If new proposals to change compensation become reality, real estate agents' commissions could come under pressure. iStock/Getty Images Plus
Buying a home is expensive these days, and it's not just because of rising prices and mortgage interest costs. High fees paid to real estate agents are also putting pressure on homebuyers' profits. In fact, Americans pay about $100 billion in real estate commissions annually, according to a 2023 analyst report from Keefe, Bruyette & Woods. But there's good news, at least for those who: it's not A new research paper entitled Real Estate Agents. Real estate commissions and home purchases It suggests that about $30 billion in commissions for U.S. real estate agents could be saved by using the new compensation model.
In a paper, Richmond Fed senior economist Boris Grochulski and vice president of research Zhu Wang say the U.S. real estate commission model is “mysterious” and “abnormal” compared to other systems overseas. claims. According to a 2015 study, home sellers in the UK, Ireland, Netherlands, Singapore, Sweden and Norway pay an average commission of less than 2% to real estate agents, compared to 5.5% in the US. Pointed out.
When it comes to buyers, the majority purchase real estate without the representation of an agent in many countries, including Australia, Canada, and Denmark, while in the United States, 87% of homebuyers I am using an agent. Considering that half of all buyers search for their home online anyway, this means a significant percentage of Americans are choosing to use a buy-side agent.
According to Wang and Grochulski, all of these problems with the current compensation model for real estate agents are contributing to “soaring home prices, overutilization of real estate agent services, and longer home searches.” To solve this problem, economists have proposed a new “a la carte” model for real estate agents on the buyer side that could save buyers about $30 billion in fees.
“The results suggest that switching to a cost-based fee model could increase the welfare of U.S. homebuyers by more than $30 billion annually,” Wang and Grochulski write. , states that “most of the consumer welfare gains will come from purchaser redistribution.'' It's the agency's profit. ”
In an a la carte compensation model, both home buyers and sellers pay their agent a fee, independent of the final home price of the transaction, to prevent something called “steering,” where agents tend to steer clients away from real estate. Must be paid separately. Low fees.
This model is also called a la carte because it forces homebuyers, rather than sellers, to pay for each task that an agent takes on individually, such as finding a home, helping with negotiations, showing properties, etc. Economists argue that this allows consumers to shop around for individual buyer agent services and haggle for better prices. “Under such a system, competition among agents would likely match agents' fees and costs, and buyers would not overuse agent services,” they wrote. ing.
The new Richmond Fed document comes at a difficult time for real estate agents. The National Association of Realtors and several national brokerages are facing multiple lawsuits alleging collusion to inflate real estate agents' fees. This comes after a Kansas City jury sided with NAR in a similar case last fall, leaving NAR with a $1.8 billion verdict (NAR plans to appeal).
The pressure on real estate agent commissions is so intense that prominent short seller Spruce Point Capital releases a short report on Zillow, a real estate market that derives the majority of its revenue from buyer agent commissions. It has come to this point. It warned that the company's stock price could fall by up to 60%. One of the key issues cited by short sellers was an analysis showing that recent litigation could change the way buyer agent commissions are handled, potentially causing the overall addressable commission market to decline by up to 30%.
Still, despite the negative impact of current compensation structure changes on the real estate industry, Wang and Grochulski believe a new model of commissions is needed and that their a la carte approach is probably the best option for the economy as a whole. I believe that. . From eliminating agent incentives to drive customers away from low-commission homes and increasing home search efficiency, to allowing buyers to use multiple agents throughout the home-buying process (saving agents' time). Economists say that the economy can be put to “more productive uses''. praised the potential benefits of their model. “We suggest that policymakers consider moving to an a la carte model,” they concluded.
