The housing market is hot, hot, hot right now, and home prices continue to skyrocket in many markets to their highest prices on record. Since it doesn’t cost ten times as much for a realtor to sell a million dollar house than a $ 100,000 house, one would expect the percentage fees for realtors to go down. They are not. Why?
I started investigating fees charged by the real estate industry about 15 years ago when I was an economics editor for the Wall Street Journal. What I found out was that real estate agents had created a de facto legal cartel that often scams home buyers and sellers. The additional cost to buyers and sellers of homes in this industry cartel is typically over $ 10,000 for homes priced over $ 500,000.
A study by the Brookings Institution found that “nationwide, national average commission fees over the past two decades have doubled and exceeded inflation in most years.” The researchers found that the increase in real estate commissions is “invariant with the factors that affect the cost of real estate transactions” and that we would expect these fees to decrease due to “significant technological changes in the meantime.”
For the economy as a whole, real estate agent rules can cost buyers and sellers up to $ 75 billion – ONE YEAR.
Do not mistake yourself. A good real estate agent can be a boon to anyone buying or selling a home. The industry is sure to add value when the agent can find the perfect dream home for a family or a buyer willing to pay full price. If a home buyer or seller wants the best in the business and is willing to pay their agent a 6% transaction fee, great.
But too often fees are set by the industry with little or no flexibility to negotiate a 6% fee typically split between buyers ‘and sellers’ agents. In other countries, like Great Britain and Australia, the fees are usually closer to 3%, which is half as much as in America.
In the digital age – with online transactions becoming the norm – fees and commissions in most consumer industries like stock trading, travel agents and used car brokers have fallen due to the online competition from eBay, E * TRADE, Etsy, Netflix, Uber, and Airbnb. Home shopping is virtually free. Yet soaring house prices have managed to remain largely immune to these “disintermediation” forces.
High-priced commissions persist today due to the government decree. State laws often make anything but illegal for unregistered agents to enter with lower commissions through “anti-delivery” laws. Even in normally pro-competitive states such as Florida and Texas, politicians continue to protect the higher commissions of agents, often adding tens of thousands of house prices.
Today, 40 states have laws that protect the industry by restricting full and fair price competition. Ten states still prohibit agents from competing with each other by offering discounts to consumers. Believe it or not, the penalty for realtors offering discounts and charging LESS is losing your license.
Real estate agents win because they know how to exercise political power. Each congressional district has hundreds of officers and they are active in politics. Last year, state and national associations of real estate agents dominated the rankings of campaign contributors in both sides in an effort to maintain a high level of commission through protectionist rules.
There are encouraging signs of cracks in the armor of the estate agent cartel. Tech start-ups like REX are trying to cut unreasonable fees by suing states to end government-created rebate bans. If successful, agent fees would be reduced and home buyers of all income brackets would save thousands of dollars by negotiating better deals with agents.
I rarely agree with President Joe Biden on the economy, but he said in a recent executive order that “competition is the central ingredient of capitalism.” He called for a federal investigation into inter-competitor pricing and professional licensing rules. Maybe after all these years he’ll be the president who puts an end to the real estate racketeering.
Stephen Moore is a senior fellow at FreedomWorks. He is the co-founder of the Committee to Unleash Prosperity and contributes to the Washington Examiner.