Here’s what people are getting wrong about real estate commissions

I recently read editorials and articles by such esteemed publications as The EconomistEntrepreneur Magazine, and The Wall Street Journal concerning the antitrust real estate commission lawsuits. 

Here are some of the highlights:

In Entrepreneur, the writer states, “…the court ruling (Sitzer) could lead to a decrease in the average home price in the U.S. by 1% to 2% just by cutting the commission paid to buyer’s agents.”

The writer in the Economist says, “…either the fat fee [real estate commission] inflates the house price, or the buyer ends up paying a similar fee when he or she sells.”

This is from the Editorial Board of The Wall Street Journal, “Ninety percent of transactions offer buyer agent commissions of exactly 3%.” And this one, “If not for the Realtors rule, many buyers wouldn’t use brokers or would negotiate lower commissions.  Home prices would likely fall.”

They are wildly wrong

Their statements are not only wrong, but they are wildly wrong. 

Any person involved in selling a home knows that you cannot increase the price of your home randomly to cover the cost of commissions and other closing costs. The market sets the price of the home, and it cares little for closing costs — or what the homeowner invested in it — when determining the price for which it will sell.

Sales prices don’t go up or down based on closing costs. It does not happen (speaking as someone who has bought and sold nearly a dozen homes, aways used a Realtor, and not once could I increase the price to cover the real estate commission or other closing costs). Aggregate data from the housing market would confirm this.

The Economist also writes that according to a 2019 Brookings Institution report, Realtor fees consumed a quarter of the capital gains earned in an average home sale. I did some simple math using data from the St. Louis Federal Reserve that says American home equity amounted to nearly $30 trillion at the end of 2022. I divided that by total commissions paid out to residential Realtors in 2022 of approximately $84.8 billion, adjusted it for homeownership levels, and came up with a figure of approximately 4.8% of homeowner’s equity paid out in commissions

Is the Brookings Institution saying that the average homeowner only saw their equity increase by 20% in years past? One source indicates that total home equity in American homes has increased by 64% in the past five years. It’s true that Brookings did their study back in 2019 and there has been a surge in equity values in the past four years, but still.

From the Wall Street Journal Editorial Board, “the commission on home sales has stayed basically flat for decades at 6%, split evenly between the buyer and seller agents.”  What a truly wrong statement for which is there ample evidence to prove that it is incorrect. We have been tracking this number on a national basis for nearly 30 years. The average has been dropping for nearly all of those years and now stands at slightly less than 5%. Our data is good enough for the DOJ and the FTC to use for their own report on competition in the industry in their 2005-2006 report.

Lastly, I quote from Entrepreneur Magazine: “Firms like Redfin and Zillow have changed the homebuying process by providing buyers with easy access to a wealth of information on properties, neighborhoods, school systems, and more.”  The writer then goes on to say “agents must adapt and find new ways to provide value to their clients. This may involve building strong relationships, offering personalized service, and providing guidance on complex aspects of the homebuying process that may not be readily accessible online.  Additionally, agents must continue to develop their skills in negotiation, market analysis, and navigating the legal intricacies of real estate transactions.”

As if that is not exactly what has happened over the past 20 years since property data became available online? If I must read one more article that says technology has lowered the need for Realtor services, then read that agents must adapt to this new environment which includes being better at every aspect of the transaction, as if they haven’t, I think I will be ill. 

Despite all the technology and information that housing consumers have at their disposal, over 90% chose to use an agent last year. When they had a clear alternative to using an agent and saving money on transaction costs.

One big factor no one is talking about – friction.

Imagine a future as the plaintiff’s counsel, the DOJ and obviously many business writers don’t want to talk about. The current marketplace has been designed to reduce friction in the transaction. The future they seem to think is a beautiful thing increases friction. 

Friction comes when the seller, seller’s agent, buyer, and buyers’ agents now have to negotiate the compensation among the parties. Who is going to pay how much to whom? 

Friction comes when buyers, particularly first-time homebuyers (about 25% of all recent homebuyers) lack effective representation when they buy a home to save on paying a buyer’s agent. The potential for litigation increases exponentially in such a future. 

Friction comes via a lack of effective representation on either the selling side or the buy side, when instead a transaction coordinator or facilitator is involved, which will ultimately reduce fiduciary to either party.

So, while many seem bent on destroying the system, not one can describe what the new system will look like and how it will benefit the parties to the transaction. Industry professionals do know and we all know it will increase chaos and conflict between parties.

This article was originally posted on HousingWire. Read it here.