In 2002, Natalya Delcoure and Norman Miller, two real estate economists, set about to learn what fees consumers pay real estate agents in America. They were especially interested in real estate commissions.
What Decloure and Miller discovered was somewhat shocking. On average 6% of the proceeds from each home sale went to the participating real estate agents. The figure was not just more than what agents make in other countries but wildly more; 200% to 400% more.
The economists figured this startling disparity couldn’t last in the digital age, but it has.
While commissions have fallen even farther in other countries, U.S. real estate agents today make more than they did 20 years ago.
U.S. real estate agents rake it in as their sales broker brethren – stockbrokers, travel agents – long ago scurried to other lines of work.
“These patterns are puzzling given the industry’s significant technological changes,” concluded a Brookings Institution paper from 2019.
For the past month, HousingWire plunged down the foreboding rabbit hole of residential real estate commissions, uncovering the past, present and future of this wholly unique part of the economy.
We sifted through the present, which includes a raft of pending lawsuits that claim the National Association of Realtors and its member brokerages wage a “horizontal conspiracy” that rips off home sellers to the tune of billions of dollars each year. That’s part two, coming up Thursday.
And in part three for Friday, we examined alternative business models, possible cracks in the structure, and the future of real estate agents.
In part one today, we document a 108-year-old rule that has led to the both controversial and cherished commission structure of now.
A real estate agent’s history of the United States
In 1913, the same year Ford began production of the Model T car, and pitcher Walter Johnson cruised to the American League MVP award, beating out “Shoeless” Joe Jackson, today’s structure for home sales commissions was established.
Back then, the National Association Real Estate Exchanges – forerunner to the NAR – declared that member agents representing a home seller, “Always be ready and willing to divide the regular commission equally with any member of the Association who can produce a buyer for any client.”
During the lively 1920s, a commission averaged around 2.5 % of a home’s sale price, according to a study from Cornell University economist Panle Jia Barwick and University of Pennsylvania real estate professor Maisy Wong.
So, the agent selling ace pitcher Walter Johnson’s home makes the decision to set the rate at 2.5%, and has to split that commission with the buyer’s agent. If the home sold for $10,000, the agent charged Johnson $250, pocketed $125 and gave the rest to the agent representing the buyer.
By 1940, total commission rates in some areas were climbing to 5%, Barwick and Wong found. That rate solidified as the NAR and other interests promoted homeownership, or at least white homeownership, as part of the American dream.
“Those rates started off with good reason,” argued Jack Ryan, CEO of REX, a brokerage that has filed multiple legal actions against the NAR. Back then, Ryan noted, “Agents drove you around,” and exclusively knew what properties were for sale.
That exclusivity was because agents posted properties in local Multiple Listings Services that were (and are) operated by NAR chapters. Agents shared these listings sheets with fellow dues-paying NAR members.
So valued was this information-gatekeeping that when the Internet rolled around NAR allegedly withheld listings from members that they worried might post them online for viewing by the general public. The U.S. Justice Department filed a lawsuit against the NAR, and a 2008 settlement barred withholdings.
“Delivering listings via the Internet enables customers to control their search process and educate themselves about the real estate market in their area on their schedule,” the settlement stated.
The legal action helped Zillow and other listing aggregators bloom. And it may have indirectly reduced commissions in other countries.
Miller, now a professor at the University of San Diego, revisited his work on commission rates this year. He found that in the intervening years commissions in the United Kingdom dropped from 3% to 1.5% of the home’s total price. Commissions in Denmark fell from 3% to 2 %, and rates in Sweden plunged from 5% to 2%.
In the U.S., commissions fell from about 6% to a little over 5% Miller found.
A study by RealTrends that the NAR has cited comes to a similar conclusion. Amid “unprecedented competition among brokers,” stated Charlie Oppler, president of the NAR, “Average commission in the U.S. fell to a new low of 4.94% in 2020.”
But that fall came as the U.S. median home sales price skyrocketed to $309,000 in 2020, compared to $159,400 in 2002.
In other words, an agent evenly splitting a 6% commission on the median 2002 home sale netted $4,782. An agent getting half of a 5% commission on a median 2020 sale grabbed $7,725.
The median 2002 home seller, then, paid $9,564 in commissions in 2002. The median home seller paid $15,450 in commissions last year.
An agent’s real estate commission incentive
No wonder, then, that many American workers, aware of the profession’s economics, are drawn to becoming a residential real estate agent.
The NAR has 1.4 million members. It’s a figure that includes some commercial real estate agents, and non-sales real estate professionals but it also excludes hundreds of thousands that are not dues-paying NAR members who have their real estate license.
In fact, almost one in every 100 U.S. adults is a licensed agent.
The median NAR member agent earns $49,200 a year, according to the trade group. The figure is above the median U.S. personal income of $43,600, per the U.S. Census. It is also deflated since the NAR does not discriminate between part-time agents, or those who do one sale a year with those who might transact 50.
As American real estate agents have weathered the digital tidal wave, other commission-based professionals drowned.
“Between the 1970s and 2000s, the average transaction cost to buy a stock dropped 600%,” Barwick and Wong wrote in 2019. “A mutual fund transaction has declined by 50% in the last 20 years.”
Why U.S. home sale commissions largely persist returns us to the 1913 rule, Barwick and Wong contend. Because the buyer’s agent income is tied to the rate set by the seller’s agent, “Buyer’s agents have an incentive to prioritize properties that offer high commissions and steer buyers away from low commission listings.”
Put another way, the rational economic incentive for a buyer’s agent is not to find the best home for their clients’ momentous purchase. It’s to find the most expensive home their client will be amenable to, with the highest commission.
A listing agent, then, must offer a high enough commission to attract a buyer’s agent. Elizabeth Korver-Glenn, a sociology professor at the University of New Mexico, noted these agent incentives in practice, while researching the Houston real estate market in 2015 and 2016.
“The real estate agents I’ve observed and interviewed in the U.S. police each other’s commission practices,” Korver-Glenn said. “And they avoid working with housing consumers who they think will try to negotiate, or have tried to negotiate, the commission.”
Check back on Thursday for part two of this three-part series. In part two, we’ll analyze that claim that the National Association of Realtors and its member brokerages wage a “horizontal conspiracy” that rips off home sellers to the tune of billions of dollars each year. Part three looks at what’s next.