Bet for Arnold: Education Is Stably Wasteful

It's worth pointing out that despite the information revolution, the National Association of Realtors still has a near monopoly on the marketing of homes for sale. This isn't really an analogy so much as a statement that it is possible for old and useless organizations to keep their hold on us. The reasons the two organizations will be around is different. Schools will be around for signaling purposes. NAR is around because of the power of networks and general ignorance. The MLS is the largest Network of home buyers and sellers in the US. It's useless to be the first person in a new network, yet new networks still form. I believe the MLS is a vulnerable network and I'm surprised it has lasted this long, given the cost of using it. If people can make the switch from Myspace to Facebook why not from the network that costs 6% of your home's value to the one that is free?

I suspect that both the NAR and schools are doomed but it's impossible to say when they will collapse. They will probably go along just fine for a long time, then POOF out of existence.

My better half saw a $900 bottle of wine for sale. I asked her what kind it was; Chateau laFitte Rothschild. 'Ah' I remarked, 'you are paying extra for the name. If it were a no-name you probably wouldn't pay more than $700 for it.'

I'm with Bryan Caplan; cachet is worth something.

Sure, cachet is worth a lot and you are likely to win the bet with Arnold. Even so, think of the rising amount of education 'consumption' that continues to increase human capital. At some point, real wealth is going to come out of that which will eventually put the present human capital model into a different light.

If people can make the switch from Myspace to Facebook why not from the network that costs 6% of your home's value to the one that is free?

Because the real estate agent (not the network) is providing valuable service in the negotiation and closing of the sale. For Sale By Owner was around long before the internet and it didn't drive the agents out of business. The internet won't either.

Whether the NAR stays in business has much more to do with whether it provides service to member real estate agents that they deem worthy of continuing to pay for.

A much better comparison would be to the record companies. They were an intermediary that was no longer providing a service commensurate with the price they were charging and disintermediation did occur.

The question is the value of the signal the education credential sends relative to its price. For Harvard, it will always have value. Faber College? Maybe not so much.

Some employers will reward it. I know I will, and other software engineering hiring managers will do likewise. Not because it's cool and alternative and fight-the-power and all that, but because college sucks at producing good junior software engineers. The whole industry has known for years that there's a better way, and the internet is right on the cusp of making it feasible. When it arrives, it will destroy the viability of traditional 4-year programs in Computer Science and/or Information Systems within a decade (which will feel like "overnight").

The NAR survives because it has political power in local and state legislatures that make it difficult to buy a house without using a realtor. If a realtor offers value, then he should price by the hour, not on some arbitrary basis such as 6% of the seller's proceeds. I've dealt with a handful of realtors, and found only one out of ten that actually earned her commission (3%). The rest were taxi drivers and MLS clerks.

While politics is a wild card in this education bet, I lean towards a meaningful disintermediation of teachers (though not necessarily school brands). The reason is that not only is online delivery of education done at a fraction of the cost, the early results of legitimate experiments (that I've seen) suggest that the students perform * much * better. If that is true, then online education may be disruptive enough to overwhelm political and cultural barriers.

I am not a realtor or a lawyer and have bought and sold 7 houses in only 4 states. I don't want to appear to be sticking up for real estate agents, but I also think it is important to understand their function and not to misrepresent them as a class. There are certainly lots of poor ones, usually because of inexperience and low barriers to entry.

I have generally bought houses from divorcing couples because it is a great way to get a house cheap if you are willing to do the cosmetic repairs necessary. But the antics they pull while under contract tax their agents incredibly. I've definitely felt sorry for the position their clients have put them in. But not enough to let either of them off the hook. My point is they earned their money.

And not everything I will write is true 100% of the time because real estate is complex and laws and regulations change with some regularity.

In all of the states I have dealt in, you could quite easily buy owner sales and hire a lawyer by the hour to close escrow if you wished.

Real estate agents are paid a commission by the seller to sell a property for the highest price the market will bear, just like investment bankers, auctioneers, and car salesmen. The commission is split 4 ways to the buyer's agent, the buyer's agent's broker, the seller's agent and the seller's agent's broker. So at 1.5% you have to sell $5,000,000 to gross $75,000 in commissions. That's a lot of houses to sell in most markets.

Frankly, I think real estate agents stack up pretty well against educators for value delivered. And nobody writes laws that say you have to use an agent to sell a house.

There has never been a home listing network as powerful as the MLS. The MLS is most of the value of the real estate agent. There is often little face to face negotiating. Agents to tend to push deals to close by getting their own clients to give a little more. The point is, if there was a free or low cost place on the internet where most of the homes were listed for sale, people would go to that place to look for houses. There are lots of low cost networks but network is only as valuable as the number of people in it. Buyers can't get enough selection in these networks, so they go to the big one...the MLS. The MLS is the powerful tool that reduces market friction in housing.

The biggest job a real estate agent does is look for new clients... not sell real estate. The MLS does most of the selling.

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