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Perhaps many of you viewed, as I did, the CBS “60 Minutes” profile Sunday on discounted residential sales agent commissions. This reminded me of an interesting phenomenon at work in the real estate market.
One would think that in this dot-com era that more real estate transactions would take to the Internet, thus ending the foothold that the National Association of Realtors has on commission rates. The process of “disintermediation” has already played out in, among other places, the travel and stock industries, dramatically reducing most commission rates.
Perhaps a better example is what has happened in the retail delivery system. While internet-based retail sales represent an ever increasing percent of consumer expenditures, they have not at all impacted real estate based retail sales. Just look around: there is a renaissance in shopping center volume, where sales are up; shopping center revitalization is very strong; and the high level of consumer expenditures has effectively propped up our national economy.
The two forms of delivering retail goods to consumers seem to co-exist and even prosper.
I expect that discounted real estate commissions will be the favored marketing choice for an ever increasing number of housing consumers. In fact, I am surprised that agent-discount firms haven’t dented the market more, particularly during the real estate ‘frenzy’ period throughout most of this decade when agents were often more like fast-food order takers. I view it as a matter of time before discounters, combined with the comfort and safety of transacting on the Internet, even a preference to shop on-line by younger consumers, downwardly impact commission levels.
But it is unlikely that commission slippage will occur immediately. This is because:
- The NAR owns and holds a monopoly on the multiple listing service (MLS), the life-blood of Realtors. Coupled with restrictive laws in some states (not California) this eliminates or limits access to discounters and consumers, effectively forcing most sales to the “retail” realtor commission level. The “60 Minutes” piece referred to pending litigation on the lawfulness of these restrictions.
- The real estate market is in a slow-down period. Sales volumes are low (see today’s news) and homes are tougher to sell. Those “have-to” sellers need real professionals representing them and they would logically conclude that this is no time for experimentation.
- Real estate sales are, in the words of one Seattle agent, a “high-touch” business. It’s your home. It’s expensive. Most buyers need to walk it to understand it. Advertising is expensive; some homes require “staging,” open houses take time, etc. These are not easy behaviors to replicate on the Internet, even with jpgs and video.
However, 6 percent commission rates are obscene when prices are as high as they are. No other industry shares and collects a 6 percent commission — not even commercial realtors who trade at half this rate or less! I predict that this battle will eventually elevate to the level of gasoline prices as an issue.
Having said that, I have transacted in both ways. I have purchased and sold investment property as a “FSBO” (For Sale by Owner); paid a slightly discounted fee when we purchased our home; and have listed at full commission level with my very talented Prudential team on our previous home.
The difference was product and timing: when I could avoid, or reduce the fee, I did. When I needed professionals to handle my home with understanding, commitment, and tender loving care, I was very willing to pay the full commission.
My conclusion is that the forces that bear will eventually erode realtor commissions. This, and stricter standards, will reduce the numbers of persons who call themselves “agents,” reducing the ranks to the real realty professionals who are full time, informed and persuasive people. The market will dictate the pace in which this happens. But it is inevitable that commissions will decline.