Business

/

ArcaMax

Sorry, home sellers: The 6% commission isn't going anywhere

Stephen Mihm, Bloomberg Opinion on

Published in Business News

Negotiation is an essential part of buying or selling a home. But for nearly a century, there’s been one part of the process where haggling doesn’t fly: the 5% to 6% standard commission charged by U.S. realtors. Now, in a dramatic turn of events, the National Association of Realtors has settled a class-action lawsuit that targeted the practice, agreeing to reforms that could cut commissions.

News outlets have generally described the case as a game-changer that will unleash competitive forces in the industry. And why not? The U.S. standard is far higher than one charged by realtors in countries like Germany (recently 4.5%), Australia (2.5%) and the UK (1.3%).

In reality, though, the history of how these commissions came to be — and how they have persisted, despite legal challenges — suggests that change will come slowly, if at all.

Prior to the early 20th century, real estate brokers had the same sorry reputation as snake oil salesman and carnival barkers, and many people eschewed them entirely. These “curbstone brokers” plied their trade as free agents, displaying a rapacity that earned them a reputation as “land sharks.”

Eager to shed this image, more reputable real estate agents began forming professional associations, usually called boards, in the early 20th century. These new groups established exclusive contracts that bound sellers to a single listing agent for a set period of time. They also set standard commissions, typically a percentage of the total sale that could go to the sellers’ agent — or, when a buyers’ agent played a role, be split in half.

Brokers had every incentive to join a board. The prime reason had to do with a related innovation: the Multiple Listing Service, or MLS, a system of cross-referenced index cards containing all properties for sale in a given area. Only dues-paying realtors could access these cards — and only if they followed the rules.

 

For example, real estate boards adopted language stipulating that “brokers should maintain the standard rates of commission adopted by the board and no business should be solicited at lower rates.” This predictability undercut price competition, and also gave brokers an incentive to share their listings. Likewise, buyers’ agents who belonged to the boards knew that they would get a cut of the action if they found a seller with a property worth buying. The system created what one historian of the profession has described as a “perfect market, in which every piece of real estate would be for sale by every real estate broker.”

The Justice Department didn’t see it that way. In 1947, government lawyers hit the National Association of Real Estate Boards with an antitrust suit, arguing that standard commissions amounted to price fixing. The group managed to fend off criminal charges, but a civil suit went all the way to the Supreme Court. In 1950, the justices declared that real estate boards could not, in fact, fix rates.

The National Association of Real Estate Boards dutifully abandoned its formal rate schedules. Instead, it began “recommending” or “suggesting” that local boards adopt the standard 5% or 6% commission. Thanks to this superficial semantic tweak, realtors just reverted to the old standard.

That the ruling did so little to change the status quo underscored the fact that the commissions, far from being a form of covert price fixing, had become woven into the fabric of the real estate industry. When the only way to access real estate listings was to agree to a standard commission — with violators expelled from the MLS — it’s hardly surprising that the practice resisted market forces. It would take much more than a lawsuit to dislodge such a central tenet of the market.

...continued

swipe to next page

©2024 Bloomberg L.P. Visit bloomberg.com/opinion. Distributed by Tribune Content Agency, LLC.

Comments

blog comments powered by Disqus