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Real Estate Continuing Education: Rent Seeking or Improvement in Service Quality?

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Abstract

Massachusetts adopted a continuing education component to its licensing requirements for real estate agents in 1999. The Massachusetts Association of Realtors lobbied for this change claiming it would enhance the quality of service for the public. Our regression analysis fails to find any improvement in the quality of service as measured by complaints to the real estate licensing board. We do find that the adoption of continuing education reduced the number of licensed active agents by 39 to 58 percent and increased the income of those who remained by 11 to 17 percent.

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Notes

  1. We use the term “real estate agents” to refer to both licensed real estate salespeople and real estate brokers (two categories of license). We reserve the term “realtor” for members of the National Association of Realtors or their state-level affiliates.

  2. Graddy [1991] finds empirical evidence that interest groups and the preferences of the general public both influence which occupations get licensed.

  3. Tosh and Garvey [1984] report that the majority of real estate agents surveyed supported the adoption of continuing education requirements.

  4. As one current realtor told us in an email interview on May 12th “Although most Realtors are not thrilled with continuing ed classes, I have not witnessed surfing the web etc. Falling asleep may be another story.”

  5. According to the Massachusetts Real Estate License Law and Regulation, 254CMR 5.02.

  6. The fact that full-time agents might benefit while part-time agents would lose from continuing education requirements is likely reflected in the fact that 75 percent of agents surveyed supported adopting continuing education [Tosh and Garvey 1984].

  7. See Shapiro [1986] for a contrary model where licensure increases the quality and ability of the licensed profession and is beneficial for consumers.

  8. See Kleiner [2006] for a book length treatment on the effects of occupational licensure. Also see Summers [2007] for a study which ranks individual states according to how pervasive occupational licensure is in them.

  9. The survey's finding is largely consistent with one of the earliest empirical investigations of occupational licensure, Maurizi [1974], who found that licensing boards use their power to prolong the period of higher incomes generated by increases in excess demand by altering the pass rate of the licensing exams.

  10. Three important papers in a related, but separate strands of the literature on real estate are Hsieh and Moretti [2003], Nadel [2006], and Kleiner and Todd [2009]. Hsieh and Moreetti argue that if commission rates are relatively fixed across cities then free entry is socially inefficient. Nadel criticizes the common commission structure and argues that it harms buyers and sellers. He offers a number of reasons why this commission structure continues to exist which include the power of the National Association of Realtors and State Real Estate Commissions that protect existing practices. Kleiner and Todd examine mortgage broker regulation and find, among other things, financial bonding of brokers is associated with higher earnings and modest reductions in the number of mortgage brokers.

  11. Although they did not examine the effect of occupational licensing, Sirmans and Swicegood [1997] studied the characteristics of individual agents in Florida to see what influenced their earnings.

  12. Data were retrieved December 2009. US average internet data were used rather than Massachusetts since many buyers of Massachusetts real estate come from outside the state, and those from outside the state might disproportionately depend on internet data to compensate for lack of local knowledge.

  13. We use the newer NAICS classification from the BEA which includes appraisers as well as activities real estate agents do but unlike the old SIC classification does not include the rental income of lessors renting their own property.

  14. The average is for the period 1993–2008 when data for both appraisers and agents were available (this is why the average number of agents is different than in the descriptive statistics table which had data from 1990). Over the entire time period the proportion of appraisers to real estate agents varied from a minimum of 2.5 percent to a maximum of 7.3 percent. We have no reason to believe that 1990–1992 is significantly different.

  15. In our income model below we also employ a third dummy variable technique but unfortunately the degrees of freedom were too limited in this regression to employ that same method.

  16. Based on Massachusetts Profile of Home Buyers & Sellers 2008 research.

  17. The table reports the unadjusted coefficients. Because the dependent variable was in logs we make the appropriate adjustments in the text when we discuss the magnitude of the economic impact of the dummy variables: 100(exp(β̂ 0)−1).

  18. Each of our four models had serial correlation, so the Newey-West error correction method was employed.

  19. An alternative measure of quality, claims against errors and omissions insurance, is used in a five-state study by Zumpano and Johnson [2003] although the study did not include any empirical modeling. Malpractice insurance premiums are also sometimes used as a measure of quality in other occupations. However, these data were not available for Massachusetts.

  20. An alternative empirical strategy would have been to exploit individual-level variation using a regression discontinuity approach. Agent's licenses are subject to renewal every 2 years on their birth date so each agent was impacted by the continuing education requirement at different times. However, a discontinuity approach requires disaggregated data by agent which is not available.

  21. Using a 0 for all years prior to 1999 and 1 in 1999 and thereafter does not significantly change our results.

  22. Budget data were not reported consistently by ARELLO for Massachusetts so it could not be included. We are skeptical that their budget data are even accurate because they report a 2006 budget for the real estate division that is larger than the entire division of occupational licensure's budget was a year later according to the state.

  23. Agency law was changed in 1993 to allow for buyer agency which is the first year of our period of analysis.

  24. We were also able to use quarterly data (not reported) to examine quality which allowed us to use vector autoregression analysis to ensure that innovations in the dependent variable do not affect independent variables. The Granger causality test demonstrated that the complaint variables did not Granger cause independent variables nor did lags of the independent variables Granger cause the dependent variable. Continuing education was statistically insignificant as reported in the table that summarizes our annual data regressions.

  25. The massive spike in number of complaints with a guilty verdict in 2008, combined with a dummy variable for 2008, explains why our R 2 increases dramatically from model 2C to model 2D. There were only 568 total complaints with a guilty verdict prior to 2008 but there were 324 complaints with a guilty verdict in 2008 alone.

  26. In the table we again report the unadjusted coefficients and make the appropriate adjustments when we discuss the economic impact in the text.

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Acknowledgements

We thank Robert Lawson, Claudia Williamson, Alison Kelly, Serge Shikher, Jongbyung Jun, and Jonathan Haughton for helpful comments on earlier drafts and Ken Peterson of the Massachusetts Division of Professional Licensure for help in acquiring data. In the interest of full discloser Benjamin Powell was briefly a member of the Massachusetts Association of Realtors more than a decade ago. He still holds a Massachusetts Real Estate Salesperson License that is on “inactive status.”

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Powell, B., Vorotnikov, E. Real Estate Continuing Education: Rent Seeking or Improvement in Service Quality?. Eastern Econ J 38, 57–73 (2012). https://doi.org/10.1057/eej.2010.51

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