In a settlement of an anti-trust lawsuit (one might more accurately call it a capitulation), the National Association of Realtors will open its multiple listing service to Internet brokers.
The NAR tried to put a brave face on this development, but consider:
1. Anyone finding a property via an internet listing will pay the Internet service whatever they charge, and the listing broker will get at most a co-broke (half a full commision, which is what they’d normally get if another broker brought the buyer). That’s a big reduction in income to brokers in aggregate
2. This development will erode the stranglehold of the MLS. Why pay 3% if you can get good exposure via the Internet and feel competent to show the house and negotiate a sale? Or if you want a third party to handle the negotiation, having your attorney do it would in the great majority of cases be cheaper than the co-broke fee. The Federal government estimated fees could drop from their current level of 5% or 6% to 1%.
First we had the real estate downturn, and now this to thin the ranks of residential brokers.
From Reuters:
The National Association of Realtors will open its vast listing of homes for sale to cheaper, Internet-based brokers in an agreement to settle a federal lawsuit, the government said in a statement on Tuesday.
The change could save those who buy or sell a home thousands of dollars since commissions could drop as much as 1 percent of the selling price, said Deborah Garza, the deputy assistant attorney general for antitrust,…
The settlement will lead to “more choice, better service and lower commission rates,” Garza added.
Essentially the deal requires the 800 multiple listings services associated with the National Association of Realtors for various local markets to give access to Internet-based competitors, the government said.
The real estate group did not acknowledge wrongdoing in the settlement, which it described as a “win” for both consumers and agents.
“We think it’s great,” said Lucien Salvant, a spokesman for the National Association of Realtors. “There was no evidence ever brought by the Department of Justice that there was a problem.”…
The settlement also requires the group to offer training on complying with antitrust law.
The National Association of Realtors has more than 1.2 million residential real estate members throughout the United States. In almost every area of the country, brokers have organized multiple listings services to share information about homes for sale.
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Unless, I am missing something in this story as it is presented there appears to be little real world effect on how brokers do business or how consumers are impacted. Most MLS services that brokers participate in are already open to discount brokers, including online brokers. The listing info is readily available both through the online brokers and the many, many real estate search engines such as Trulia. The few properties for sale that are not generally listed are foreclosures, FSBO’s and other private sales
Commission rates are already competitive and sellers can negotiate a wide range of rates and services. Pay less and get less. Less marketing and less service; and in the case of online brokers, less knowledge of the local market.
Most real estate transactions already involve commission splits between a selling broker ( buyers broker ) and the listing broker, so where is the angle on reducing commissions there ?
Apparently, there is an assumption that sellers who already are in the position of negotiating their commissions and services will flock to online brokers to list their homes at very low rates ? The brick and mortar discounters are already doing this and are and have been a small part of the market for the simple reason that they do very limited marketing and what may be saved on the commissions is frequently lost with a lower sale price ( due to limited exposure and poorer service ) What matters in the end to the seller is that he nets the most from his sale and that he receive good service that allows him to meet their goals, including how long it takes to sell the property.
The idea that it is a simple business to bring buyers and sellers together to make informed decisions without guidance from a professional seems far fetched. The model that seems to be implicit with the claims being made is that buyers and sellers will find their way via access to unencumbered information on the internet and magically bring everything to closing with perhaps a lawyer drawing up contracts or the services of the online broker ??
There is a reason why traditional real estate brokers and agents have been around for so long – it is hardly just an exercise in monopoly powers. It is possible that rates may come down in some markets marginally but only if real service is offered. At this point it looks like the online brokers are simply trying to pick up referral fees for sending buyers to traditional brokers that they would have had anyhow without the online broker. ie they are just collecting a toll courtesy of the DOJ.
You are an idiot. The article said commission could DROP BY 1%; NOT DROP TO 1%.
You are a typical over eager doomsdayer exaggerating your way to b.s.
No one like someone like you.
William,
Actually, if you’d read #2 in the article, it says “The Federal government estimated fees could drop from their current level of 5% or 6% to 1%.”
It’s bad enough to resort to infantile name calling when it is you that’s in error (which by your way of looking at the world, makes you an…ah hell, we’re not in the 3rd grade anymore, let’s just say it makes you “mistaken”).
But then, you compound matters by following up the ill-conceived name calling with incoherent babbling about “exaggerating one’s way to B.S”…whatever that means….
There’s no need to be nasty, William, but if you must resort to this type of behavior, at least be clever about it.
Dan:
There is a discrepancy between item 2 and the Reuters story.
Item 2: “The Federal government estimated fees could drop from their current level of 5% or 6% to 1%.”
Article: “The change could save those who buy or sell a home thousands of dollars since commissions could drop as much as 1 percent of the selling price, said Deborah Garza, the deputy assistant attorney general for antitrust,…”
Thanks Anon.
OK, so maybe James is in fact an idiot.
Oh yeah, and maybe Yves is also an idiot for inserting #2 in the first place.
And finally, I’m definitely an idiot for pointing out that William is…urh…”mistaken”.
Are you kidding me?
James, you are obviously well informed. I undertsand that DOJ comes after NAR every 5 years or so because they assume monopolistic behavior in everything NAR does. In fact, real estate is one of the most competetive industries– no barriers to entry or exit and consumers are free to negotiate fees. I do wish the local real estate associations would pubish more detailed sale price information rather than the averages. I also take issue with the advocates in their national housing economics team — always very sunny view of real estate.
Yves, one of the frustrations about this DOJ settlement is DOJ’s misunderstanding about sharing online info– it’s the consumer who controls where the listing is shown online not the seller agent. It’s hard to fathom but DOJ just doesn’t get it. The media is sloppy and missed that key distinction by reporting in some instances (NYTs, Bloomberg) that the seller agents have to release the listing to other online brokers (there’s never was a restriction to begin with!). It’s amazing that if you’re a federal authority you automatically get the benefit of the doubt, and that’s human nature. Sometimes it’s just officials who have a hard time admitting there’s ‘no there there’. This appears to be one of those cases from what I understand from the folks at NAR.
Oh, I forgot to note that the top of Naked Capitalism has an ad that says FSBO people can place their homes on the MLS in any state for a fee as low as $399. DOJ needs a stronger case or should put their efforts elsehwhere. I hope they are embarassed.
Anon of 12:01 PM,
Whlle I apologize for the error. However, I do believe fees will fall far further than the mere 1% suggested. I see the situation with 2 brokers over time becoming rare, rather than common as now, and the owner in most cases paying for a listing and in only in some cases paying 1/2 of the former prevailing brokerage fee to the buyer’s broker.
For instance: in New York, residential brokers get 15% of the first year’s rent as a rental commission (paid by the tenant). In Sydney, where the Internet listings are excellent and widely used, brokers get 1 week’s worth of rent as a commission, which is under 2%. Now New York is a special situation in terms of how high fees are, but nevertheless, the contrast is considerable.
And I must disagree with #1. I’ve bought, sold, and rented property. The absolute worst experience I had, far and away, involved a broker who engaged in behavior that I can describe only as completely dishonest, highly unethical, and highly unprofessional (she started screaming at me when I told her how under the law the course of action she insisted I take would put me at huge risk. If you REALLY want the details, I can provide them). And the other brokers too often engaged in substantial misrepresentation of either their client’s interests (too often, late in the game surprise disclosures) and their creditworthiness. By contrast, with the exception of one broker I used on purchases, I did far better, both in terms of price and process, when I went on my own. I got much better information and much less BS. And this is in New York, where the brokers ought to be better, due to the high fee potential and the approval process, which means the brokers can in theory add more value.
When fixed stock brokerage commissions were deregulated in the 1970s, no one would have forecast commissions would fall to pennies a share for institutions. or as low as they are for retail.
And as to people being able to negotiate, while that is true, I suspect few now do. The increased recognition of the Internet as a selling option will encourage and enable that. The comment in the article that the industry needed to educate brokers about anti-trust suggests a lot told prospective clients they could only list in the MLS if they gave a broker an exclusive. I know of people personally who believe that.
Real estate brokerage is not as competitive as you suggest, at least in all states, In New York, you must be licensed to be a broker. Not only do you have to take a certain number of hours of courses, sit an exam, but you THEN have to work for a more senior broker for I think 3 years, perhaps even four. In the 1970s, you merely had to sit the exam. I imagine that at least some other states have made getting a license more difficult over time.
As Dean Baker has repeatedly pointed out, restrictions to entry to a profession serve to reduce competition (entry of new people) and lead to higher compensation levels for the incumbents.
Yves,
Your testimonial experience hardly justifies such sweeping generalizations about real estate agents.
Additionally, the NYC market hardly justifies sweeping generalizations about the rest of the country.
As someone who’s involved in a considerable number of real estate transactions, and been an attorney on thousands more, I truly believe that nothing is more important to a good real estate transaction than a good agent. Unfortunately, there aren’t enough good ones out there.
I’ve seen too many people go the FSBO route, only to end up switching to an Agent. Same with the discount brokerages.
Dean Baker, if he is suggesting making it easier for real estate agents to enter the industry is delusional. If anything, the standards should be much higher.
And no, I am not writing this from the offices of NAR. To be frank, most agents get on my nerves…and I just loved Annette Benning’s portrayal in American Beauty. She nails this part…which is why Agents HATE this movie….but that stated: A good agent earns every penny he or she is paid.
Anon of 8:27 PM,
I reread what I wrote, and there was not a single statement that I could find that warranted being depicted as a “sweeping generalization”. I said my own experience, with one exception was (effectively) that brokers are negative value added. And this is in a state with very stringent licensing requirements, so that says licensing is likely not a remedy. No broader conclusion was made. But you choose to attribute one nevertheless.
Now there is a convenience issue. If you as the principal cannot take home-sale-related calls and accommodate prospective buyer requests for showing times, then you do need an agent, There is no way around it. But if you have good means of exposing the property to buyers, and have someone who can act as a negotiator if the deal winds up having some complexity, I am at a loss to understand the value added by a broker.
And in some countries, there are no brokers for residential real estate sales. Again, in Australia, houses are sold by auction. Yes, in a weak market, your house might not sell, but the same thing is happening here, broker or no broker.
I also said that I anticipated brokerage commissions will fall far more than the 1% forecast and gave reasons for that view.
I seriously question the value of brokers in residential real estate transactions. I see NO reason to use a stock broker, contrary to your views, particularly given that brokerage firms require you to use arbitration in the event of a dispute (I could go into details but the selection of arbitrators is highly biased towards ones who favor the securities industry). Unless you choose to make investing your second job, you should be in index funds. And even then the merits of buying stocks individually is highly debatable (the biggest reason for doing so is to get long term capital gains treatment but many investors overtrade, obviating that advantage).
Again, hiring a financial planner, who is paid on a professional rather than a commission basis, for those who lack investment savvy, want a second opinion, or are too busy, is a completely different kettle of fish, but that is NOT what you advocated
The reason I raised the Dean Baker point (which is true, he invokes it in particular with regard to doctors) is that at least in New York, some of the requirements are clearly simply to deter entry. Why require someone to be an apprentice for three+ years if they have passed an exam and taken coursework? They have the expertise, and most de facto will have to work for an agency initially to get started.
Commercial real estate is completely different, with the complexities of lease structuring and negotiation, brokers can and do contribute a great deal.
However, in lieu of a sweeping generalization never made, let me offer the results of a Harris poll, which found real estate brokers to be held in the lowest esteem of all professionals. This has been true of every year that they have been included in the survey, save 2005 when they were inched out by stockbrokers.
I should make explicit that New York City is one of the few markets where residential brokers can contribute a good deal for those looking at buying co-ops or more stringent condominiums. Those buildiings have an elaborate buyer approval processes (strict financial criteria, either limits on or complete prohibitions on mortgages, application packages, interviews) and the broker can be very useful in getting those together, and in steering buyers away from buildings where they have no chance of getting in.
However, it is also pretty well understood that the broker steering also facilitates discriminating. For example, some of the best buildings in town will take a Jew only if a Jew is selling (ie, no net increase in representation). The best buildings also will not accept a single woman no matter how solid her financials, or a single man (they are assumed to be gay, and the conservative buildings regard HIV risk as a financial risk factor).
I find the claim that FSOB types have such a hard time strange (unless, of course, they don’t know how to get their house in the MLS) IF they are willing to pay brokers who bring a buyer half the customary commission.
Which then makes me wonder…..is it because the brokers in a community refuse to bring buyers to houses for sale by owners, to punish them for not giving them or one of their peers the listing (ie, an exclusive?)
There may be a need for more anti-trust action here…..
Unlikely anyone will fish back to this thread but here goes …
Anecdotal stories can be useful and illustrative but they can distort just as easily as a clever use of statistics. Certainly it is clear that real estate brokers /agents are held in low esteem by many and it is equally true as others here have pointed out that there are not enough really good agents. Really, this is because the barriers to entry are too low, not too high as Yves argues. Other professions are also held in very low esteem – until you need someone in that profession to straighten things out and keep you on track – lawyers come to mind.
Selling real estate is not the same as selling stock or any other widget and is not really a comparable activity. I am not prepared to expand to other countries and their traditions as I do not know those markets or how they work – so it would seem difficult for most of us to reconcile those differences. From what I hear European health services cost roughly half as much per capita as in the US and yield better health outcomes. And yet there is little likelihood that we will get like-minded systems here anytime soon ( even with an Obama administration ) – so I take that as a interesting diversion but not really that relevant.
Real estate commissions have come down in the US roughly one percent in the past 7-8 years. ( This is an estimate as it is impossible to have comprehensive data on the subject and local markets vary substantially ) It seems unlikely that they will drop another 1% or more in the coming 3-4 years when many of the most difficult and challenging operational changes in the industry have just been succssfully managed by traditional real estate brokerages. The data that I have seen shows that traditional brokers are holding steady at around a 72% share of the market with average commissions around 5.2%.
Discounters have found their place but they are not likely to gain significant market share unless they provide services that are on par with traditional brokers. Also, in tough markets with downturns like we are seeing now – the discount brokers tend to lose market share.
Yves states that he believes that business practices will change as sellers will end up being the party that will still utilize a broker. I am very sceptical of this idea also as the industry has steadily gone in the other direction to provide genuine representation to buyers which in the good old days was a pipe dream for most buyers.
Finally, I see little benefit to the public from the DOJ suit – and don’t believe that NAR was posturing by putting a good face on the deal. Rather they just helped DOJ save face so that they would just go away and find something better to do.
James,
You mis-stated several things I said.
I did NOT say that the norm would be for sellers to use brokers. What I said was:
I do believe fees will fall far further than the mere 1% suggested. I see the situation with 2 brokers over time becoming rare, rather than common as now, and the owner in most cases paying for a listing and in only in some cases paying 1/2 of the former prevailing brokerage fee to the buyer’s broker.
I later qualified that by saying some sellers might wind up engaging a broker, most likely due to their own scheduling constraints.
You also chose to misrepresent my statements about restrictions on entry. I said 1) they raise the compensation levels of the incumbents (I noted that some of New York’s requirements, namely the 3+ year apprenticeship, looked designed to deter entry and did not seem a way to improve the caliber of the industry and 2) noted that despite the fairly tough requirements in New York, the professionalism (yes, anecdotal, but based on consistent views from the people I know) is still not very high. So the evidence appears wanting that tough licensing leads to better outcomes for customers.
And why might that be? The incentives are hopelessly bad. There is a reason that stockbrokers and real estate brokers are at the bottom of the Harris poll. They can never be professionals because they are not paid on a professional basis. They are paid to make trades happen, not to serve their clients’ best interest. Those may coincide, but the broker’s ultimate loyalty is to the deal.
One academic study found that brokers achieve higher prices (this was done by analyzing comps) when selling their own property than when working for customers.
And as I indicated earlier, I suspect the DOJ’s issue with NAR, per the training requirement, is that brokers have been telling prospects that the only way to get into the MLS is to give a broker an exclusive. I know a person to whom that happened recently, and I would be surprised if his case is isolated.
And the NAR “helping” the DOJ? That strains credulity. No one helps out a prosecutor. The DOJ is a prosecutor and is plenty able to take care of its own interests and PR. A defendant acts based on his assessment of risks and costs.
I in fact imagine that the DOJ had leverage, even if there was not much to extract, because I suspect it had examples of bad behavior (in terms of brokers lying, as they did to my buddy, by claiming that they could get to the MLS only via an exclusive with a broker) that the NAR would not want put before the public.
My friend wasted a year because a broker lied to him about an exclusive. He would not have given it save the MLS argument.The broker tied up a substantial property with the exclusive, did not even get a single person to see it, and couldn’t even write a grammatically correct advertisement. He missed the last window when the market was good. He considers himself to be damaged and I am certain would say the suit has merit. I’m not making this person up; he is the owner of the property I have featured from time to time on this blog.
Yves. Thanks for the detailed response. Sorry to misrepresent you, perhaps I could have been clearer. I will only address a couple of points and then move on. It still seems to me that the greater substance of your argument is anecdotal or as another reader put it “testimonial” No, doubt every word is true, but the utility of this kind of evidence is limited.
NAR did in fact vigorously defend itself and the industry. My point was that they “won” the battle in the sense that there was little that DOJ could really proof in terms of systemic wrongdoing. And nothing much is really changing that will make the market function differently than it does now. Sometimes when you are the victor it is better to let the vanquished leave the battle with their pride intact ( and even let them feel they have obtained a great deal ) in order to MOVE ON.
We do agree on one thing. The level of professionalism in the industry does need improvement. There are far too many agents and many are poorly educated and simply do not bring the level of knowledge and service to the table that both buyers and sellers deserve. There are however, many good agents and some first rate brokers /offices that do a very could job of cultivating a qualified agent workforce. You are also correct that many agents and brokers are only “in it” for the transaction. which is very unfortunate. A responsible agent will be informing some buyers that they should rent for a bit longer or not buy in a weaker area in term of investment values. Or will tell a seller that he would be better off waiting 6-months to a year to sell their house etc. Every situation is unique and can not be handled in a preconceived or self serving way. It needs to be remembered also that many clients will receive good advice and simply not listen – yet they still need someone to blame. This happens in all areas of the business but has been an especially serious problem in the area of mortgages. Discouraged from taking cetain types of ARM’s, including option arms – some would still sign on. Referred to reputable and honest mortgage brokers, some would sign up with the teasers and hucksters.
Really successful ( and professional agents ) know that referrals is the name of the game and will always put their clients first. Buyers and sellers are well advised to seek out referrals from trusted friends, families or other professionals when selecting a broker/agent. You would do this for a good mechanic or your doctor – so do the same when finding an agent to represent you. Come with a set of reasoned questions and get them all answered.
So for now lets just see what the future brings. I will bookmark this story and make this prediction. You will see no significant aggregate change in commissions for the next two years. Perhaps commissions will move up or down as much as .2%
I am a regular reader of your blog and I greatly admire and learn from the work you do here. So please take that as thanks from
an old dinosaur.
James,
Thank you for your judicious response, and your kind words.
As you might infer, I don’t see an easy solution to the problem of getting better caliber brokers given the incentives. I see a similar pattern in mergers and acquisitions, where even though clients often pay retainers, no one (except perhaps at the very low end) is in the business of living off retainers. In that field, due to the comp, you have very talented people, yet still poor results for clients. Depending on what study you read, 60% to 75% of the deals fail. Now of course, you can’t entirely blame the M&A types, since CEOs also have lousy incentives (golden parachutes for selling, higher comp for buyer CEEO due to running a larger enterprise), but the poor deal outcomes is a long-standing phenomenon (ie, before CEO incentives got worse in the 1990s).
As for fees falling, a post at Calculated Risk said that at the peak of the bubble in California, it was common for agents to list a property for 4 1/2 or 5%, with the selling agent getting 3% and the listing broker taking less.
If you have sales resulting from Internet listings, I am not sure how that data on feed paid would be captured. Even though the BEA provides a estimate of broker commissions, CR said they assume a 6% rate, ie. even their current data does not capture the discounting that was done). Thus we will probably need to look to anecdotal evidence until the data capture improves.