Why US Realtors Are Such A Scam

JIT PAST decade hasn’t been great for intermediaries, who match buyers and sellers for a slice of the transaction’s value. Travel agencies have seen their margins crushed by flight search and hotel booking websites. Stockbrokers have been squeezed out by clever algorithms that transact for a fraction of the cost. Taxi dispatchers have been replaced by Uber and Lyft.

Listen to this story.
Enjoy more audio and podcasts on iOS Where Android.

Your browser does not support the item

Save time by listening to our audio articles while you multitask

There is, however, an exception. Even though there are many sites, like Zillow and Redfin, that offer US buyers the ability to search for properties, commission rates for real estate brokers (estate agents in Britain) have not come down much, remaining close 6% (3% for the buyer’s representative, 3% for the seller’s). Americans pay twice as much as people in most other developed markets, where similar sites have done a lot to reduce transaction fees on residential properties (see chart).

It irritates a lot. “Why are residential real estate broker fees two to three times higher in the WE than in any other developed country in the world? asks Jack Ryan, who founded REX Homes, a real estate brokerage that offers to sell homes for just 2% commission. He believes the problem lies in the anti-competitive practices of the Multiple Listing Service (MLS), through which nearly every broker in America lists and searches for homes, and the National Association of Realtors (NRA), a trade association with 1.3 million member brokers in America, which regulates it.

This view is gaining popularity. Two class actions have been filed against NRA and some of the largest real estate brokerages, such as Realogy and Keller Williams. In America, a practice called “tying” is common, whereby home sellers are forced to agree in advance on the rate they will pay the buyer’s broker. The lawsuits allege that the sellers’ brokers pressured the owners to offer the industry standard 3%. If they refuse, the buyers’ brokers may refuse to show their home to clients.

This is possible due to the MLS. In April, the Ministry of Justice (DohJ) began assigning information on how brokers use the system, looking for evidence that they are looking for homes based on commission rate. If found, this would support the idea that buyers’ brokers invariably direct buyers to the homes that offer the juiciest commission. The NRA moved to dismiss both lawsuits in early August. John Smaby, president of the National Association of Realtors, said the lawsuits were “wrong on facts, wrong on economics and wrong on law”.

But the market seems to think there is cause for concern. Many large real estate brokerages are privately held, but the share price of Realogy, one of the brokerages named in the lawsuit, has fallen by half since late April, just after the announcement of the DohJ the investigation leaked. The value of RE/MAXanother listed brokerage, fell 40% over the same period.

If transaction fees are kept artificially high by these practices, that’s bad news for owners. Some $1.5 billion in homes change hands every year. If anticompetitive practices raise U.S. brokerage fees two to three percentage points above what they might otherwise be, it costs consumers up to $70 billion a year, or 0.25% of the GDP.

The costs to the US economy are probably higher than that. When moving is so expensive, many people may not care. This means less expense for services associated with the move, such as gardening and decorating. Worse, it may also suppress mobility in America. Ben Harris, who was Joe Biden’s chief economist when he was vice president, says average incomes in poorer cities aren’t catching up with those in rich cities, ‘partly because people aren’t moving anymore “. Sky-high real estate commissions aren’t the only problem — wealthy cities like San Francisco need to build new housing if people are to find better-paying jobs there. But they certainly don’t help.

Kristan F. Talley