Editor’s note: Every few years, Realtors and their commission structure come under scrutiny and it is happening again now. In this three-part series, we examine whether commissions are going up or down and what’s adding pressure to the debate. (See Part 2 and Part 3.)
Real estate agent commissions are a favorite topic of discussion lately, with the popular press poking at the traditional model with questions about compensation and the industry growing defensive over the issue.
Pressure is mounting on the standard 6 percent commission model, with a number of factors contributing. The federal government shined a light on the industry with an antitrust lawsuit against the National Association of Realtors last September, and by publicly opposing several Realtor-backed state bills that would effectively ban some discount service models.
Two other notable forces adding pressure on commissions are the groundswell of agents entering the business in the last few years and the availability of more real estate information on the Internet.
In California alone there are nearly half a million licensed real estate agents. The number of sales has soared during those years, but not enough to feed all the mouths that have come to the industry feeding trough.
Also, with more real estate information available online, buyers are doing more of their own homework and expecting to pay less.
Judging by interviews and articles written by academics and authors, you’d think the Realtor profession was on its way out the door. Some have Realtors going the way of the travel agent and getting tossed aside in favor of big Internet sites and technology centers.
A March 5 New York Times article by “Freakonomics” authors Steven Levitt and Stephen Dunbar offers up two reasons to feel bad for real estate agents: Despite skyrocketing commissions during boom years, most agents don’t make much money in a hot market; and new Internet and discount services eventually will replace traditional agents.
“It would seem obvious that being an agent during a real-estate boom is a great way to earn a good living,” the economists wrote. Traditional agent commissions are paid as a percentage of the home sale price, creating more expensive fees as housing prices go up even though agents may not have spent more time on the sale.
“As it turns out, however, most agents don’t make very much money during a boom, because of one simple fact: the boom attracts way too many of them,” the authors wrote.
Membership in NAR has increased to a record 1.2 million, a trend some industry executives say is not a good thing for the industry overall. Levitt and Dunbar say the number of agents swells during boom years because compared to most professions, becoming an agent is fast and inexpensive, a phenomenon known as “free entry” in economics.
The economists pointed to a 2003 study published in The Journal of Political Economy, concluding that traditional commissions and few barriers to entry for new agents create billions of dollars of waste in the real estate industry – and neither consumers nor agents benefit.
In, “Can Free Entry Be Inefficient? Fixed Commissions and Social Waste in the Real Estate Industry,” authors Chang-Tai Hsieh and Enrico Moretti spell out how and why the generally accepted 6 percent sales commission goes awry.
Hsieh and Moretti, both associate professors of economics at the University of California, Berkeley, used mathematical formulas to show how earnings from commissions quickly become warped in areas marked by rising housing costs, and how agents flooding hot markets dilute one another’s efficiency.
Central to the study is the idea of “social waste” – in essence, spending resources that have no redeeming value to anybody. Agents themselves don’t benefit, because a hot housing market draws more agents into the business and splits their profits. And consumers are hurt by paying larger sums for essentially the same amount of work, the study noted.
A new wave of discount and flat-fee brokerages also are adding pressure to commissions. While many consumers would prefer to work with a traditional, full-service brokerage in their real estate deals, some pioneering brokerages have carved a niche in discount and flat-fee services.
Help-U-Sell, which launched in 1976 and has about 1,000 franchise offices nationwide, has plans to pursue an aggressive consumer marketing and press campaign to “blow up the issue” of Realtor compensation, the company’s CEO Steve Ozonian said during a conference in Las Vegas last week.
“The Internet and home prices have really caused people to think about the value they’re getting from traditional business models. The disparity between the relationship of the price a Realtor charges for services and the cost for delivery of services … it’s hard to find anybody who doesn’t say, ‘It’s gotten ridiculous,'” he said in a speech to company affiliates.
The slowing housing market could also add pressure on commissions, though insiders and experts disagree on how market conditions ultimately will impact agent compensation. RE/MAX International Chairman Dave Liniger told Inman News that an agent becomes more valuable in this type of market, thereby strengthening commissions.
Others, such as Colby Sambrotto, chief operating officer of ForSaleByOwner.com, say that a cooling market brings more customers to low- or no-commission models.
“From our standpoint, there will never be a day in America again when real estate commissions will climb. The new alternative models entering the marketplace, new Internet-related tools being available to consumers, have changed the industry,” Sambrotto said.
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