Posted on 07/30/2005 11:29:36 PM PDT by NormsRevenge
In the pre-Internet era, homebuyers relied on real estate agents to chauffeur them around to properties, help search for mortgages and provide other services, for which buyers typically paid 6 percent commissions when they closed escrow on their American Dream.
For a $139,000 median-priced home sold in 1988 in San Diego County, that commission would have been $8,340, an amount shared equally between buying and selling agents and their brokers.
But today, despite the emergence of sophisticated online searches for homes and loans, the commission system remains virtually the same. The $493,000 median priced home in June would have carried a 5 to 6 percent commission of $24,650 to $29,580, a three-fold increase since 1988.
With annual home price appreciation rates in San Diego County, once running at 25 percent, now standing at about 6.3 percent and expected to flatten even further, sellers are bound to wonder why commissions aren't lower.
The answer may lie in the real estate industry's failure to take advantage of technological advances and in long-standing anticompetitive habits that border on "informal collusion," according to a new report from two Washington-based think tanks.
The inquiry originated with Robert E. Litan, a former deputy assistant U.S. attorney general in the antitrust division and author of a book on the Internet's impact on the economy. He said he paid a 7 percent commission on a home in Kansas a couple of years ago that was priced between $450,000 and $500,000.
"It sort of dawned on me, after I paid (the commission) why this transforming economy had not transformed this yet," Litan said.
Now director of the Joint Center for Regulatory Studies, operated by the conservative American Enterprise Institute and liberal-minded Brookings Institution, Litan and his colleagues issued their findings in a 30-page working paper earlier this month.
Competition an issue
"The key, in our view, is to create an environment that encourages rather than suppresses competition," they said. The question of collusion was raised from a review of other academic work on the subject after it was found that commissions have stayed relatively stable at about 6 percent for 50 years. That's a sign of little price competition among agents, although commissions are negotiable between seller and agent.
"Given the relatively free entry into (the) agent market, some conclude that a form of price fixing, or at least an informal collusion, keeps fees at an above-competitive level," they wrote. "This, in turn, could result in losses to consumers."
The National Association of Realtors, the industry's largest trade group and one of the largest membership organizations in the nation, has yet to officially respond to the report, but a spokesman rejected the premise that competition is lacking.
"The paper suggested collusion," said Lawrence Yun, managing director of research at the association. "That's nonsense. How can there be collusion when we have 1.2 million members?"
Recommendations
The authors issued three recommendations:
Federal and state authorities should "carefully scrutinize" efforts to limit competition. They cited rules limiting public access to the Multiple Listing Service, where most properties for sale are posted.
State legislatures and real estate commissions should "refrain" from passing laws and rules inhibiting competition. The authors expressed concern about attempts to ban commission rebates to consumers and to set minimum service requirements beyond present licensing regulations.
Congress should not stand in the way of the Federal Reserve Board and Treasury Department allowing banks into the real estate brokerage business, authorized in the 1999 Gramm-Leach-Bliley Act.
University of San Diego economist Alan Gin speculated that the real estate industry is not changing quickly in the Internet age because agents advertise their services so heavily to consumers who only buy or sell a home a few times in their lives.
"It's going to take more time for competition to develop and for people to feel comfortable listing with other than a traditional real estate agent," Gin said.
He said more pressure is likely if the slowing housing market shifts to the buyer's side and sellers feel pressure to reduce prices.
"It all depends on the state of the market," he said.
Clearly, real estate commissions in rapidly appreciating markets such as San Diego generate more income to successful agents than they did 17 years ago.
In 1988, it took four sales of median-priced homes to generate the equivalent of a median household income of $34,500 for a family of four. Today, it takes commissions from just over two sales to nearly equal the median household income of $63,400.
Jill Morrow, who heads the Coldwell Banker real estate offices in San Diego County, said commissions have stayed high to compensate agents for newspaper advertising, office rent and other overhead expenses.
But the U.S. Bureau of Labor Statistics says inflation has not pushed prices up as fast as real estate commissions. The $8,340 commission of 1988, when adjusted for inflation, figures out today at $13,712, according to the bureau's inflation calculator. That is less than half the actual commission paid on the same median home today.
Lure of high pay
The high compensation may explain why local real estate licensing schools are reporting record enrollments and local realty associations are signing up thousands of new members.
A part-time realty career can be quite lucrative. An agent could earn nearly $90,000 a year by selling a median-priced home every month and sharing his or her commission with a cooperating agent and associated brokers.
Morrow also said the Internet has not necessarily reduced the time agents spend showing property, even though many buyers enter the process well informed about properties they are interested in.
"Often what it does is broaden their scope of information and a desire to see more," she said.
But Brian Yui, who founded HouseRebate.com six years ago as an alternative to full-service brokerages, said other agents have not necessarily welcomed alternative business models such as his, which promote active use of the Internet and rebate a portion of the commission to buyers. Recently, one Prudential California agent hung up on him when he identified himself as a discounter and tried to inquire about a listing.
'Small-minded people'
"I think there are some very small-minded people in the industry like that, but that happens in all industries," Yui said.
The real estate industry has successfully lobbied Congress so far not to let banks into their business and Sandy Fish, owner of Re/Max of Rancho Bernardo, said that's a good thing.
"They would probably take away business from Realtors, that's probably what Realtors are fearing," she said.
As for giving consumers more choices in the way they employ real estate professionals, the study's authors said state realty associations are pressuring their legislatures to impose minimum service standards, which effectly choke off alternative business models.
"Minimum service requirements are vehicles for inhibiting competition from brokers or other specialists who are willing to provide services more selectively," the study said.
But the San Diego Association of Realtors doesn't see it that way. Its board this month asked the state association to look into seeking state-mandated agents and brokers beyond the existing requirements for obtaining a real estate license.
Executive Director John Lomac said his board is not aiming to stifle competition but to ensure that full-service agents do not have to take up the slack of limited service counterparts.
"For us, to me, it's about always doing the right thing for the home seller," Lomac said.
David Barry, a San Francisco attorney who has sued many real estate entities, including the San Diego Association of Realtors, over perceived anticompetitiveness, blamed realty associations, not licensed agents, for the slowness to change.
"If it had not been for all the restraints, you would have seen more innovation comparable to what we've seen" in the stock market, Barry said.
Sounds like misguided attempts to help the consumer may be what pops the RE bubble.
http://www.catalisthomes.com/index.aspx
Don't pay more.
I hear ya re: Don't pay more.
They may not be making anymore real estate these days, but they're pumping out real estate agents and realtors like crazy, it seems. ;-)
Those that went into RE careers got taken. There are almost more RE agents in Cal than available homes for sale.
There are thousands with RE licenses, yet few have homes for listed for sale. Anyone can get their RE license, and thousands did, but few have have sold any homes, due to the low inventory of homes for sale.
Another reason for the RE bubble to burst... 0% down interest only financing.
There are a million of these out there. When that one hits, watch out.
Also you can work with RE agents on their commission fees. Have done so many times. Never paid 6%. Ever.
I wouldn't recommned holding my breath.
When that one hits, watch out.
LOL! Also you can work with RE agents on their commission fees. Have done so many times. Never paid 6%.
6%?? Your a fool to pay over 3%. See post #3.
How?
I don't see how increasing competition/lowering transaction fees will burst the bubble.
Commissions should be lowered by the market. Many realtors will refuse to show houses to buyers where they don't make 3% on their end. Maybe that's not morally right, but if their commissions are cut, it could push many of the big volume deal-making agents into other fields.
The point of the article is that the market is not setting the commission rates. The commission rates are being protected by real estate commissions and misguided laws. Remove those protections and the market will find its way.
RE always goes in cycles. This one has lasted a lot longer. Not to worry, I won't hold my breath. I just feel sorry for the young ones that can't afford the $600,000 shanty and have to rent. The banks will be the ones to eat the big one when it does cycle down. Had a conversation with the Wells Fargo loan agent and she said the same.
P.S. the last house I paid nothing. Ta-da.
I just sold a rental house in the SF Bay area. Commission was 5%.
I chose the agent carefully, and feel the 5% was well worth it.
I could have listed with one of the do-it-yourself agencies, but what I got was:
1. advice on what repairs/upgrades were valuable
2. contractors to work with on repairs/upgrades
3. discount prices on repairs/upgrades
4. supervision of contractors, and better work. (They came back & fixed everything immediately because they knew if I wasn't satisfied, the agent would not use them again)
5. a fast track on getting the work done--very important when the house is vacant and I am paying the mortgage while these guys fix it up.
6. a sales price 4% over what I would have asked on my own.
Essentially, when compared to a bare-bones commissin of 3%, I got a lot of value added and about 2% more money in my pocket.
Good for you. In the Washington, DC area the RE agents would have told you to go to HELL, they will not help, facilitate, arrange, NADA.
They would laugh at you if you wanted a discount to get work done.
I just can't wait for this bubble to burst.
As a California RE broker, perhaps my experience is worth sharing.
Nobody is forced to even list with a RE company. They can sell on their own. All that is needed is for the seller to spend the time and money to do the things a real estate practitioner would do.
Advertise, price it correctly, show the property, put up signage, hold open houses, negotiate and write the contract and disclosure documents, help find financing, coordinate with escrow, title, inspection, repairs, etc.
The "for sale by owner" has just one property to sell, yet must have the knowledge, skill, time to do all the above for his single transaction.
So this seller decides to save on commissions, and do all these aspects. He often overlooks that his buyers usually seek to "share" in whatever commissions get avoided.
And often realtors attempt to bring buyers to fsbo's if they can get their half of the commission.
Single family homes in most of Calif. are at mostly now 5 percent, not 6 or 7 percent.
At the end of the day, some sales occur without any commissions. If a seller wants this method, he can do it.
But most sellers consider all aspects, negotiate a fair commission, and recognize it is the price for a fast and smooth transaction.
It is not much different than my situation when I need to replace a vehicle. I can put signs on my car, park it in a good location with my phone number. Answer the calls, make appointments, let them drive it. Then come financing and contracts, plus state vehicle registration.
Or I can go to a vehicle dealer, cut the best deal, and go on with life, not worrying that somebody makes some profit.
Mention is made of "Catalist" and their 3 percent rate. Entities like this, and "Help You Sell" have been around for a long time.
Both started in Orange County. They work better in sellers' markets, but not so well in buyers' markets.
The market is in transition right now. An agent with a buyer doesn't much like to show a 1.5 Percent listing, but most will.
Often the seller and agent will be difficult, giving the buyer and his agent reason to skip on by such a listing. All the more so, in a weakening market.
There is no "price fixing" and sellers are free to do what they want. Just be prepared to do all the steps, spend the advertizing money, answer the phone, be home to meet buyers, etc.
Contractors, architects, stock and bond brokers, lenders, engineers and others offer "expert" services and get paid fees to take total responsibility for contractually defined tasks and results.
One reason for high prices is an efficient market, to match willing sellers and buyers of real estate.
'help find financing, coordinate with escrow, title, inspection, repairs, etc. "
Unheard of in No. Va.
You have to have your own financing, before ANY RE agent will show you ANY property, you gotta have it faxed to the RE agent.
I can't even SEE a 'new construction' (rehabbed apt condo) w/o my willing by pay a RE fee. I must have my own RE agent signed up with my preapproval.
Professional associations outlawing competition and increasing minimum liscencing requirements to limit access is an insidious problem in America.
Almost every organized profession is guilty of it and many are truly damaging to society. Such as the doctors being the only ones allowed to perscribe medication. Even though pharmacists have far more training in the drugs. A doctorate of pscyhology can't even perscribe an anti-depressant to a patient.
Its these things that take what should be a small cost to consumers for a basic service. And turns it into a huge cost that the poor can't afford, and which drains the middle class standard of living.
Exactly the problem is the laws. And luckily I believe the real estate profession is still relatively open compared to other areas.
I could easily see the government requiring a 4 year degree to get certified, and homes legally having to be sold through certified agents. Where the government also limits the total supply of those agents. That is how many professions are set up in America.
Similarly your statement that this is the problem with laws applies to the building permit process in Pennsylvania (maybe other states as well).
In order to get a permit (for a commercial building) one must submit drawings with an architects or engineers seal and signature. No matter what you are doing you need a permit.
We purchased a building that was a restaurant intending to renovate. We ended up building a concrete block addition that is 12 by 30 feet. The addition cost us a little over 30K to have built. The PERMITS ended up costing us about 8500 bucks by the time we got all the drawings done.
This law was put into effect about a year ago. While we have no issue with code compliance we have a big issue with the requirement that a mechanical engineer produce drawings for the heating/ventilation system in an addition (the only heat is radiant in the floor and there is no ventilation in this addition) and charge us 1500 bucks for it! In shopping around for drawings we were quoted prices as high as 18K for the drawings - over 50% of the cost of the addition!
The law needs to be changed to reflect common sense. In my research on how the law got there in the first place it appears that certain legislators from the big cities insisted these provision be included - no doubt influenced by either lobbyists or contributors - thus giving many "professionals" a gravy train of earnings.
While we just bit the bullet and moved on, many prospective businesses would just do what they have to to avoid this process and either continue to use an unsafe building or choose to abandone otherwise worthwhile projects.
This is another fine example of government taking care of us whether we need it or not!
HEre in the POLICE STATE of New Yorek, the rats in this industry command between 5 and 7 % out of customers. No, you don't have to use them but it is out right theft and since, magically, ALL of them do this and ALL of them use the MLS (Multiple Listing Service) it IS a form of collusion. They all wash each others back with the sharing of the commissions. It is so very gross.
I sold my home for 225,000. They would have received 15,750. I paid 185,000 for this home initially. My gain for the sale, for all I did to it and for the naturally increasing value in the area I lived was 40,000. I worked quite hard to get it. Since I poured a little over 10,000 into it my gain was now 30,000. This means that of the increase in value of the home I would only get LESS THAN HALF.
FOR SALE BY OWNER. It is easier than you think and surprise surprise...you get it all. And with the realators pumping millions into their propaganda campaigns to make everyone think its hard, too much paperwork and a risk they are lying.
Its MY money, not theirs and I was offended by the outright theft their little work would have netted them.
When I purchased my home 18 years ago, the seller paid a very fat commission to 2 agents who really did nothing to facilitlate the sale of this house. I found the house myself and had to do all the prepatory legwork. At closin, when we looked over the title, we found a major mistake in the title papers. Guess who had to run it down and get it corrected? The title company threw both realtors out of the room when we finally closed. Only the attorneys were allowed to stay in the room with us.
The taxes were quoted to us wrong. The split on the taxes between the buyer and the seller were wrong FIVE times (the same number of times that we went to closing). The parameters of the land were quoted wrong. The zoning of the area was misrepresented. The perks and warranties of the realtor selling (Coldwell Banker) the property were misrepresented. The only thing the realtors did was to erect a barrier between buyer and seller. I don't know what I'll do when it comes time to sell this place -- certainly I won't hire either of those jerks.
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