A survey by Google found that 67% of Americans do not trust real estate agents. Now, new research conducted by the National Bureau of Economic Research confirms they may be justified in their belief not to trust them.
How impressive was this research? It was conducted by PhDs from Cornell, MIT and the Wharton School of Business. And the National Bureau of Economic Research is one of the most respected think tanks in the US. And what did the research discover about Realtor behavior?
Properties listed with lower commission rates experience less favorable transaction outcomes: they are 5% less likely to sell and take 12% longer to sell. These adverse outcomes reflect decreased willingness of buyers’ agents to intermediate low commission properties (steering) rather than heterogeneous seller preferences or reduced effort of listing agents. While all agents and offices prefer properties with high commissions, firms and agents with large market shares purchase a disproportionately small fraction of low commission properties. The negative outcomes for low commissions provide empirical support for regulatory concerns that steering reinforces the uniformity of commissions
Our findings provide empirical support for regulators’ long-standing concern of steering behavior contributing to the lack of variation in commission rates, despite consumers’ increased access to information and lower search costs due to the internet.
Compared to other industrialized countries, commission fees in the United States are high. For example, commission rates average less than 2% in the United Kingdom and the Netherlands, compared to the typical rates of 5% and 6% in the United States (Delcoure and Miller, 2002). As highlighted by our model, unbundling commissions has the potential to eliminate steering and reduce commission fees.
Why are real estate commissions still so high in spite of all the new information freely available and an oversupply of Realtors? Because buyer’s agents punish sellers who try to save on commission by keeping their buyers from buying the home until the seller increases their commission to the acceptable rate. In other words, extortion.
Sellers get ripped off because they are forced to pay the extorted rate and buyers get ripped off because they do not get honest representation from their agent. That’s a problem.
And what is the solution these really smart people suggest to combat this problem? The same thing I have been screaming about for two years: stop expecting the seller to pay for the buyer’s agent. What I call Problem One in my book The Intelligent Home Seller.
Unbundling of commissions (making the buyer pay for their own agent) makes 90% of the problems in the real estate industry go away. Unfortunately for Realtors, it will probably make 90% of the Realtors go away. What we know from countries like Australia, where sellers do not pay for buyer’s agents, is that there are almost no buyer’s agents. And without buyer’s agents (and their steering buyers away from low commission homes), there will be tremendous downward price pressure on Realtor listing fees. The average commission would most likely fall from around 6% to less than 2%, instantly turning a $60 billion industry into a $20 billion industry and wiping out a lot of Realtors in the process.
I think it is fair to expect NAR (The National Association of Realtors) and their team of high-priced lobbyists to be out in full force to oppose any legislation that even hints at unbundling of Realtor commissions. After all, what’s more important, serving the interests of 85 million home owners or maintaining the revenue from a million dues-paying members? Fight on NAR.