Time to take a wrecking ball to realtors' fees in America – The Economist

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DEATH, TAXES and extortionate realtors’ fees: for decades these have been the three grim certainties of American life, and one of them is avoidable. Every time a home changes hands, realtors (known as estate agents in Britain) charge a staggering 5-6% of its value, two or three times more than they can get away with in any other rich country. As the internet has allowed would-be buyers to browse properties from a sofa, agents’ fees have tumbled elsewhere—but not in America, where they have been set in concrete for nearly a century. Why?
On October 31st a court in Missouri gave the obvious answer: because of anticompetitive practices. Ruling on a class-action lawsuit, a jury found the National Association of Realtors (nar) and a handful of large real-estate brokers guilty of conspiring to keep commissions high. They awarded homesellers $1.8bn in damages. It’s a start.
A similar class-action suit in Illinois will probably be decided next year. America’s Department of Justice is investigating the industry. The plaintiffs in the Missouri suit have already filed another suit against another group of brokers. More copycat suits are likely to follow. Analysts think damages could reach $400bn. Share prices of listed real-estate brokers have dropped sharply. Bob Goldberg, the boss of the nar, said he would retire early.
The current rip-off works like this. The nar has long insisted that any agent who lists a home for sale on a database called a “multiple listing service” must offer to split the commission equally with the agent who brings the eventual buyer to the property. Sellers are often told that if they do not offer the going rate, of 2.5-3% for the buyer’s agent, no one will show up. They have a point: academics have found evidence that buyers’ agents “steer” them away from low-commission properties. Buyers are told they need not worry about the fee paid to their agent, because the other guy is paying it. This is nonsense. Either the fat fee inflates the house price, or the buyer ends up paying a similar fee when he or she sells.
In other industries technology has eliminated middlemen (when did you last call a travel agent?) or squeezed their fees (think of tracker funds for stocks). In American property excess profits have attracted excess workers. America has roughly 1.5m realtors, about as many as it has primary-school teachers. They sell 6m homes a year. Relative to the number of deals, Britain has a fifth as many estate agents.
Previous attempts to shake things up have hit a brick wall. Firms like Zillow, an online platform which lists homes for sale, once feuded with the nar over access to information. At times Zillow and other real-estate tech platforms looked like threats to the status quo. But ultimately they found it more lucrative to become part of the existing arrangements. Zillow now makes most of its revenues from fees paid by agents who get referrals from its platform.
The judge in Missouri has yet to rule on specific anticompetitive practices that might be banned in light of the jury’s finding, but he could set standards nationwide. Commissions could be “unbundled”, with buyers and sellers each paying their own agents, as early as next year. Keefe, Bruyette & Woods, a research group, estimates that this would cut 30% off agents’ $100bn-a-year commissions pool.
The benefits of encouraging more competition would be huge. Obscene commissions gobble up families’ nest-eggs. In 2019 a paper from the Brookings Institution, a think-tank, found that realtor fees consumed a quarter of the capital gains earned in an average home sale. High fees also trap people in unsuitable housing and discourage them from moving, even when they might earn more elsewhere. This makes America less mobile, less dynamic and less rich than it otherwise would be.
For years trustbusters in America have been chasing cases against big tech, an industry where services are often free and evidence of consumer harm is hard to find. Yet they have neglected the scandal that is literally on their doorstep. It is time to take a wrecking ball to the real-estate racket. ■
This article appeared in the Leaders section of the print edition under the headline “The great realtor racket”
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