a price conscious market. So our market, as Richard said, is a little bit more than the median home but certainly not in a premium space. Our consumers are price conscious consumers. What we've seen in the premium space is actually a different type of preference, not so much around price but around privacy, actually create a new different alternative market.


      And so there's a series of networks out there in areas where real estate is priced very high where what the buyers and sellers are looking for is essentially a private marketplace where they can be sure that they know who's looking at their home, they know when the person's looking at the home, they know that the details and the circumstances around the home sale and transactions are not made public. It is a premium preference.


      But again, it's a preference that isn't purely material, and yet, it's rational at the same time. Another preference that I think we've sort of touched on, it underlaid part of my presentation about the outside agent and the bidding over the services for the outside agent, is our preference for sociability. Oftentimes, I'm asked by economists and others well, when a buyer who has an outside agent who's looking at one of your properties realizes they could be represented by your company for zero, why don't they just offer their agent zero? Essentially, I won't pay you anything or a dollar.


      And the reality is that the relationship between an agent and a client and agent is more Humean than Hobbesian. There is a relationship that's formed, services that have been provided. And so the transaction, and this is a phrase that Richard had brought up in a prior conversation, occurs according to conditions of confined generosity, given innate sociability.


Prof. Richard A. Epstein:  That's Hume's phrase, not mine.


Michael Toth:  According to David Hume, given the relationship between the parties involved, the face to face relationship. This is not a trade between nations. This is service between a client and the client's agent.


      The final value that I wanted to talk about or preference that I wanted to talk about, and I did want to just clarify one point that Richard raised, is a preference for comprehensiveness, a preference for a unified approach, a preference for efficiency that goes beyond mere cost, a preference for a comprehensive aspect.


      What I mean by that is one thing that we've seen with the brokerages, the stock and the bond and the asset, the traditional asset brokerages, is they charge zero percent but what they're looking for is a relationship with the client. They're looking for a full 360-degree relationship with the client.


      And we've seen some of that at my company. So we do provide the full service to a buyer or seller. I think we still attract experienced buyers because as with anything in life, the more you do it, the more you realize you kind of know what's going to come next. That having been said, we offer the full services.


So how do platforms like ours succeed in scaling? And the reason is we also provide a one-stop shop for a series of other services that are attended to the home service from mortgage financing to insurance to moving to landscaping, really the entire life cycle of home ownership.


      And so some of what we're seeing with our clients is the preference is really for a team approach, for that one-stop shop, for that ability to have in one click of the app or one call from your smartphone, a single team that can help you through any aspect of not just the home transaction but the management of the home itself, which is really the sector for so much of the money spent in the service economy across the U.S.


      So with that, I'll close and, Richard, if you have anything further, of course, always, or we could open it up for the audience.


Prof. Richard A. Epstein:  Just one sent -- just one sentence because essentially what you said was that confined generosity is the sort of the appropriate mental state that as people regard themselves as having obligations in a moral sense, even when they don't have them in a legal sense. And that form of enforcement is far more efficient because essentially it doesn't require any external force to keep it going.


      And so it is constant mistake in market to treat people as highly atomistic, at which point you don’t understand this. It's also the case, I think, if you look in most industries that has two kinds of workers. They have relationship bankers and so forth, and then they have the technical people. I think, Michael, you know this better than I, but the largest salaries tend to go to people who have the softest skill on relationships and communications. And that's often what makes for a very good broker.


So there's somebody in the back room who can do the technical stuff, but if somebody would get the client's confidence and elicit their preferences in a sensible way who commands the line and shares the paycheck, is that right?


Michael Toth:  Yeah. Yes, and no. I mean, yes in the obvious sense, but one thing I think I would also touch on is, as you mentioned, the pricing of the home, given just the size of the transaction that we're talking about, is very important, and that is also very technical.


Prof. Richard A. Epstein:  I agree.


Michael Toth:  And that is another area that we really try to optimize so we try to put real data science and economic science behind the asset pricing, which is a harder skill -- I mean, hard skill in the sense of not level of difficulty but focus on the technical rather than the relational.


But that would be the only caveat, but in terms of client relationship throughout the life cycle, you're absolutely right. It's very nuanced, it's very contextualized, and you never know where things are going to go in terms of that relationship. So you do need just a very client focused approach on whatever the need may be.


Prof. Richard A. Epstein:  Yeah. And so what happens is the equilibrium is as small as the technical side on asset modeling. You take a very small fraction of a very large number of transactions and if you do it right, you could become rich. On the relationships, you take a much larger fraction of a much smaller set of transactions, and that's another way of becoming rich.


      And so in virtually every business, what happens is you have to figure out how to get the effective synergy between two times the people who've very different kinds of skills. Now, on that, I think we should probably open it up for questions.


Michael Toth:  Great.


Greg Walsh:  Perfect. Let's go to audience questions. We will now go to the first question.


Paul Hurd:  Hello, this is Paul Hurd. I'm in Louisiana. One thing that -- and I missed a little bit of the earlier part. One thing that I see happening is that the basic factor of the real estate market is that the -- it's the biggest transaction people are going to do during their lives and they're totally unknowledgeable about what they're doing. They know they need a nice house, and what I see happening is on the one hand, you are getting one stop shops with the realtors, but it's predatory because they're now controlling the title. Charges are not the most economical for their client. It's the ones that help support them. Tt's the lenders that support them.


And that what I'm looking for is a way to use technology so that the brokers provide their broker service but they're not -- ya'll aren't counting the income that they're getting from the service providers where they control the contract, and I wondered just in ya'll's analysis and experience, how you think this consolidation of the home inspection, title, lending, all those services, if you don't own them, it's relationship. And if someone has a condo in Colorado, it's easier to get referrals. Anyway, I just was curios because I see the consolidation going against the consumer.


Prof. Richard A. Epstein:  Well, I'm not so sure about that. It's very complicated but what happens is supposed it turns out that -- so the consumer who doesn't know very much to try to find each of these individuals is very costly. He may pay very little by way of a transaction fee, but he may pay a great deal amount of money by way of the search.


      And so what happens is if you can go to a broker who will, say, has been referred by a friend who's now kind of an implicit guarantor of the transaction, then that broker can handle the inspection, the title, and all the rest of that stuff is going to be extremely important.


      So for example, my wife and I just bought a house, and one of the things that we needed to do is some remodeling. And the question is who should we turn to in order to handle that particular process for us? And the broker had a very strong recommendation, and it has proceeded famously since then.


      And that's a service which is not separately charged for. It takes the broker about 30 seconds to say the name of the person who she thinks to be appropriate and then we can benefit from. So what you have to do is to always ask the following question. If your formal transactions costs go up and your private search costs go down, on net you may be better off by paying more because you can then substitute it and free up your own label to do things with which you are more productive. Michael?


Michael Toth:  Yeah, I agree with that. And I also agree that -- I would also say that I think there has been an incredible explosion in consumer knowledge, at least around searching for homes online and looking at neighborhoods and familiarity with using credible platforms, the data aggregators from Zillow and others, that really allow you to get inside a home before you even leave your house.


      And in addition to that, obviously a lot of the asset discovery that goes into a home purchase is not just the home itself but it's the neighborhood. It's the distance between the home and the places that you're going to want to go to regularly. And all of that can happen now online. 


      I think also we're starting to see increasing amount of knowledge going to the consumer about how to price out the different attendant services. To me, whether -- the consumer should control and the consumer should decide how he or she wants to purchase a particular asset, whether they want to put more work into it, whether they want to have more of the work done by someone else that they trust, etc.


      But I think what's important is that there's competition, there's a marketplace, and there's possibility for new entrants to come in and to rearrange things. I do also just want to echo, Paul, I agree with your first point about this is the biggest transaction. And one thing I did try to touch on in my initial comments is whatever we can do from California to Texas, from New York to Oregon, from Louisiana to Washington State to bring the cost of housing down through market portions, we should do.


      And these are issues that -- I work at a tech company, that it's increasing issues for a lot of tech companies because we tend to ask our employees to accept a lower take home pay for equity. But less of an ability to be able to pay for housing for equity in the company. So as housing prices go up and up and up, it becomes increasingly difficult for the companies that are innovating, that are of the future, to be able to operate except for in a few places.


      So whatever we can do. The particular space that we're most focused on are bringing the transaction costs down, which would have a downward pressure on the homes by a few percentage points. And that does make a difference according to the studies that we've done. But whatever that can be done out there in order to use basic supply and demand to bring some downward pressure would be good for the benefit of everybody. And that's on many different levels, including family formation, labor mobility, and other aspects as well that are not purely economic.


Prof. Richard A. Epstein:  One other way to do this is that once somebody has decided to sell and somebody else wants to buy, essentially, the ability to -- we do see uncertainty by having a very prominent transaction with a fine -- with a precise date on when possession is going change control. That's a huge benefit for both sides. And what Michael does is provide services that can get you that, and it's fancy brokers who understand the business do that as well.


      I mean, figuring out the right closing day for a transaction so you could get your kids into the house before they have to go to school or you can keep the house long enough so they can graduate and so forth, that's just part of the skills that take place. I'm just -- a question for Michael is how do you actually negotiate closing dates in the U.S. system? It's done, I think, consensually, right?


Michael Toth:  Sure, yes. It is done consensually. And you're absolutely right. That's where the soft skills come in because these can be aspects that are either subjectively or objectively are highly valued among both sides of the deal. So we do do it consensually, and, again, this is one of these areas where having that full service approach where we can really fully represent both sides of the deal allows us to get to the right yes on issues of timing. And timing can be a big part of these deals.


Paul Hurd:  But let me ask you this. You get a buyer, and that buyer doesn't even know they're going to need an appraisal, which the banks, the lenders control pretty much. They need appropriately an inspection. They don't know inspectors. And what happens, I see, is you have someone that you trust, but it's not price. And what happens is the same thing on title referrals. You've got certain lawyers or title companies you like to deal with. And all I'm saying is while the broker's fee may go down a percent, the fees that are going up to the required service providers -- I'm not talking about renovation. I see those doing nothing but going up, and I think going up because of the control of the --


Prof. Richard A. Epstein:  I disagree. It's the example of the cost of hiring a lawyer to close a real estate transaction have plummeted in recent years because it's all been automated. And the competition is very stiff. So I don't --


Michael Toth:  Yeah, Paul, and what we kind of do, I mean --


Prof. Richard A. Epstein:  I think we should take another question. But I think in effect that the competitions for brokers includes competition for brokers who can get you into good people. For example, when you hire an internist, you're hiring two people: the person who will take care of your routine care and the person who knows which specialty to refer you to and how to get you into that person quickly. And I think good brokers do both.


      Next question, do we have another question on the line?


Greg Walsh:  Now, we have a second caller.


Caller 2:  Hello. This has been very interesting. I am a realtor in Ohio. And for those of you who are knowledgeable about our industry, the term realtor is basically copyrighted and trademarked by the National Association of Realtors. So -- and I hear that term misused all the time.


      At any rate, I've been in and around real estate since the '70s, and I majored in real estate at OSU a number of years ago, blah, blah, blah. Any rate -- but I know that it's going to change, and it's going to change drastically. And if somebody were to come to me just a few years ago and said hey, give us a few thousand dollars and we're developing this app that we're going to -- that the users are going to be able to hail a cab and they're going to be able to ride to the airport, to their home, whatever, when they've been drinking too much. I would've said you're nuts. You can't do that. Every city requires a taxicab license. You can't do that. That's not going to work.


      Well, guess what? I wish I would've invested in Uber.




Caller 2:  We are living in incredible times, revolutionary times, and my prediction is that it is going to happen. And I, myself, have been working on something to make this happen. Haven't figured it out exactly yet but it's going to happen. And it may be a lot of different players that have it happen, and --


Greg Walsh:  I'm sorry, caller. Would you mind getting to your question. I just want to be cognizant of the time.


Caller 2:  Well, really. No, no, okay, yeah. I'll cut it off. Wasn't a question, it was just a statement from someone that is in the industry and does believe it is going to happen. And it's going to happen I think quicker that we anticipate.


Prof. Richard A. Epstein:  Can I make an observation about this? The Uber situation shows you exactly what can happen. What we do is a basic theory of transactions costs which is absolutely powerful in these cases. Assume you have a market, whether it's riders and drivers or buyers and sellers of real estate, in which there's a large number of end people on one side of the market and the end people on the other side of the market. And if you're trying to figure out what the ideal matching is, you'd like to get one from one column to match the first person on the other column to maximize surplus.


      If you have to do it one at a time, the number of combinations you may have to scroll through are going to be n times n, which is a very big number. So what everybody does is they put somebody in the middle called a technology platform. And then what happens is all the people on one side feed into it. All the people on the other side feed into it, and that party does the matching. So instead of having people do mn transactions, its m plus n, a very much smaller number.


      And that's the way Uber works. Uber's always maintained that it's a platform. The California courts and the California legislature says no, you're not that. You're just an employer so therefore, we can regulate the hell out of you. And Uber and Lyft are threatening to shut down in California on Friday because they can.


Michael Toth:  I really do appreciate the --


Prof. Richard A. Epstein:  They can't make the model work. And so essentially, the point is if you reg -- you can regulate -- the danger about technology is it's easy to regulate, at which point, it's fatal.


Michael Toth:  Can I just make one comment on --


Greg Walsh:  Well, I don't know if it's hit the presses yet, but I think the Uber and Lyft situation has been granted a stay by an appeals court sometime during this call or maybe earlier today.


Prof. Richard A. Epstein:  Well, thank God. Because it's a crisis, and you can kill real estate markets in the same way. It's harder to do it because the exploitation factor is much weaker here than is perceived to be in the driving situation. But essentially, the logic of Michael's business is that he is in the idle, and so long as mn is greater than m plus n, it turns out he's always got a job for himself. Right, Michael?


Michael Toth:  Oh, just very briefly, yeah. If I could just make an additional comment echoing the gentleman's statements from Ohio. One thing that I haven't ever looked at, and maybe somebody on this call knows this, when you look at Uber and Lyft, the question is well, how many taxi drivers decided to become Uber and Lyft drivers? I don't know the answer to that, but what I --


Prof. Richard A. Epstein:  The answer is it's large.


Michael Toth:  Is it large?


Prof. Richard A. Epstein:  It's large.


Michael Toth:  Well, that's what I've seen at our company also. In preparation for this call, I talked to four or five different brokers that we have. We're a tech company. We do a law of average through data science, with digital marketing. But it's a real estate business, so we have licensed brokers in many different markets. And every single one that I talked to had been working in a more traditional setting before they joined with us. And they saw the challenges that the traditional market was, at least, presenting them. Preferences are different from not just consumer to consumer but also from employee and worker to worker.


      But I had a particular conversation with one of our brokers in Florida who's doing tons of deals now with individuals coming from large metropolitan areas, whether it's California or New York, who are buying properties in smaller metros in central and north Florida. And she described to me what life was like before she joined our platform. And it was just very illuminating in terms of what the gentleman earlier referred to as just, again, the desire and the understanding that markets and new markets will continue to emerge and evolve.


Prof. Richard A. Epstein:  Yes. It would have to be. And what I said before -- I think we're probably out of time now, but I'll just repeat it. The reason why Michael succeeds, and not only does he make himself better but he makes his competitors better, is because we have the system of free entry and free exit in which the government doesn't take upon itself to determine the terms of these transactions but only to make sure that enforceability is there.


      And the other thing, of course, about Michael's services is that collectability of these various commissions is pretty easy given the way in which you can take them out of the sales price as those traditional brokers. So I mean, this is basically a happy story. Uber is at this point becoming a tragic story in California because of the meddlesome that comes from above.


      All right. Are we done? Where are we now?


Greg Walsh:  Professor Epstein, Mike -- or Michael, do you have anything you want to say before we conclude?


Prof. Richard A. Epstein:  No.


Greg Walsh:  Okay. On behalf of The Federal --


Michael Toth:  I just want to say --


Greg Walsh:  Oh.


Prof. Richard A. Epstein:  Say thank you.


Michael Toth:  Well, if he will actually let us, yeah, thank you. Yes, thanks, again.


Greg Walsh:  I want to thank our speakers for the benefit of their valuable time and expertise today. We welcome listener feedback by email at info@fedsoc.org. Thank you all for joining us. We are adjourned.




Dean Reuter:  Thank you for listening to this episode of Teleforum, a podcast of The Federalist Society’s practice groups. For more information about The Federalist Society, the practice groups, and to become a Federalist Society member, please visit our website at fedsoc.org.