How American homebuyers are subsidizing real estate agents
The cost of buying and selling a home in the U.S. isn’t just about mortgage rates and house prices. Real estate agents also take a large cut to perform a service some consider obsolete.
According to Ryan Tomasello, an industry analyst with Keefe, Bruyette & Woods, Americans pay $100 billion in real estate commissions yearly. The average commission on a home sale is between 5% and 6%, split between the buyer’s and seller’s agents.
Those fees subsidize an industry of 1.6 million active agents, allowing top earners to make well over six figures, according to the Labor Department.
The problem is that almost nobody else in the world pays such exorbitant commissions when selling their home.
An analysis conducted by Professor Norm Miller (University of San Diego), Professor Chad Syverson (The University of Chicago), KBW Research, and Surefield found that only two countries have higher real-estate commissions: Japan (6.2%) and Argentina (6%).
Everywhere else, commission rates are much lower than what Americans pay.
Even with such high commissions, the National Association of Realtors (NAR) boasts that 89% of U.S. home sellers use a real estate agent.
How could this be when the internet has made it much easier for buyers to browse properties without ever stepping into an agent’s office?
According to a recent landmark court case, the answer is collusion.
A court case could change everything
On Oct. 31, the National Association of Realtors (NAR), HomeServices of America, and Keller Williams were ordered to pay nearly $1.8 billion in damages to home sellers after a federal jury determined these associations colluded to inflate commissions on home sales.
The class-action lawsuit targeted an NAR policy requiring brokers to offer buyers’ agents compensation after selling a home.
In other words, home sellers must pay their listing agent and the buyer’s agent, who, ironically, is negotiating against their best interest.
“NAR and corporate real estate companies have had a stranglehold on real estate commissions for too long,” said Michael Ketchmark, the plaintiffs’ lawyer.
One week later, home buyers filed a similar class-action lawsuit accusing Compass, eXp World Holdings, Redfin, Weichert Realtors, and United Real Estate of artificially inflating agent commissions, resulting in higher home-buying costs.
The legal action is “not turning the whole system on its head, but it’s injecting market forces into the process to make sure you’ve got a correlation between service provided and the commission that the broker is getting,” said Ted Tozer of the Urban Institute’s Housing Finance Policy Center.
Ryan Tomasello of Keefe, Bruyette & Woods thinks the lawsuit could “drastically” change the real estate industry’s commission structure.
“We believe changes to the residential brokerage industry's commission structure could cause the annual commission pool to decline by upwards of 30% over time,” he said.
Removing the middleman
While most experts agree that real estate agents won’t go extinct, the recent class action lawsuits are a “wake-up call” for the industry, according to Sissy Lappin, owner of the Houston-based Lappin Properties.
There’s no guarantee that buyers and sellers will hire agents in the future, she said.
Technology has also transformed how buyers browse and shop for properties, reducing the need for a middleman. Unlike other industries, real estate has been sheltered from these market forces, according to a Leaders column that appeared in The Economist.
“When did you last call a travel agent?” the column asked rhetorically.
Mandatory agent fees have created excess profits, which “have attracted excess workers” to the real estate industry. Although there are 1.6 million NAR-licensed realtors, the actual number of agents is twice that amount, according to the Association of Real Estate License Law Officials.