Will Lower Real-Estate Commissions Push Home Prices Higher? Economists Clash on the Impact

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Real-Estate Shake-Up: How New Commission Rules Could Affect Home Prices

As of August 17, a seismic shift has occurred in the real estate industry, fundamentally altering how agents are compensated for their role in buying and selling homes. This transformation, aimed at increasing transparency, may have unexpected consequences on home prices, according to recent research from esteemed institutions including Columbia, Northwestern, and Stanford universities.

The New Commission Landscape

Under the new rules, part of a landmark $418 million settlement involving the National Association of Realtors (NAR) and various brokerages, buyers will now be responsible for paying their agent's commission, rather than having it covered by the seller. This change also mandates that buyers sign agreements with their agents and prohibits the listing service from disclosing how much sellers are willing to offer the buyer’s agent.

Prior to these changes, real estate commissions in the U.S. were among the highest globally, often reaching 6% of a home's sale price, split between the buyer's and seller's agents. This arrangement has now been revised, potentially reducing the commissions from 6% to 4%, a shift that some believe will lead to a rise in home prices.

Economic Theories: A Divided Consensus

A new working paper, “NAR Settlement, House Prices, and Consumer Welfare,” authored by researchers from Columbia, Northwestern, and Stanford, suggests that reducing agent fees might actually drive up home prices. The study estimates a potential price increase of 4% to 5%, arguing that lower transaction costs enhance the overall value of homeownership. This is because reduced fees decrease the future costs of selling a property, thus increasing its value as a durable asset.

The researchers posit that if agents’ fees drop, the savings might not directly translate into lower purchase prices for buyers. Instead, the increased overall value of homes might lead to higher sale prices, with the benefits primarily accruing to existing homeowners.

Counterarguments: Alternative Perspectives

However, this view is not universally accepted. Critics, including Stephen Brobeck from the Consumer Federation of America, question whether the study implies that raising commission rates might be more beneficial. Brobeck cites a February paper by the Federal Reserve Bank of Richmond, which argues that the previous commission structure, where sellers paid both agents, may have inflated home prices and led to inefficiencies such as prolonged searches and overuse of agent services.

The Richmond Fed's paper suggests that the new commission model could correct these market distortions, potentially leading to a more efficient and affordable housing market. They highlight that U.S. real estate commissions are significantly higher compared to other developed economies, suggesting that lower commissions might streamline the market and reduce overall costs.

What This Means for Home Prices

While the precise impact of the new rules on home prices remains uncertain, the study by Columbia, Northwestern, and Stanford offers a provocative perspective. According to their findings, if sellers continue to pay 3% and buyers pay 2%, home prices could rise by 0.6%. A scenario where sellers pay 3% and buyers pay 1% might see a 3.8% increase, and if sellers pay 3% while buyers pay nothing, prices could surge by 7.3%.

The rationale is that lower transaction costs could make buying and selling homes more fluid, increasing demand and driving up prices. Despite this, experts caution that these changes might not significantly improve overall affordability for new buyers.

As the real estate industry adapts to these new commission rules, the debate continues. While some anticipate that reduced fees will lead to higher home prices, others argue that the changes will create a more balanced and efficient market. The true impact will unfold as buyers, sellers, and agents navigate this evolving landscape, potentially reshaping the dynamics of homeownership and investment.