Alex has his Canadian dander up aboot real estate commissions:
The Justice Department may file suit against the National Association of Realtors (NAR) to prevent them from excluding discount brokers from access to the regional MLS systems. I'm hardly a fan of antitrust but the market for realtors is a racket. Six percent to sell a house? Outrageous!
Alex's prime concern is that the commission rates, in his view, do not seem to vary by either time or space. But contrary to his assertion, the traditional 6% isn't traditional anymore, and hasn't been for some time.
Nationwide, according to industry research firm REAL Trends, average commissions have fallen from 6.1% in 1991 to 5.98% in 1995 to 5.48% in 2000 and 5.1% in 2003. Commissions are NOT stable, and change all the time.
Part of this change is attributable to the buyer's/seller's market dichotomy. Demand for real estate services peaked in the early 1990s, when a particularly acute housing bubble popped, and the market didn't really recover fully until after the collapse of the dot-com bubble in 2000 and 2001. Commissions followed that trend pretty closely, slowly dropping during the recovery years, and then dropping much faster with the start of the housing boom.
I haven't seen 2004 numbers yet, but I would not be surprised at all to see average commissions under 5%. When I was selling homes in New Jersey over the past few years, 5% was very much a ceiling, not a floor.
The introduction of these very discount web services that are at the heart of the Justice Department inquiry -- Foxton's, et al., who advertise 2% commissions -- has also clearly had an impact, and probably a permanent one. Their services are somewhat different, in that the web sites don't offer open houses, newspaper ads, telephone contact, speakers of foreign languages, or even live agents in most cases. But they do offer a listing, and that's all many homesellers are looking for. As the newer sites catering to "fisbos" -- like forsalebyowner.com -- grow in popularity, it will likely place even more pressure on commission rates.
Furthermore, there are several thousand agencies nationwide that offer flat fee-based services. These are especially popular for those looking for fiduciary buyer's agents (there has always been an inherent conflict of interest to a buyer's representative being compensated by splitting a commission, since the higher the sales price, the higher his remuneration) and for higher end sellers -- those whose properties list at $1 million and above.
Indeed, in my experience, the 6% standard has NEVER been applicable to the high end of the market, which functions more like the market in commercial real estate. For the chance to represent a seller with, say, a $10 million mansion, not only will most brokers cut their commissions to 1% or 2%, or simply accept a flat fee, but they'll even degrade themselves to go without an exclusive listing agreement. Like the prettiest girl at the party, a high end seller can dance with all the firms she likes, each of whom is just happy to be in the running for the chance to take her home at the end of the night.
Now, I don't doubt at all the more limited claim that social convention has contributed to the stickiness of real estate commissions, but they are not nearly as sticky as Alex seems to believe they are. And contrary to his assertion that:
Unfortunately, no one really understands why commissions are stable. The answer is not monopoly. It's very easy to enter the market for realtors. So why don't commissions fall?
Actually, I think a great deal of the price inefficiency in the real estate market CAN be attributed to monopoly. The barrier to entry for real estate AGENTS is low -- typically, it only requires a 90 hour or so class and passing a state test -- but agents are not legally permitted to work for themselves. An agent is an agent of a broker, who holds that agent's license. And the barrier to entry to become a broker is, in most states, typically pretty high. Since it is brokers, not agents, who ultimately set agency policy on such matters as commission rates, that's really where the focus should lie.
In New Jersey, where I hold my license, not only must a broker pass a second, more demanding course and test, but he must show he has at least five years of experience as a salesperson, and has been engaged "full time" in the business of real estate for the prior three years. "Full time" is interpreted to mean that the agent did not engage in any other profession for more than an average of 20 hours a week.
Since real estate is typically a commission-only business, many agents hold second jobs to provide them with medical and other benefits, and to provide a more steady income. In New Jersey, doing so would permanently lock the agent out of ever opening their own agency, even if they amassed 30 or 40 years of experience.
State real estate commissions across the nation are also notorious for enforcing anti-competitive rules that protect the existing class of brokers. It is illegal to advertise commission rates in many states. Anti-rebating measures also abound, as well as restrictions on what sort of promotions you can run. Some states outlaw even the proverbial free toaster.
Heck, there are even states where a realtor cutting his commission to help make a deal happen when buyer and seller are close in their demands (fairly standard practice in my experience, unfortunately) would be considered "unlawful sharing of commission proceeds with an unlicensed party"....even though the "party" is the seller himself!
If I were looking for an answer to this "puzzle," that's exactly where I'd start.
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