What's the truth about realtors and commissions?

[Doug Morris]

The current online New York Times has an article claiming that real estate commissions in the USA were at the high rate of 6% because the National Association of Realtors had the power to enforce it and that this constituted a failure of the free market that required antitrust action to correct it.  Can anyone provide a good source explaining the real reason commissions were so high?

  

[tadmjones]

It looks like a 6% rate was last seen in 1992 and hasn't gone below or even to 5% since.

Maybe 'high' is a clickbaiting term ?

https://www.statista.com/statistics/777612/average-commission-rate-realtors-usa/

Edited March 18 by tadmjones

[Boydstun]

Doug, I had imagined our agent would be getting about 10% (we came to own real estate only once, late in life), so I was surprised that people consider 6% or so high. I've seen some dramatic data given for the thesis that if one is a seller, one will get about 1.5 times for your home using an agent than doing a "for sale by owner." Whether one is a seller or buyer, I think most of us would not want to do it ourself if the other party had an agent.

[necrovore]

I do seem to recall (from some older articles) that many jurisdictions had laws requiring that all real estate agents had to be Realtors, so much so that people began to forget that Realtor was trademarked and not a generic term like "lawyer."

I do not know if such laws are even still on the books, but even if they were or are repealed, it is still likely that the National Association of Realtors would have a lasting advantage from their existence.

If the market is open to competitors then prices should stabilize even if no competitors appear (the mere threat of competition is often enough to stabilize prices).

This kind of arrangement is similar to laws requiring that cars be bought through a dealership, which Tesla has gotten in trouble with, or laws that grant city or county monopolies for cable television.

Such things are of course products of the "mixed economy" and are violations of the separation of state and economics (a principle not recognized by law at present).

Edited March 18 by necrovore

[DavidOdden]

It is analogous to the fees imposed on vendors who accept credit cards. Credit card companies charge vendors some amount for their service, which the market has set at about 3% but some companies charge more (hence “we don’t accept Discover or American Express”). In this case, the business can either eat the cost, or refuse to accept credit cards, or charge mor for using a credit card (if legal, otherwise they offer a discount for cash). NAR has the power to enforce terms on members using their services, and 3% per party is fairly standard (was so when we bought our first house in 1987). An agent has the greatest incentive to sell a house that they are the seller’s agent, so as a buyer you can assume that you will probably get shown many houses being sold by your agent: but not exclusively. MLS is the useful tool by which agents gain access to many more houses and buyers.

Originally, there was little alternative to paying the “standard rate”, when all agents agree to abide by a certain fee standard. The rates have never been fully-enforceable so the NYT is just lying, no surprise. An agent can elect to forego some of their commission, if they want, but Agent A cannot force Agent B to accept a lower commission. I’ve heard of agents accepting a lower commission but it seems to be rare. Of course there was always “for sale by owner”, where there is a chance that you will sell your house for a good price. The interwebs provided some competition, and there are services which aim to match buyers and sellers for a lower commission. The FTC approach is to force multiple listing services to become public utilities, preventing them from not including discount sales in their listing.

Outside of real estate, 3% is a ludicrously low sales commission given the agent's labor, so whiners who object to paying for the service provided by a real estate agent are free to arrange cheaper alternatives. Doing without an agent is an obvious albeit hard-to-implement choice. Shopping for a discount listing service is another choice, depending of course on the nature of the market you are in (i.e. do you need a shark, to make sure that you make the winning bid?). But real estate commissions are not "so high". Government excise taxes on the other hand...

[Boydstun]

David's remark got me thinking that the way we found the house we wanted to buy was probably pretty good from the competition factor. We were buying in 2009 which was good for buyers, as housing transactions had fallen (also, since we were first-time buyers, we were able to get a federal tax advantage at that time). We had been renters in Chicago throughout adult life. By retirement time, we had saved enough money to by a house, provided we moved to a less expensive part of the country. Using sites like Zillow, we had spotted about 30 places in the mid-South we wanted to explore. We had no agent. We rented a car and drove down to look at those houses only from the outside. All but 7 could be eliminated by the surroundings of the house. I wrote down the agents with whom the 7 homes were listed at the property, and after we returned to Chicago, I called each of them and made an appointment to see the interior. They knew I was looking at a number of definite houses, and perhaps that was to our advantage. When I came to the house that was calling "home," it turned out that (in Virginia) that agent could be also our agent, so that is what we did, and it was very convenient for us. I'm pleased to hear his commission may well have been 6% from us—I never knew—and really that seems like a bargain for us.

[Reidy]

Yaron Brook took this up on his show, expanding on Necrovore's point that real estate agents are a cartel, held in place by licensing laws. Market failure had nothing to do with it.

He predicts that commissions will go way down in the short run, because there are too many agents, then go up to 4% or 5%.

[Doug Morris]

Thanks to everyone who commented.  I found the cartel explanation particularly helpful.

For a little further clarification, the NYT compared the USA to other countries.  From the article:  "The typical commission in the U.S. has been almost 6 percent, compared with 4.5 percent in Germany, 2.5 percent in Australia and 1.3 percent in Britain. As a recent headline in The Wall Street Journal put it, “Almost no one pays a 6 percent real-estate commission — except Americans.”"

One question this raises is, are there countries where government interference forces commission rates wrongfully low?

 

[tadmjones]

Off the top of my head , and I had not thought about this previously, but are other countries' real estate markets structured the same as the US's? Are mortgages and mortgage markets similar?

 

[DavidOdden]

2 hours ago, Doug Morris said:

One question this raises is, are there countries where government interference forces commission rates wrongfully low?

I don’t know what would be rightfully low if it is forced. Rates are regulated in a number of countries (Austria, Greece, Slovenia, France, UAE and Italy under municipal ordinance). A major difference across countries is whether sellers pay the commission (the majority practice e.g. US, Turkey, Switzerland, Spain, Portugal, Montenegro, Latvia, France), rarely buyers (UAE, Slovenia – most of the commission), or shared (Italy, Greece, Croatia, Germany in some cases otherwise shouldered by the buyer). Real estate brokers are generally government licensed as in the US, the UK situation being exceptional. Reports of average total commission are highly variable (the number is set by a state commission in Germany, by the local chamber of commerce in Italy). In fact, Americans do not pay 6% except in Alaska, West Virginia, Wyoming, but also the lowest state average in the US is around 4.9 in Utah. US is certainly on the high end for civilized countries, but France is even higher.

I would certainly like to blame the government for everything, but I just don’t see the evidence that that is correct in this case. Agents are typically licensed by law, licensed agents are not required to be members of NAR in the US, regulated rates can be high (France) or low (UAE). There does seem to be a relation between low rate and whether the burden is not entirely on the seller.

[Reidy]

This is easy to test. See if rates in the US are lower a year from now.

[tadmjones]

In the 'biz' 3% goes to the listing agent and 3% to the buyer's agent , if the same agency sells their own listing they could get the full 6, but to sweeten the deal they will sometimes negotiate either with the buyer or the other agent to lower the rate total.

[DavidOdden]

3 hours ago, Reidy said:

This is easy to test. See if rates in the US are lower a year from now.

We have some concrete national averages of total commissions from three sources that bother to give concrete numbers: 5.49%, 5.8%, 5.57%, which averages out to 5.62%. The usual ballpark cited is “between 5%-6%”, which sort of meshes with the actually-computed means. If this government intervention is actually effective in reducing net commission paid, we expect that in a year, the average rate should be about 0.5% lower (or more). I will set myself a reminder to come back here in about a year to see if commissions went down as a consequence of this antitrust action.

The leftist Brookings Institute promulgates the observation that “steering” contributes to high commission rates, as well as higher prices. Seller publishes the commission split on MLS, information that is available only to agents, not to customers or non-agent real estate professionals. Buyer’s agents also have an incentive to steer customers away from low-commission deals, consequently sale prices on low-commission properties is lower. They had been able to get away with this because MLS was private unregulated property, thus the rule that MLS information is members-only. Following an earlier antitrust case MLS became more of a “common carrier”, though that action did not seem to have ameliorates the commission "problem". NAR still recommends commission percentages, and apparently that practice is the target of the current legal action, one example here where part of the relief sought was permanently “enjoining Defendants from continuing to require sellers to pay the buyer broker and from continuing to restrict competition among buyer brokers”, and the current settlement purportedly requires NAR to get rid of the Participation Rule, which is part of the license to use the service.