Are New York’s Real Estate Agents Perpetuating Inequality?

(Bloomberg) -- A new book argues that the stratification in quality of life between New York’s rich and poor neighborhoods is at least partially the result of real estate agents. 

“Agents’ work in shaping buyers’ choices leads to upselling,” writes author Max Besbris, referring to the phenomenon of homebuyers starting with a predetermined budget and then spending beyond it. “Repeated in aggregate, these practices create positive feedback loops that drive up prices in more expensive neighborhoods.”

Those high prices, Besbris concludes, lead to a cascade of investments in wealthy neighborhoods’ infrastructure, often at the expense of poorer neighborhoods that haven’t experienced housing booms. “It costs more to live in certain neighborhoods,” he writes, “and their high cost is deeply intertwined with their higher quality of life.”

The findings, which Besbris, an assistant professor of sociology at the University of Wisconsin, will publish in the forthcoming book Upsold: Real Estate Agents, Prices, and Neighborhood Inequality (Aug. 31, University of Chicago Press), were developed over years of research dating back to 2011. 

Besbris followed 57 luxury homebuyers, 49 of whom actually made offers on a house; interviewed nearly as many brokers; and created quantitative models, using addresses of licensed real estate salespeople he acquired through a Freedom of Information Law Request to determine where those brokers were based.

“Right now, social scientists are really interested in various kinds of inequality in cities,” Besbris tells Bloomberg Pursuits. “I’ve used these statistical models, which show that neighborhoods which have more real estate agents tend to be higher-priced neighborhoods and also tend to be way more ethno-racially segregated.”

Brokers, in turn, “will tell you themselves that they act as neighborhood boosters,” Besbris says, pushing clients to buy in areas the agents are already invested in. “That’s their job. They want the area to be marketable and valuable,” he says.

That impulse, combined with the fact that “Whiter neighborhoods tend to have more real estate agents,” Besbris continues,  means that brokers end up pushing clients to spend increasingly large sums of money in very specific neighborhoods at the expense of others, in a compounding feedback loop that deepens inequality.

With that in mind, it’s unsurprising that wealthy buyers are upsold at the highest rate. “Middle-class families spending the median price to get an apartment will spend more than they [plan to] but it’s $10,000, $20,000 more,’ he says. “It’s the people who start out wanting to spend $2 million that end up spending $1.5 million to $2 million more.” The result is an increasing concentration of wealth in a relatively fixed set of neighborhoods.

No Surprise

For anyone who’s tried to buy an apartment in New York, these base findings won’t, on the face of it, come as a surprise. Nice apartments always cost more than buyers would like or expect, and brokers, whose commission is a percentage of the sale, are incentivized to ensure that clients buy at the top of their price range. Rich people can spend more than middle-class people and have more access to capital, allowing greater flexibility outside their initial price range. 

Moreover, it stands to reason that real estate agents are drawn to neighborhoods with high sales activity. It’s nonsensical to go where business isn’t. Yet, until now, the simple act of an agent chasing commissions hasn’t been directly linked to inequality. 

Besbris acknowledges that this “is not an airtight-causal story,” meaning that he can’t prove agents are first in line to be blamed for a neighborhood’s housing boom or for rich people spending more than they’d want.

In addition, he is quick to note that “there are a lot of reasons why prices go up and inequality is going up.” He cites development laws, rezoning policies, and policies at the national level such as interest rates, all of which have contributed to the gap between New York’s haves and have-nots. 

But, Besbris continues, the crux of his research is that real estate agents aren’t merely functionaries. “Agents are actors, not just passive people benefiting from this,” he says. “What my work shows is that they’re working in concert with other factors to keep prices moving up.”

By impacting buyers’ decisions, he says, “they’re affecting neighborhood inequality.”

What Inequality Looks Like

This inequality manifests in two key ways. The first is a phenomenon that has been identified— and combatted—for decades: known as “steering,” it’s when agents push their clients toward “particular kinds of neighborhoods, based on the race of their buyer and the racial and socioeconomic composition of a neighborhood,” Besbris says. “It’s not as pronounced as it once was, and that has a lot to do with legal enforcement, but it’s still an issue.” 

The second manifestation, Besbris says, is that “property values in a neighborhood determine that neighborhood’s resources.” Schools are funded by local property taxes, meaning that home values determine the quality of a child’s education. Also, when home prices go up, by definition, the people who can afford them become wealthier, too. Those people are able to contribute to local political campaigns, giving the neighborhood a more powerful—and theoretically, more effective—advocate on municipal, even state levels. 

Finally, “The quality of civic organizations—and the social fabric and infrastructure that bring people in a neighborhood together—is often determined by the amount of wealth in a particular neighborhood,” Besbris says. 

Should this book be read as an argument against brokers? “There is nothing in my book that says you shouldn’t use a real estate agent,” Besbris says. “Agents do serve a function for most people, and they’re generally worth the cost. We give them a set of parameters, and they spend time searching on our behalf. 

“I do believe that some of these inequalities would be reduced if we were not using so many intermediaries who have an interest in making more, higher-priced sales,” Besbris says. “But this inequality is entrenched—and the product of a lot of socio-historical processes that are ongoing.”

©2020 Bloomberg L.P.