The Realtors had it coming. At least according to much of the reaction to the recent blockbuster moves by the real estate broker group National Association of Realtors (NAR). With the age-old broker-compensation system set to be thrown overboard in place of more negotiated (and presumably smaller) broker fees, predictions flew fast and wide that a new arrangement would result in lower house prices across the country.
Don’t count your winnings yet; the predictions are based on a delusion — and on a fundamental misunderstanding of how real estate pricing works.
For decades members of NAR, known as Realtors, built into their agreements with home sellers a 6 percent commission, which was split between the seller’s Realtor and the buyer’s Realtor. The buyer did not pay any commission — other than the obvious fact that they paid for the entire purchase price. After facing class action lawsuits and the prospect of having to pay out more than a billion dollars in court losses, NAR bit the bullet and ended the lawsuits in exchange for paying $418 million and tearing up the commission structure.
That left the nation’s approximately 1 million Realtors looking at incomes plunging by estimates of 25–50 percent. Which, in a zero-sum world, people would welcome because Realtors’ pain is our gain, right?
Not so fast.
What the market bears
The expectation that this will make buying a home a less expensive endeavor is, to put it mildly, delusional. Do you think a seller is going to reduce their price because they have to give less of their capital gains to a real estate agent?
Let’s say you have a condo in the Diamond Heights neighborhood that your agent’s market research estimates can be sold for $900,000. Which is great, right? Because you paid only $400,000 for it when you purchased it in 2006. Previously, assuming you received the asking price from a buyer, you would have been expecting to pay $54,000 in commission to your agent and the buyer’s agent. But in the new post-settlement world, you won’t pay the buyer’s agent 3 percent, and you can negotiate down your seller agent to, say, 2 percent. So now you’re only paying $18,000 in commissions.
So naturally, you lower your asking price by $36,000. Right?
As that woman said on those Esurance commercials, “That’s not how it works; that’s not how any of this works.”
The seller can now expect an extra $36,000 to save, redo the vacation home, or bribe an Ivy League admissions department to get junior into a good school. But the buyers not only aren’t getting discounts in the post-settlement world, they are paying their agent’s commissions for the first time.
Finding properties is not the main reason for using a Realtor. They bring market expertise and process experience.
Home prices aren’t set by committees. They’re not set by careful toting up of the costs and the market conditions and a measurement of how nice the buyer is. Instead, it’s buoyed up by that similar condo down the street selling for $980,000 last month; it’s pushed down by the condo elsewhere in your building that sold for $780,000 this month. It’s pushed down by a blip up in interest rates, down further by a big layoff in the city.
Home prices are set by the market; whatever the market will bear. If another buyer comes along and offers to buy that condo for $1.1 million, what seller is going to say, “Nah, I’m going with the $900,000. I don’t want to over indulge”?
So buyer beware, indeed.
Realtor reality check
The predictions these days are that the number of Realtors could drop by as much as half, as people seek other jobs. An amusing side effect might be if a shortage of available Realtors created a market scarcity that was compensated for by . . . increasing their negotiated commissions. People can always try to buy or sell without a Realtor, and they could have done that before this recent NAR agreement. But people use Realtors because they need Realtors.
There is one last fallacy involved in this national moment of Realtor Hate. The fallacy is that the value Realtors bring is providing access to the Multiple Listing Service (MLS) of available properties. In the bygone days before Zillow and Redfin and even Realtor.com, a homebuyer only found out about homes for sale by seeing ads (in newspapers, flyers, or “Homes for Sale” magazines filled with nothing but listings), by driving around their desired neighborhood and seeking “For Sale” signs, or by talking to a Realtor with MLS access.
Those days are over — long over. For decades now, people have had the ability to find out about most properties on the market simply by surfing the property sites online. (There are some caveats, however. Sometimes an agent will kind of market a property to other agents before it’s officially on the market. Agents sometimes know of potential buyers who are looking for a specific type of property, and these broker previews can jump-start the selling process. In a hot market like San Francisco experienced until the current downturn, it was not uncommon for a home to sell before it officially reached the market, thus saving everyone involved a lot of time and money and angst.)
So finding available properties is not the main reason for using a real estate agent. Why do people still use them? Because they bring market expertise and experience in the process.
On a personal note, I sold a condo unit last year, and then I bought one. Was I tricked? No. In both cases, my agents were clear about the costs and how transactions were structured; I literally had to acknowledge in writing the brokerage fees. In both cases, I had excellent agents who took away so much of the stress about pricing and prepping and marketing a property, as well as finding and negotiating and navigating legal paperwork for a new home. I definitely wouldn’t have done that on my own.
This is not the first time people have predicted NAR’s doom. Back in the 1990s, I worked in Chicago as an editor for the CCIM Institute, which is a commercial affiliate of NAR, its members having earned the Certified Commercial Investment Member designation after completing graduate-level-type education courses over several years. At that time, the office scuttlebutt was that NAR’s leaders were thinking the organization would lose half of its members by the turn of the century due to online home listings. Instead, its membership grew by hundreds of thousands as the country went through a house-buying binge and people wanted someone to guide them through the process.
It’s that role as an expert that is the Realtor’s value to the buyer and seller. Again, drawing on my experience in 2023: One or the other of my two agents provided expert analysis of comp prices for similar homes in my neighborhood, got inside information on the stability and efficiency of HOAs in prospective buildings, and they both took me step-by-step through the whole selling and buying process so I never felt like I didn’t know what was going on. And within just a few months, a home was sold in one of the worst selling markets in recent memory, and a new home was painlessly purchased.
From market to market
O.K., so you know on which side of the pro-Realtor, anti-Realtor line I stand. So I’ll leave you with one more deflating prospect from the recent agreement.
If you’re selling that $900,000 Diamond Heights condo and relishing the prospect of that extra $36,000 and getting junior out of the house, I have some bad news. The commission is only part of what sellers likely are paying their Realtors. Except for the unlikely chance that they’re selling a pristine home that is literally move-in ready, they’ll be shelling out thousands of dollars to their agent for arranging for new carpeting, painting, fixing a wall here and a faucet there, and staging, the costs for all of which get taken out at the final settlement of the sale. Expect those costs to go up, and think of sending junior to trade school.