How can we drive down real estate prices across the country?
John Hatfield, Century Club Professor of Finance at the McCombs School of Business at the University of Texas at Austin, looks into one possible avenue.
John Hatfield’s work in matching theory has facilitated the design of many real-world mechanisms, including FCC spectrum auctions, kidney paired donation, and the redesign of the U.S. Army’s branching mechanisms for assigning cadets. Hatfield also works at the intersection of the theory of industrial organization and the field of law and economics, which has advanced our understanding of anticompetitive practices in real estate agency and other markets.
In October 2023, a Missouri jury found that the National Association of Realtors and large real estate brokerages such as RE/MAX and Keller Williams “knowingly and voluntarily” worked together to keep real estate commissions high, resulting in a billion-dollar verdict. In the United States, real estate commissions comprise 5 to 6 percent of the purchase price of a home; in other countries, such as England, they only comprise one-and-a-half to two percent.
In the U.S., real estate commissions for both the buyer’s and the seller’s agents are typically paid by the seller. The seller, upon listing the house for sale, offers a “cooperating commission” to the buyer agent representing the purchaser of the home.
Our work shows that this has led to “steering.” Buyer agents steer clients to see homes offering higher commissions for the buyer agent, not necessarily the best homes for the buyer. This induces most sellers to all offer the same commission to buyers’ agents — 3 percent here in Austin. Sellers who offer a lower rate can expect less interest from homebuyers, as evidenced by fewer views on web portals such as Redfin. Their homes can then take 15 to 30 percent longer to sell and are more likely to not sell at all — a substantial risk for many families, who cannot afford to move until their old home is sold.
Sellers thus feel compelled to offer high cooperating commissions to buyer agents to ensure that their home is seen by buyers — three quarters or more of sellers do this in the areas we study. And this keeps real estate commissions artificially high, costing a typical home seller thousands of dollars. And it leads to some sellers not moving at all, passing up on better opportunities for themselves and their families.
The Department of Justice has suggested that we “decouple” the amount a buyer’s agent is paid from any decision by the seller. Instead, a buyer would negotiate directly with his agent over the agent’s compensation. Under that system, buyer agents would no longer have any reason to steer their clients.
Unfortunately, the current settlement does not decouple buyer agent compensation and so far does not seem to be lowering agent commissions. Promoting real competition between agents in this market would drive down the cost of buying and selling a home and benefit consumers across America.
Read More:
[Iowa] - Et Tu, Agent? Commission-Based Steering in Residential Real Estate
SYSTEMATIC NATIONAL EVIDENCE OF STEERING BY REAL ESTATE AGENTS
[Wiley Online Library] - Collusion in Brokered Markets
