The housing market is hot, hot, hot right now, and house prices continue to rise in many markets to the highest prices ever.
Since it won’t cost an agent ten times more to sell a million dollar home than a $ 100,000 home, you can expect the interest fees for real estate agents to fall. This is not true. Why?
I started researching fees charged by the real estate industry about 15 years ago when I was an economist for the Wall Street Journal. I have found that real estate agents have actually created a legal cartel that often robs home buyers and sellers.
The excess value of homes for buyers and sellers in this industry cartel typically exceeds $ 10,000 for homes over $ 500,000.
A Brookings Institution study found that “nationwide, national average fees have doubled over the past couple of decades and outstripped inflation in most years.”
The researchers found that increases in real estate commissions “are independent of factors affecting the value of home transactions,” and that we expect these commissions to decline due to “significant technological change at the same time.”
For the economy as a whole, real estate agent rules can cost home buyers and sellers up to $ 75 billion a year.
Do not misunderstand me. A good real estate agent can be a godsend for anyone buying or selling a home. The industry is sure to add value when an agent can find their dream home for a family or a buyer willing to pay the maximum price.
If a home buyer or seller wants the best in their business and is willing to pay their agent a 6% transaction fee, that’s great.
But all too often, fees are set by the industry with little or no flexibility in agreeing on the 6% fees typically shared between agents for buyers and sellers. In other countries, such as the UK and Australia, fees are usually around 3%, which is half of America’s.
In this digital age, with online transactions becoming the norm, fees and commissions in most consumer industries like stock trading, travel agents and used car brokers have dropped due to online competition from companies like eBay, E * TRADE, Etsy, Netflix, Uber and Airbnb. Shopping at home is almost free. However, the overpricing of real estate managed to avoid the impact of these “disintermediation” forces.
High commissions persist today due to government orders. State laws often make it almost illegal for unregistered agents with lower fees to come through anti-rebate laws.
Even in normally competitive states like Florida and Texas, politicians continue to advocate higher agent commissions, often adding tens of thousands to home prices.
Today, 40 states have laws that protect the industry by limiting full and fair price competition. Ten states still prohibit agents from competing by offering discounts to buyers. Believe it or not, the fine for real estate agents offering discounts and charging LESS means losing your license.
Realtors prevail because they can flex their political muscles. There are hundreds of agents in each constituency and they are active in politics. Last year, national and state associations of realtors topped the rankings of campaigners in both parties to maintain high commissions in line with protectionist rules.
There are some encouraging signs that there are cracks in the armor of the real estate agent cartel. Tech newcomers like REX are trying to squeeze out unreasonable fees by suing states to overturn government-imposed discount bans. If they succeed, agency fees will be cut, and home buyers at all income levels will save thousands of dollars by bargaining with agents better.
I rarely agree with President Joe Biden about economics, but he said in a recent executive order that “competition is the main ingredient in capitalism.” He called for a federal investigation into competing pricing and professional licensing rules. Perhaps, after all these years, he will become the president who will end the real estate racketeering.