Homebuyers Could Save 30 Billions with New Real Estate Commission Model

A new study by the Richmond Federal Reserve Bank suggests a major shakeup could be coming to the real estate industry, potentially saving homebuyers billions of dollars.

Currently, homebuyers in the US face a double whammy: high home prices and hefty commissions for real estate agents. These commissions can add up to a whopping $100 billion annually, according to a 2023 report by Keefe, Bruyette & Woods analysts.

But there’s a potential solution. A new working paper titled “Real Estate Commissions and Homebuying” proposes a new compensation model that could slash real estate agent commissions by a staggering $30 billion.

The Problem: High Commissions and a Broken Real estate System

The study’s authors, economists Borys Grochulski and Zhu Wang, argue that the current US model for real estate commissions is outdated and inefficient compared to other countries. They point out that in nations like the UK, Ireland, and Sweden, home sellers pay significantly less in commission (around 2% on average) compared to the US standard of 5.5%.

Furthermore, unlike the US where 87% of buyers rely on real estate agents, many countries like Canada and Denmark see a significant portion of buyers navigate the process independently. This raises the question of why such a high percentage of US buyers use agents, especially considering that half of them find their homes online anyway.

Grochulski and Wang argue that the current system leads to several problems: inflated home prices, unnecessary use of agent services, and extended home searches.

The Solution: An “À La Carte” Approach

To address these issues, the economists propose an “à la carte” model for buyer-side real estate agents. This model would have several key features:

• Separate Payments: Both buyers and sellers would pay their agents independently, eliminating the current system where commissions are tied to the final home sale price. This prevents “steering,” where agents might push clients towards properties with higher commissions.
• Individualized Services: Buyers would pay for each specific task their agent performs, such as searching for homes, negotiating deals, or showing properties. This allows buyers to shop around for individual services and potentially negotiate lower prices.

Benefits for Buyers and the Market

The economists believe this model offers numerous advantages:

• Reduced Costs: Buyers could potentially save up to $30 billion annually on commissions.
• Increased Competition: Agents would compete on price and service, leading to more efficient use of their time.
• Greater Choice: Buyers could potentially utilize multiple agents for different parts of the homebuying process.
• More Efficient Searches: The model incentivizes focused searches and discourages unnecessary services.

Challenges and a Changing Landscape

This proposal comes amid a period of turbulence for the real estate agent industry. Lawsuits are challenging the National Association of Realtors (NAR) and brokerages over alleged collusion to inflate commissions. Additionally, a recent short-seller report on Zillow, a major player in the real estate market, cited potential changes to commission structures as a threat to the company’s revenue.

Despite potential resistance from the industry, Grochulski and Wang believe an “à la carte” model is necessary. They argue that the potential benefits for buyers and the overall market outweigh the drawbacks. The study’s findings could spark a major debate about the future of real estate commissions in the US.