naked capitalism

William Behm says:

You are an idiot. The article said commission could DROP BY 1%; NOT DROP TO 1%.

You are a typical over eager doomsdayer exaggerating your way to b.s.

No one like someone like you.

Anonymous says:

Dan:

There is a discrepancy between item 2 and the Reuters story.

Item 2: “The Federal government estimated fees could drop from their current level of 5% or 6% to 1%.”

Article: “The change could save those who buy or sell a home thousands of dollars since commissions could drop as much as 1 percent of the selling price, said Deborah Garza, the deputy assistant attorney general for antitrust,…”

Anonymous says:

James, you are obviously well informed. I undertsand that DOJ comes after NAR every 5 years or so because they assume monopolistic behavior in everything NAR does. In fact, real estate is one of the most competetive industries– no barriers to entry or exit and consumers are free to negotiate fees. I do wish the local real estate associations would pubish more detailed sale price information rather than the averages. I also take issue with the advocates in their national housing economics team — always very sunny view of real estate.

Yves, one of the frustrations about this DOJ settlement is DOJ’s misunderstanding about sharing online info– it’s the consumer who controls where the listing is shown online not the seller agent. It’s hard to fathom but DOJ just doesn’t get it. The media is sloppy and missed that key distinction by reporting in some instances (NYTs, Bloomberg) that the seller agents have to release the listing to other online brokers (there’s never was a restriction to begin with!). It’s amazing that if you’re a federal authority you automatically get the benefit of the doubt, and that’s human nature. Sometimes it’s just officials who have a hard time admitting there’s ‘no there there’. This appears to be one of those cases from what I understand from the folks at NAR.

Yves Smith says:

Anon of 12:01 PM,

Whlle I apologize for the error. However, I do believe fees will fall far further than the mere 1% suggested. I see the situation with 2 brokers over time becoming rare, rather than common as now, and the owner in most cases paying for a listing and in only in some cases paying 1/2 of the former prevailing brokerage fee to the buyer’s broker.

For instance: in New York, residential brokers get 15% of the first year’s rent as a rental commission (paid by the tenant). In Sydney, where the Internet listings are excellent and widely used, brokers get 1 week’s worth of rent as a commission, which is under 2%. Now New York is a special situation in terms of how high fees are, but nevertheless, the contrast is considerable.

And I must disagree with #1. I’ve bought, sold, and rented property. The absolute worst experience I had, far and away, involved a broker who engaged in behavior that I can describe only as completely dishonest, highly unethical, and highly unprofessional (she started screaming at me when I told her how under the law the course of action she insisted I take would put me at huge risk. If you REALLY want the details, I can provide them). And the other brokers too often engaged in substantial misrepresentation of either their client’s interests (too often, late in the game surprise disclosures) and their creditworthiness. By contrast, with the exception of one broker I used on purchases, I did far better, both in terms of price and process, when I went on my own. I got much better information and much less BS. And this is in New York, where the brokers ought to be better, due to the high fee potential and the approval process, which means the brokers can in theory add more value.

When fixed stock brokerage commissions were deregulated in the 1970s, no one would have forecast commissions would fall to pennies a share for institutions. or as low as they are for retail.

And as to people being able to negotiate, while that is true, I suspect few now do. The increased recognition of the Internet as a selling option will encourage and enable that. The comment in the article that the industry needed to educate brokers about anti-trust suggests a lot told prospective clients they could only list in the MLS if they gave a broker an exclusive. I know of people personally who believe that.

Real estate brokerage is not as competitive as you suggest, at least in all states, In New York, you must be licensed to be a broker. Not only do you have to take a certain number of hours of courses, sit an exam, but you THEN have to work for a more senior broker for I think 3 years, perhaps even four. In the 1970s, you merely had to sit the exam. I imagine that at least some other states have made getting a license more difficult over time.

As Dean Baker has repeatedly pointed out, restrictions to entry to a profession serve to reduce competition (entry of new people) and lead to higher compensation levels for the incumbents.

Yves Smith says:

Anon of 8:27 PM,

I reread what I wrote, and there was not a single statement that I could find that warranted being depicted as a “sweeping generalization”. I said my own experience, with one exception was (effectively) that brokers are negative value added. And this is in a state with very stringent licensing requirements, so that says licensing is likely not a remedy. No broader conclusion was made. But you choose to attribute one nevertheless.

Now there is a convenience issue. If you as the principal cannot take home-sale-related calls and accommodate prospective buyer requests for showing times, then you do need an agent, There is no way around it. But if you have good means of exposing the property to buyers, and have someone who can act as a negotiator if the deal winds up having some complexity, I am at a loss to understand the value added by a broker.

And in some countries, there are no brokers for residential real estate sales. Again, in Australia, houses are sold by auction. Yes, in a weak market, your house might not sell, but the same thing is happening here, broker or no broker.

I also said that I anticipated brokerage commissions will fall far more than the 1% forecast and gave reasons for that view.

I seriously question the value of brokers in residential real estate transactions. I see NO reason to use a stock broker, contrary to your views, particularly given that brokerage firms require you to use arbitration in the event of a dispute (I could go into details but the selection of arbitrators is highly biased towards ones who favor the securities industry). Unless you choose to make investing your second job, you should be in index funds. And even then the merits of buying stocks individually is highly debatable (the biggest reason for doing so is to get long term capital gains treatment but many investors overtrade, obviating that advantage).

Again, hiring a financial planner, who is paid on a professional rather than a commission basis, for those who lack investment savvy, want a second opinion, or are too busy, is a completely different kettle of fish, but that is NOT what you advocated

The reason I raised the Dean Baker point (which is true, he invokes it in particular with regard to doctors) is that at least in New York, some of the requirements are clearly simply to deter entry. Why require someone to be an apprentice for three+ years if they have passed an exam and taken coursework? They have the expertise, and most de facto will have to work for an agency initially to get started.

Commercial real estate is completely different, with the complexities of lease structuring and negotiation, brokers can and do contribute a great deal.

However, in lieu of a sweeping generalization never made, let me offer the results of a Harris poll, which found real estate brokers to be held in the lowest esteem of all professionals. This has been true of every year that they have been included in the survey, save 2005 when they were inched out by stockbrokers.

Anonymous says:

I find the claim that FSOB types have such a hard time strange (unless, of course, they don’t know how to get their house in the MLS) IF they are willing to pay brokers who bring a buyer half the customary commission.

Which then makes me wonder…..is it because the brokers in a community refuse to bring buyers to houses for sale by owners, to punish them for not giving them or one of their peers the listing (ie, an exclusive?)

There may be a need for more anti-trust action here…..

Yves Smith says:

James,

You mis-stated several things I said.

I did NOT say that the norm would be for sellers to use brokers. What I said was:

I do believe fees will fall far further than the mere 1% suggested. I see the situation with 2 brokers over time becoming rare, rather than common as now, and the owner in most cases paying for a listing and in only in some cases paying 1/2 of the former prevailing brokerage fee to the buyer’s broker.

I later qualified that by saying some sellers might wind up engaging a broker, most likely due to their own scheduling constraints.

You also chose to misrepresent my statements about restrictions on entry. I said 1) they raise the compensation levels of the incumbents (I noted that some of New York’s requirements, namely the 3+ year apprenticeship, looked designed to deter entry and did not seem a way to improve the caliber of the industry and 2) noted that despite the fairly tough requirements in New York, the professionalism (yes, anecdotal, but based on consistent views from the people I know) is still not very high. So the evidence appears wanting that tough licensing leads to better outcomes for customers.

And why might that be? The incentives are hopelessly bad. There is a reason that stockbrokers and real estate brokers are at the bottom of the Harris poll. They can never be professionals because they are not paid on a professional basis. They are paid to make trades happen, not to serve their clients’ best interest. Those may coincide, but the broker’s ultimate loyalty is to the deal.

One academic study found that brokers achieve higher prices (this was done by analyzing comps) when selling their own property than when working for customers.

And as I indicated earlier, I suspect the DOJ’s issue with NAR, per the training requirement, is that brokers have been telling prospects that the only way to get into the MLS is to give a broker an exclusive. I know a person to whom that happened recently, and I would be surprised if his case is isolated.

And the NAR “helping” the DOJ? That strains credulity. No one helps out a prosecutor. The DOJ is a prosecutor and is plenty able to take care of its own interests and PR. A defendant acts based on his assessment of risks and costs.

I in fact imagine that the DOJ had leverage, even if there was not much to extract, because I suspect it had examples of bad behavior (in terms of brokers lying, as they did to my buddy, by claiming that they could get to the MLS only via an exclusive with a broker) that the NAR would not want put before the public.

My friend wasted a year because a broker lied to him about an exclusive. He would not have given it save the MLS argument.The broker tied up a substantial property with the exclusive, did not even get a single person to see it, and couldn’t even write a grammatically correct advertisement. He missed the last window when the market was good. He considers himself to be damaged and I am certain would say the suit has merit. I’m not making this person up; he is the owner of the property I have featured from time to time on this blog.

Yves Smith says:

James,

Thank you for your judicious response, and your kind words.

As you might infer, I don’t see an easy solution to the problem of getting better caliber brokers given the incentives. I see a similar pattern in mergers and acquisitions, where even though clients often pay retainers, no one (except perhaps at the very low end) is in the business of living off retainers. In that field, due to the comp, you have very talented people, yet still poor results for clients. Depending on what study you read, 60% to 75% of the deals fail. Now of course, you can’t entirely blame the M&A types, since CEOs also have lousy incentives (golden parachutes for selling, higher comp for buyer CEEO due to running a larger enterprise), but the poor deal outcomes is a long-standing phenomenon (ie, before CEO incentives got worse in the 1990s).

As for fees falling, a post at Calculated Risk said that at the peak of the bubble in California, it was common for agents to list a property for 4 1/2 or 5%, with the selling agent getting 3% and the listing broker taking less.

If you have sales resulting from Internet listings, I am not sure how that data on feed paid would be captured. Even though the BEA provides a estimate of broker commissions, CR said they assume a 6% rate, ie. even their current data does not capture the discounting that was done). Thus we will probably need to look to anecdotal evidence until the data capture improves.