By Phillip Molnar | San Diego Union-Tribune
Americans pay some of the highest real estate commissions in the world and the fees are coming under scrutiny.
The average commission on a home sale here is typically around 5 to 6 percent, usually split between the seller’s and buyer’s agents. That’s the third highest in the world, said a Wall Street Journal report. For example, commissions in the U.K. are typically 1.3 percent and 2.5 percent in Australia.
With rising mortgage rates, some consumer advocates have argued U.S. real estate agent commissions are too high considering the Internet has made it much easier for a shopper to research themselves. A federal jury in late October found the National Association of Realtors and several large brokerages conspired to keep commissions high and are liable for about $1.8 billion in damages.
Real estate agent groups say the commissions are justified given their expertise in navigating what is an increasingly complicated market. They also argue that commission fees are negotiable.
Here’s what some Southern California economists think.
Q: Are real estate agent commissions too high in the U.S.?
Caroline Freund, UC San Diego School of Global Policy and Strategy
YES: If we paid UK commissions, Americans would save more than $70 billion dollars a year! Realtors earn more from quick sales, high transaction prices, and maximum commission. They have incentives to share new listings with a few colleagues in advance, while steering buyers away from homes with discounted commissions. There is value to having an intermediary in a stressful negotiation, but the current system encourages collusion and bad behavior. This is the rare area where more regulation and oversight are warranted to improve competition.
Kelly Cunningham, San Diego Institute for Economic Research
NO: You largely pay for what you get negotiating real estate transaction prices and commissions. One pays for representation of real estate agents and the services they offer, including multiple listing access, or not and opt to negotiate deals oneself. Complications and risks for one of the largest transactions consumers ever make are significant and worth paying some amount for the expertise of professionals to handle such complexities. Comparing rates is misleading without considering all factors.
Lynn Reaser, economist
YES: The Internet has sharply reduced the cost of matching buyers and sellers compared to the common 5-6 percent commissions set up prior to the advent of computers. Rather than being the third highest in the world, 3-4 percent commissions might reflect the Realtor value in most transactions. Realtors still contribute valuable services in the search process for many buyers, arranging walk-throughs, negotiating prices, and handling the contract paperwork. It is just that those services may be too highly priced.
Phil Blair, Manpower
YES: So much change, good and bad has happened in the residential real estate market. Except the pricing for sales commissions. We know sellers of high-end properties negotiate the sales fees they will pay, commercial real estate does the same. Today, with so much technology available to buyers and sellers the services a buyer or seller needs are very different. And pricing needs to be a la cart,too.
Bob Rauch, R.A. Rauch & Associates
NO: No. If there was a law that said, “You must pay 6 percent commission when you sell your home” then I’d agree it is too high. However, commission offers are negotiable. They are determined by the market and the value that real estate agents bring to consumers. In my business, if a hotel charges $300 per night, that may sound high. So, stay somewhere else. If you don’t like the price a restaurant charges, eat somewhere else.
James Hamilton, UC San Diego
YES: Modern technology makes it much simpler to find details about homes available for sale and their fair market price. This allows brokers to connect buyers with sellers much more efficiently than used to be the case. There still is a benefit to having a personal broker to assist with some of the details. But that service is not worth 6 percent of the value of a $2 million home.
Norm Miller, University of San Diego
YES: The top 10 percent to 20 percent of full-time experienced agents are worth significant compensation for their advice and help in avoiding pitfalls and risks prior to a home transaction. The bottom 80 percent, many of whom are part-time and inexperienced, are not worth the typical fees and yet they add to the inefficiency of the market, i.e. overpriced listings. The top agents will do many more transactions if fees decline and hopefully, the marginal producers will drop out of the system.
Jamie Moraga, Franklin Revere
NO: Commissions are negotiable and there are plenty of agents to choose from. Real estate agents provide the requisite expertise and years of experience to earn that commission from scheduling property showings and marketing to negotiation and closing the deal. The commission fee is well worth the time, effort, and guidance a real estate agent provides and many consumers are willing to pay it. If you don’t want to pay a real estate agent commission, then there’s the option for a For Sale by Owner or listing in an app like Zillow.
David Ely, San Diego State University
YES: The finding against the NAR and several large brokerages by a federal jury provides the strongest evidence that commissions are excessive. Buyers’ lack of opportunity to negotiate the commission paid to their broker is consistent with this view. Agents can spend less time than in the past helping clients identify properties given the online resources available to buyers. An option to purchase services individually rather than as a package would lower expenses for many.
Ray Major, SANDAG
YES: Nothing a real estate agent does warrants 6 percent on the price of a house. The concept of “paying a percentage of your home’s value to sell it” is rooted in an 1800s system when agents had to work hard to find buyers. With the internet, agents are no longer needed. The average salary of a San Diegan working 2,000 hours is $69k, while the commission on a million-dollar home is $60k, this seems disproportionate.
Austin Neudecker, Weave Growth
YES: Compensation should be correlated with the value provided. I have had a very positive experience with an agent in town where the commission was earned, and another experience where I felt exploited. Digital platforms have made listing and advertising fairly commoditized. Depending on the market, one side of the transaction requires substantially less effort. Agent commissions should be paid by each side of the transaction to align interests, potentially scaled to performance and size.
Have an idea for an EconoMeter question? Email me at phillip.molnar@sduniontribune.com. Follow me on Threads: @phillip020
