Real estate agents’ commissions could be under pressure if new proposals to change their compensation become reality.
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US Real Estate Agents’ High Commissions Could Be Slashed by $30 Billion
Buying a home is expensive these days, but beyond the high prices and burdensome mortgage rates, costly commissions for real estate agents are also impacting homebuyers’ finances. Annually, Americans pay approximately $100 billion in real estate commissions, according to a report by Keefe, Bruyette & Woods. However, a new working paper called “Real Estate Commissions and Homebuying” by economists from the Richmond Federal Reserve Bank suggests that implementing a new compensation model could slash about $30 billion from US real estate agents’ commissions.
US Model Vs. International Systems
The paper presents a compelling argument about the “puzzling” and “anomaly” of the US model for real estate commissions in comparison to other systems abroad. The piece, authored by senior economist Borys Grochulski and VP of research Zhu Wang, highlights that countries such as the UK, Ireland, the Netherlands, Singapore, Sweden, and Norway typically pay less than 2% in commission to real estate agents, whereas the US average is 5.5%, according to a 2015 study from the Brookings Institution.
Overreliance and Misalignment
The study reveals that the US market differs significantly in terms of the usage of real estate agents. While a significant portion of homebuyers in countries like Australia, Canada, and Denmark purchase properties without agent representation, 87% of homebuyers in the US decide to use an agent, as per the National Association of Realtors. This statistic is staggering, considering that almost half of all buyers find homes online without any help.
The paper argues that these factors, combined with the current compensation model, result in elevated home prices, overused agent services, and prolonged home searches.
A New Compensation Model Proposal
Wang and Grochulski propose an alternative compensation model, termed “à la carte,” with the potential to reduce buyers’ commissions by around $30 billion. This model requires buyers and sellers to pay their own agents separately, independent of the final home price, to avoid any biased decisions. Additionally, buyers would be responsible for paying for specific agent services individually, such as property searches, negotiations, and property showings.
In their model, the economists believe that increased competition among agents and easily comparable individual service prices would align agent compensation with their cost and limit excessive use of agent services.
A Challenging Time for Real Estate Agents
This paper emerges at a difficult time for real estate agents, as the National Association of Realtors and national brokerage firms find themselves facing multiple lawsuits accusing them of colluding to inflate agent commissions. Last fall, NAR suffered a $1.8 billion judgment in a Kansas City case, which it plans to appeal. Moreover, short-seller Spruce Point Capital warned that recent lawsuits and potential changes in buyer-agent commissions could reduce the total market of commissions by up to 30%, impacting companies like Zillow.
An Imperative Paradigm Shift for the Industry
Despite the potential negative impact these changes may have on the real estate industry’s current compensation structure, Wang and Grochulski insist that a new model is necessary for the overall economy. Their “à la carte” approach offers significant benefits, eliminating agents’ incentive to “steer” clients away from low-commission homes, improving housing search efficiency, and allowing buyers to use multiple agents for more effective homebuying processes.
With their assertive conclusions, the economists believe that it is worth considering a paradigm shift in the industry, transitioning to the proposed “à la carte” model.
