Be Careful What You Ask For: The Economic Impact of Changing the Structure of Real Estate Agent Fees
41 Pages Posted: 13 May 2022
Date Written: May 11, 2022
Over the past few years, several class-action lawsuits have been filed against the National Association of Realtors and other members of the real estate brokerage industry involving the structure of real estate commissions. Among other things, plaintiffs have argued that the standard practice of having the seller’s agent pay the buyer’s agent’s fee unfairly limits competition and leads to excessive commissions. Their basic argument assumes that if buyers paid their agents directly, they would be more likely to negotiate lower buy-side commissions than what sellers currently agree to have their agents pay, an outcome that would presumably benefit sellers and buyers alike.
This paper develops a simple economic model to illustrate how changing the current compensation structure could affect potential buyers’ ability to qualify for a mortgage and purchase a home. In particular, it shows how requiring buyers to pay their agent’s fee directly would result in reduced homeownership opportunities for cash-constrained families and lower net proceeds for many sellers. We then use data on household savings, the characteristics of recent mortgage originations, and surveys of recent home buyers to illustrate the potential magnitude of these effects and how different sectors of the housing market would likely be affected.
Proponents of the so-called “decoupling” of real estate agents’ fees have dismissed concerns over cash constraints as a “red herring” that would have little, if any impact on the housing market. However, our analysis suggests the opposite. In particular, we find that changing the current compensation structure would suppress homebuying opportunities for large segments of the potential market, and that minorities, lower income households, and first-time home buyers who rely more heavily on agent services would suffer the most. Survey data on how buyers and sellers select their real estate agent also suggests that requiring buyers to pay their agents’ fee directly would not necessarily produce the large reductions in commission rates that decoupling proponents have envisioned, particularly for first-time home buyers.
Given the Biden Administration’s emphasis on greater equity in the housing market—as well as the fact that minorities are more likely to face wealth constraints—mandating changes to the current compensation structure would clearly conflict with this stated public policy goal. The transition costs of moving to a revised compensation structure—while admittedly uncertain—would also be relatively high since the legal, accounting, and reporting infrastructure that governs the sale of homes today would likely be both time-consuming and expensive to change. As a result, any deliberate attempt by policymakers to force home buyers to pay their agents directly would be unwarranted at best, and at worst, extremely risky—all with little, if any, guarantee that it would produce the desired reductions in commission rates.
Keywords: real estate agent fees, commission structures, homeownership opportunities
JEL Classification: R,D,M
Suggested Citation: Suggested Citation