The people bringing these real estate commission lawsuits don’t seem to understand the basic principles of the brokerage market.
To understand how flawed the lawsuits that claim the commission that home sellers pay to real estate agents is unreasonably high and fraught with antitrust violations, we must look at the data.
National Average Commission Rate is Falling
In a study from Redfin (more on them later), “The typical U.S. home seller in 2020 paid the brokerage repping the buyer a commission equal to 2.7% of the sale price—down only slightly from 2.8% in 2012.” They claim that it’s going to fall further because, “Data on agent commissions is about to become widely available for the first time in U.S. history, setting the stage for a new era of transparency and pricing competition in the housing industry.”
The truth is, the average national commission rate has been consistently falling for years, and it has nothing to do with a “new era of transparency,” which they say is happening because of the NAR/DOJ lawsuit settlement. According to RealTrends data, we’ve set a new, low average national commission rate, in the range of 4.9 to 4.94 percent, down from 5.40% in 2012.
From 30 years of RealTrends data, we’ve found that the persistent decline in the average national commission rate has everything to do with competition among agents competing for listings and little to do with the rise of real estate portals, growth in discount brokerage or other factors. In a report on competition in the residential brokerage industry published by the U.S. Department of Justice and the U.S. Federal Trade Commission in 2006, they showed that the inflation adjusted cost of real estate commissions was less than 1.5% for the year 1991–2005.
In addition, the industry also set what appears to be a new record high total sales volume. Now, add to that the fact that, according to a RealTrends analysis, the total gross commissions paid in 2020 is over $85.9 billion which, for the first time in 16 years, surpassed the previous high set back in 2005 and is up over $10.2 billion from 2019. The real estate industry has the highest level of existing home sales since 2006 at 5.64 million existing homes sales.
The settlement between the National Association of Realtors and the U.S. Department of Justice and two class action lawsuits—where the outcome is uncertain— has many real estate practitioners unsettled as to what the industry may look like in the future.
The NAR lawsuit will be settled this month and will make it illegal for a buyer’s agent to advertise or say their services are free. In addition, real estate websites must disclose the percentage of a sale that buyers will earn. Redfin recently announced that they have made public the buyer’s agent brokerage fee on 700,000 listings spread across 65 Multiple Listings Services, which are the National Association of Realtors-created databases of homes for sale that Redfin (and Zillow and other home listings websites) take their information from, according to HousingWire.com.
In a recently filed Illinois lawsuit (which may become a class-action lawsuit), the judge stated that, absent NAR’s policies, commission costs would be far lower.
Discount Brokerage Rex Real Estate filed a lawsuit against the State of Oregon for antitrust practices. REX’s 2020 lawsuit alleges the state’s policy banning homebuyers from receiving discounted real estate fees harms consumers and stifles competition. The Rex suit alleges that, without prohibitions against rebates, buyer’s commission rates would be far lower.
The Consumer Federation of America, which has been anti-Realtor for decades, says commissions are $100 billion-plus. Their evidence for that? According to the report, they came to that number by “multiplying the latest average home sale price reported by the Federal Reserve Bank of St. Louis ($378,700) by the number of home sales in 2018 (6 million) by an average commission of 5% [t’s higher than this according to RealTrends] yields a product of $114 billion, which must be adjusted down for those homes sold without assistance from agents (FSBOs).” They even cited RealTrends, but failed to note that that average commission rate has been trending downward for years.
What They Don’t Understand
What these plaintiffs do not seem to understand are a few basic principles of the brokerage market.
- No one is required to use a real estate agent. The argument was that “consumers can’t buy and sell because they can’t get access to data.” That’s a failed argument because buyers and sellers can get access to all the data they need online. A 2018 Consumer Survey by RealTrends, the California Association of Realtors and CE Shop showed that some 90% of consumers surveyed choose to use an agent to sell or buy a home, up 5% from 2004.
- Commissions are negotiable. Commissions are 100% negotiable, and they always have been. Even buyers know that they can ask for a portion rebated to them from the buyer’s agent—ever heard of Zip Realty or Redfin? They’ve offered that from the beginning. Further, evidence is that the national average commission rate has fallen from 6.1% to nearly 4.9% in the last 30 years—all without the courts or the government mandating it.
- Discount brokers are everywhere. Starting with the launch of HelpUSell (approx. 1977), Assist2Sell (approx. 1987), Zip Realty (approx. 1977) and Redfin (approx. 2007) to today, there have been discount brokerage offerings. This doesn’t count the thousands of small brokerages offering flat-fee services to consumers, sometimes under Exclusive Agency listing agreements rather than Exclusive Right to Sell agreements.
Discount Brokers Are a Small Percentage of the Market
After much examination of the discount brokerage segment, collectively, they have never achieved more than 3-4% of the national market. It’s not because real estate professionals are preventing them from growing their share. It’s because consumers still like to choose an agent, because they know one or are referred by a trusted source
Those who constantly opine, and sue about commission rates, Realtors blocking innovation, and lower costs don’t understand that most housing consumers think agents are valuable. Consumers understand that they can negotiate the cost with their agent.
The idea that Realtors are suppressing competition has been around for more than 40 years. It will likely never end. Even still, the fact remains: Consumers choose to use agents and support them being compensated for what they do.
Steve Murray is founder of RTC Consulting and a senior advisor to HW Media, owner of RealTrends. Tracey C. Velt is managing editor of RealTrends.