Real Estate Revolution?

Real Estate Revolution?

A century-old cartel has been broken.

James Joyner
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Thursday, March 21, 2024
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13 comments

CC0 Public Domain image from PxHere

Yesterday’s episode of The Daily, “The Bombshell Case That Will Transform the Housing Market,” featured an interview with NYT real estate reporter Debra Kamin based in part on a report she filed last with with Rukmini Callimachi headlined “Five Ways Buying and Selling a House Could Change.”

A settlement reached this week threatens to strike a blow to an established standard of residential real estate: the 6 percent sales commission. It also will change who pays it. The deal, reached after a yearslong court battle initially brought by a group of home sellers in Missouri, calls for the powerful National Association of Realtors, which has long regulated the way U.S. homes are sold, to amend its rules on how Realtors for sellers and buyers are compensated.

In most real estate transactions in the United States, both the seller and buyer have an agent representing them. For decades, there’s been a standard for paying these agents: a commission of between 5 and 6 percent of the home’s sale price, covered by the seller and split between the two agents.

Commission rates are significantly lower in many other countries. In Britain, they are just above 1 percent, while in Singapore, the Netherlands and Denmark, they hover between 2 and 3 percent, according to a study by the investment firm Keefe, Bruyette & Woods. The homeowners who sued in federal court in Missouri said that N.A.R., through its rules on agent compensation, conspired to artificially inflate the commissions paid to real estate agents.

Now those rules are set to change as early as July, pending court approval of the settlement that includes N.A.R.’s agreement to pay $418 million in damages.

I had, of course, read about the settlement when it came out but, as I’m not likely to buy or sell a house any time soon, hadn’t given it a whole lot more thought.

My longstanding view, both as one who has bought and sold multiple houses and one who has read Freakonomics and other treatments of the issue, is that the real estate market is essentially a criminal enterprise. It’s rather obviously a cartel because of the way the Multiple Listing Service works. Paying a commission on the gross proceeds of a sale—and having no realistic alternative—amounts to extortion.

Most importantly, in my view, is that, while “Realtors” represent themselves as fiduciaries, they’re essentially scam artists whose interests are wildly misaligned with that of their ostensible client. Given that their commission is based on the gross, not the net, they are incentivized to price the house to sell quickly, minimizing their work. An extra $10,000 in their client’s pocket is, after all, only $300 in theirs, since the 6% commission is split both ways. (Indeed, it’s less than that, since they usually have to pay part of their earnings to the firm.) Further, information given to them in confidence will surely be given to the other party since, again, their incentive is to make as many sales as possible with as little time investment as possible. And don’t even get me started on their recommendations for home inspectors and the like.

So, I very much welcome the judgment in Missouri and the broader capitulation by the NAR. Indeed, the $418 million settlement strikes me as a pittance compared to how much their cartel distorted the market.

Kamin argues that not only will commissions to real estate agents go down with open competition but that owing to buyers no longer needing to fork over such a huge chunk of the selling price for their services, they will be able to lower the selling price of homes. She likens this to the end of the travel agent monopoly on vacation planning brought on by the advent of online price-searching tools.

That sort of transformation was already underway even before the settlement. When I bought my previous houses (in 1997, 2003, and 2007), I was totally at the mercy of the real estate agent in looking. In 1997, the only information was newspaper ads and the like and, in 2003 and 2007, Internet searchability was only slightly above the classified ad level. When shopping for the current house in 2019, I had panoramic views and all manner of detailed information via Redfin, Zillow, and the like. The only reason I needed an agent at all was to get access to the houses I identified as possibles.

Still, there are a large number of people who make a pretty decent living as listing and selling agents. Presumably, the only ones willing to take a major haircut are those with no other options.

We used a Redfin agent when buying and selling our previous home. Because our needs were unusual (5 bedrooms plus two additional spaces suitable for home offices; parking for at least 3 and preferably 4 vehicles; good schools at both the elementary and secondary level; etc.) my wife and I looked at a lot of houses over a span of two or three months. Like, in the neighborhood of 50 of them. For the most part, I was able to group these into chunks or 3 to 5 per visit but, still, that’s a lot of visits. That’s an investment well worth making with a payout of 3% of a million-dollar house at the end of the rainbow. If not, are they going to want to be paid per visit? Per hour?

Does the model simply change entirely? If buyer’s and seller’s agents aren’t splitting a commission, the incentives for shady conduct mostly go away. But what will the new system be and what incentives will it create?