Wednesday, February 1, 2012

Help, I’m Sinking in a Think Tank and I Can’t Get Out

Help, I’m Sinking in a Think Tank and I Can’t Get Out

Today, the Beacon Hill Institute issued a report entitled “Massachusetts Real Estate Licensing Requirements Benefit Agents Not Consumers.” The Boston Business Journal and Banker & Tradesman ran the article as their lead columns on line.

The research article was written by Benjamin Powell, Ph.D., an Associate Professor of Economics at Suffolk University and a Senior Economist with the Beacon Hill Institute, and Evgeny Vorotnikov, Ph.D., a Post‐Doc Research Fellow at the University of Minnesota and Tuerck Foundation

In short, the writers argue that requiring brokers to take 12 hours of continuing education courses every 2 years at a cost of $100 is a) driving brokers out of the industry; b) increasing the average incomes of those remaining; and c) having no impact on claims filed against brokers at the Mass. Division of Licensure.

They have fallen victim to the trap of coincidence and effect. This fallacy was recognized in Ancient Greece and simply states that correlation does not imply causation. The opposite belief, correlation proves causation, is logical fallacy by which two events that occur together are claimed to have a cause-and-effect relationship. The fallacy is also known as cum hoc ergo propter hoc (Latin for "with this, therefore because of this") The writers even state in their report that “the cost, in terms of both time and money, of twelve hours of continuing education is unlikely to cause many full‐time realtors to exit the industry or to deter others from entering.” Not a single broker was interviewed in the article.

The requirement to take classes does not “cause” anything. The balance of their research is a measurement of coincidence, not causation. The writers use the legislation passage as the independent variable, even though they fail to establish cause, and use multivariate regression analysis to state that the legislation requiring continuing education was statistically significant in accounting a) fewer brokers, b) lower incomes, and c) lack of change in complaints against brokers. I could further critique their work for the paucity of additional dependent variables that should have been added to the list tested. But there really is not point when we are speaking coincidence, not correlation.

What is also amazing is that, at no point do the writers actually discuss the nature of the classes, and I would be willing to bet they attended none and have no knowledge of them. I have sat through 6 sessions to date. The purpose is education. There are six modules, each covering a different topic which enhances a broker’s skill sets and, above all, informs brokers of new rules and regulations affecting the profession, such as disposal of toxic waste; lender-broker relationships; and rules on the use of multiple listing services. The authors are trying to argue that obligating brokers to pay $100.00 every 2 years to bring themselves up to date should be abolished because it is too much of a burden for part time brokers. Would the writers like it to hear their doctors tell them they had not attended any industry events or training programs since receiving licenses to practice? How about their attorney? How about the pilot flying their plane?

The writers ran their statistical tests, the results of which emblazoned the papers. And yet they failed to establish any reasonable case for cause and effect. We all want to believe. That’s why we have rain dances and rub our rabbit’s feet. But, if the event occurs after we have danced or rubbed, it is a coincidence, nothing more.

The simple fact is that the requirement to take a licensing course every 2 years has no effect on the number of brokers, the income of brokers, and the number of complaints. Let me tell you what does have an effect on these three measurable facts.

1. Numbers of brokers: The number of brokers has been shrinking continuously and will continue to do so due to:

a. Real estate technology used not only in residential online “shopping” but as a single source of information for the massive commercial real estate brokerage industry. It is both a source of information and as a tool for market and financial analytics. The individual broker simply has more tools at hand which has led to a massive layoff of brokers. That has reduced the number of real estate brokers more profoundly than any other influence, and it will continue to do so. Think of Wall Street 30 years ago and today.

b. Brokerage industry consolidation has eliminated overlapping brokerages within geographic areas, decreasing the number of brokers necessary to cover a given area. The consolidation has also allowed brokers to draw on central office sophistication to further improve general skills or to develop necessary transaction documentation, allowing a standardized approach to the business, which again allows fewer brokers to do the work of one.

2. Broker Income:

a. The income of brokers has increased because there are fewer brokers for the reason state above, not because of the burden of licensing.

3. Complaints and Litigation:

a. The fact that the number of complaints has not materially changed is, once again, an instance of not understanding where the nature of complaints play out. Any broker knows that it is not at the Licensing Division. Most complaints against brokers fall under Chapter 93A of the consumer protection acts of Massachusetts through the Attorney General’s office. But there is a distinction between the complaints against a broker’s action and the actions of an incompetent broker. I would recommend the broker check the AG’s office for a true sample of complaints. I would suggest the writer’s might list as a “dummy” variable the number of houses in foreclosure and the statistical significance of the number of broker complaints.

b. What the writers fail to grasp is that the argument to end licensing requirements would lead to the real legal battles in real estate which involve contract law and, typically, the disagreement between the parties over the obligations of each party in the contract. Since brokers are the first step toward a contract, I think I would prefer a more-educated, licensed lawyer, with knowledge of changes in real estate law and regulation involved in a transaction. Of course, that would cost $100.00 every 2 years.

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