In an era of disruptive innovation, real estate is a laggard. Elsewhere, consumers armed with technology have made an end run around gatekeepers, buying airline tickets, hotel rooms, and even stocks with little to no commissions. When it comes to buying and selling homes, however, a dominant cadre of brokers has made a simple transaction mind-numbingly complicated.
The result: The housing sector remains stuck in the pre-internet past. No other industry is mired in the same dismal combination of opaque rules, minimal transparency, and sky-high fees. In 2021, consumers will fork over $100 billion in real estate commissions — up 16% from 2020.
As the great economist Herb Stein famously quipped, all unsustainable trends must stop someday. And the overcharging of homeowners may finally see its day of reckoning.
The pushback began a couple years ago with two private lawsuits targeting a long-standing anomaly in home sales. Home sellers are forced to pay two agents: theirs and the buyer’s. The fee to the buyer agent is immune to competition, as sellers fear offending a buyer agent by offering less than the going rate — often 3%. Federal courts seem warm to these lawsuits challenging fixed buyer commissions.
Meanwhile, the Trump Justice Department launched its own investigation of broker practices, culminating in a November 2020 lawsuit, which confirmed that brokers have ripped off homebuyers and sellers for decades. The Trump DOJ called out such egregious broker practices as the rule prohibiting the disclosure of buyer-agent commissions to home buyers — the agents’ own clients! An industrywide command forbidding price transparency is a telltale sign of a racket.
On real estate competition, the Biden administration has amplified the effort begun under the previous administration. This summer, the Biden Justice Department pulled out of the deal that the Trump DOJ ultimately struck with the National Association of Realtors, claiming that it did not go far enough. A week later, the Biden DOJ launched a 20-part probe into the trade group just as the president was directing the Federal Trade Commission to address “exclusionary practices” in home sales.
The real estate lobby is now running scared. In Washington, this means an expensive public relations campaign coupled with minimal substantive changes. The National Association of Realtors voted last month to give consumers the smallest amount of competition and transparency possible, agreeing to no longer block consumer access to transparent Realtor and commission information.
The intense public relations campaign surrounding the measure shows how worried the real estate lobby is that pro-consumer change is coming. Facing a renewed federal investigation into its anti-competitive policies and a bipartisan consensus that headache-inducing real estate rules are stifling consumer choice at a time of skyrocketing housing costs, the National Association of Realtors is trying to put lipstick on a pig with its new “competition” portal. The site claims that higher commissions somehow lower costs for consumers.
The reality is, real estate commissions in the United States are two to three times higher than in other developed nations around the world. Currently, for every additional percent in real estate commission charged, more than 200,000 homebuyers are priced out of the real estate marketplace.
The real estate gatekeepers, who spent $100 million on a losing lobbying effort last year, are now saying that if commissions are lowered, then buyers would bear additional upfront costs. This nonsensical argument is really about control. The legacy brokers that have dominated real estate for decades are afraid that consumers will finally take control. We all know that more consumer choice will only lower costs.
After all, we’ve seen this game played before. The taxi lobby tried a similar approach with Uber a decade ago. Ride-sharing services have now saved consumers millions of dollars. The difference here is we’re talking about a $400,000 median home sale, not a $20 taxi fare. Just imagine the savings that competition would bring to consumers by cutting home fees in half. The good news is that the transformative changes that have benefited consumers in so many other industries may be finally coming to real estate.
Michael Toth is the general counsel of REX, a digital real estate startup based in Austin, Texas.
