Some overcharges are right there for everybody to see. One of them is how much Americans have to pay to buy or sell a house. The combined commission paid to agents for buyers and sellers is typically 5 percent to 6 percent, compared with below 2 percent in Britain, the Netherlands and Sweden, among other countries, according to studies cited by the Federal Reserve Bank of Richmond.
Fortunately, those commissions are coming under pressure, especially on the buyers’ side: A tentative settlement reached last week by the National Association of Realtors could knock a percentage point or two off commissions, which would mean $5,000 to $10,000 off the price of a $500,000 house if all the savings went to buyers.
The history of the real estate industry’s efforts to prop up commissions is long and inglorious. In 1939, the National Association of Real Estate Boards — the predecessor of the National Association of Realtors — formed a committee to standardize commission rates. “By 1950, the 5 percent commission rate was an industry standard, and calls for 6 percent soon followed,” according to an article in Chicago Agent Magazine that was cited by the Justice Department in another case last month.
For nearly as long, the Justice Department, the Federal Trade Commission and private citizens have tried to break the industry’s grip.
Things started heating up in 2019, when private plaintiffs brought class-action suits on behalf of home sellers in Illinois and Missouri. This past October a federal jury in the Missouri case found that the National Association of Realtors and several big brokerage firms had conspired to follow and enforce a rule on how buyers’ agents are compensated. Plaintiffs alleged that the rule inflated agent commissions. The jury ordered the defendants to pay $1.8 billion in damages. Several major brokerage firms have settled the claims against them with financial payments and an agreement to abide by future structural changes in the industry that would be part of a final settlement.
What happened last week is that the National Association of Realtors reached a settlement on those structural changes, pending a judge’s approval. The settlement doesn’t discuss commission rates, only policies. It also agreed to pay $418 million in damages. The settlement covers the cases in Illinois and Missouri as well as those in a number of other states. Most brokerage firms are covered, although not the biggest, Berkshire Hathaway-controlled HomeServices of America.
Stephen Brobeck, a senior fellow at the Consumer Federation of America, told me that the tentative settlement “will eventually represent a great gain for consumers.” He added, “It will be more difficult for the industry to fix prices.”
“The wheels have been in motion for a long time,” Makenzy Mohrman, a director in the financial services group of the policy analysis firm Capstone, told me. She said that some big real estate firms were probably surprised when the National Association of Realtors, which had been promising to vigorously fight the class-action lawsuits, abruptly reached a tentative settlement.
The problem in real estate has always been, as economists like to say, a misalignment of incentives. When I’m buying a house, I want my agent to be on my side. How can she be 100 percent on my side if the commission she earns is paid by the seller? Won’t she be tempted to show me houses that make her more money? My agent can earn more for herself if she steers me to a more expensive house, or to a house where the seller’s agent is offering a bigger cut of the action.
The National Association of Realtors has said that such things never happen because agents owe a fiduciary duty to their clients. “This duty obligates a real estate broker to act at all times solely in the best interests of his principal to the exclusion of all other interests, including the broker’s own self-interest,” an N.A.R. brochure from 2013 said.
On paper, maybe. But plaintiffs have introduced evidence that sellers don’t dare cut commissions to buyers’ agents for fear that the agents will steer customers away from them.
To be clear, I’m not accusing real estate agents of behaving unethically. The ones I’ve worked with over the years have been great. It’s the system that’s the problem. I feel bad that fixing the system is likely to push a lot of people out of the business. I hope they find other work.
The tentative settlement last week goes partway toward fixing the alleged misalignment in today’s system. Sellers are no longer permitted — let alone required — to post offers of compensation to buyers’ agents on the Multiple Listing Service, which is where houses for sale appear.
But there’s more to be done. The settlement still allows sellers to offer compensation to buyers’ agents, just not via the Multiple Listing Service. This strikes me as problematic: My agent is still beholden to the seller. A more pro-competition solution would be to ban all payments by sellers to buyers’ agents. Buyers could do without an agent or could negotiate their own, presumably lower, commissions.
A 2022 research paper cited by the National Association of Realtors warns that “minorities, lower-income households and first-time home buyers who rely more heavily on agent services would suffer the most” from a ban on payments by sellers to buyers’ agents, because they couldn’t afford to pay the agents out of their own pockets.
But it would be possible for buyers to negotiate commissions with their agents without having to pay those commissions out of pocket, the Justice Department said in comments on a lawsuit in Massachusetts last month. It said the buyer could negotiate a payment to the buyer’s agent, then direct the seller to pay the agent that amount from the proceeds of the home sale. The seller would compare bids based on the net payment he or she would receive after any payments to the buyer’s agent.
It’s possible that the judge could modify the settlement that was tentatively reached last week along those lines. That would be better for consumers than what’s on the table.
Commissions to real estate agents for buyers and sellers add up to about $100 billion a year. Switching to a system that bases buyer agent commissions on cost “could increase annual consumer welfare by more than $30 billion,” the Richmond Fed study said. It would reduce agents’ welfare at the same time, so the net benefit would be smaller. Still, I think, a step in the right direction.
Elsewhere: Japan Raises Pay and Interest Rates
Japan seems to be climbing out of a deflationary rut. The Japanese Trade Union Confederation reported last week that its member unions obtained annual wage increases of about 5.3 percent this year, the biggest raises since 1991. On Tuesday, the Bank of Japan lifted its target for its policy interest rate into positive territory, albeit just barely: a range of zero to 0.1 percent. It was the first time the rate had poked its head above zero in 17 years. “The virtuous cycle between wages and prices has become more solid,” the central bank said in a statement.
Quote of the Day
“Prejudice apart, the game of push-pin is of equal value with the arts and sciences of music and poetry. If the game of push-pin furnish more pleasure, it is more valuable than either.”
— Jeremy Bentham, “The Rationale of Reward” (1843 Bowring edition)