The housing market is hot, hot, hot right now, and home prices continue to soar in many markets to their highest prices ever. Since it doesn’t cost a real estate agent ten times as much to sell a million dollar home than a $100,000 home, one would expect that the percentage fees for real estate agents would be falling. They aren’t. Why?
I started investigating the fees charged by the real estate industry some 15 years ago when I was an economics writer for the Wall Street Journal. What I discovered is that the real estate agents had created a de facto legal cartel that often rips off buyers and sellers of homes. The excess cost to home buyers and sellers from this industry cartel is typically more than $10,000 for homes with a price above $500,000.
A Brookings Institution study found that, “across the country, national average commission fees over the past couple of decades have doubled and outpaced inflation in most years.” The researchers found that the increase in real estate commissions are “invariant to factors that affect the cost of housing transactions,” and that we would expect these fees to be falling due to “significant technological changes in the meantime.”
For the economy as a whole, the real estate agent rules may cost home buyers and sellers up to $75 billion dollars — A YEAR.
Don’t get me wrong. A great real estate agent can be a godsend for anyone buying or selling a home. The industry adds value for sure when the agent can find just the right dream home for a family or a buyer willing to pay top price. If a home buyer or seller wants the best in the business and is willing to pay a 6% transaction fee to their agent, that’s great.
But too often the fees are fixed by the industry with little or no flexibility in negotiating fees of 6% typically split between the agents for the buyers and the sellers. In other countries, like Britain and Australia, the fees are typically closer to 3%, half as high as in America.
In this digital age — with online transactions becoming the norm — the fees and commissions in most consumer industries like stock trading, travel agents and used car brokers have fallen due to online competition from the likes of eBay, E*TRADE, Etsy, Netflix, Uber and Airbnb. At-home shopping is practically costless. Yet the real estate price gouging has managed to stay mostly immune from these “disintermediation” forces.
High-priced commissions persist today because of government fiat. State laws often make it all but illegal for nonregistered agents to come in with lower commissions through “anti-rebate” laws.
Even in normally pro-competition states such as Florida and Texas, the politicians continue to protect the agents’ higher commissions — often adding tens of thousands of price to the homes.
Today, 40 states have laws that protect the industry by restricting full and fair price competition. Ten states still prohibit agents to compete by offering consumers rebates. Believe it or not, the penalty for real estate agents providing rebates and charging LESS is losing your license.
Realtors prevail because they are good at flexing their political muscle. Every congressional district has hundreds of agents, and they are active in politics. Last year, national and state associations of Realtors topped the rankings of campaign contributors in both parties in order to maintain high commission by protectionist rules.
There are some hopeful signs of chinks in the real estate agent cartel’s armor. Technology upstarts like REX are trying to squeeze out unreasonable fees by suing states to end government-created rebate bans. If they succeed, agent fees would be slashed, and home shoppers of all income ranges would save thousands of dollars by negotiating better deals with the agents.
I rarely agree with President Joe Biden on the economy, but he declared in a recent executive order that “competition is the core ingredient for capitalism.” He has called for a federal investigation into price fixing among competitors and occupational licensing rules. Perhaps, after all these years, he will be the president who ends the real estate racket.