The recent National Association of Realtors settlement is set to transform how homes are bought and sold in America. A significant change is that buyers will now be responsible for ensuring payment to their agents, while listing agents can no longer publish compensation offers in the Multiple Listing Service (MLS). These changes aim to enhance transparency in the real estate industry and allow competitive forces to reduce commissions, which are currently nearly double those in other developed economies.
Some experts, including those in the Biden administration and various consumer advocates, argue that these reduced commissions will lead to lower housing prices. However, research conducted by Kellogg’s Gregor Matvos and colleagues suggests that the opposite may occur: lower commissions could actually increase housing prices.
The Economic Model
Understanding the Argument
Matvos explains the initial intuition behind the belief that lower commissions would decrease home prices. Consider the example of shampoo, where a reduction in sales tax would logically lead to lower prices. When it comes to houses, however, the scenario changes due to the resale aspect of real estate.
“Unlike shampoo, houses can be resold, making them similar to stocks,” Matvos notes. “When the costs associated with selling decrease, buyers perceive homes as having a higher resale value. Consequently, they are willing to pay more, ultimately driving home prices up.”
The Relationship Between Transaction Costs and Home Values
The high transaction costs often cited as the reason for inflated home prices also tend to diminish the perceived value of the home, much like a tax would. Therefore, when these costs are lowered, the value of the property increases.
Who Benefits?
Winners in the Market
Matvos emphasizes that the adjustment in commission structures ultimately benefits both buyers and sellers. Buyers gain access to improved homes, while sellers enjoy the advantages of reduced transaction fees. “Our analysis indicates that sellers stand to gain more significantly due to the long-term savings on reduced fees,” he says.
However, young households with limited financial means may face challenges as rising prices could exclude them from the market. While the homes become more desirable, the increased prices might create barriers for those lacking sufficient savings.
Increased Supply and Market Dynamics
Potential Supply Effects
Some suggest that reduced fees could encourage more homeowners to sell, leading to an increase in market supply. While this could potentially stabilize or lower prices, Matvos notes that the increase in transactions could also enhance property valuations as buyers find better matches in the market.
The Role of Real-Estate Agents
Agent Functions and Compensation
A crucial aspect of the real estate transaction process is the role played by agents. They facilitate connections between buyers and sellers and provide vital services such as staging, pricing advice, and marketing. Matvos explains, “To justify the traditional six percent commission, agents would need to significantly increase the number of showings they facilitate.”
He argues that while sellers’ agents may still command a commission reflective of their services, buyer’s agents will need to clearly demonstrate their value in this new landscape. This may lead to changes in how agents structure their fees, potentially adopting fixed rates or emphasizing specific skills, such as negotiation prowess.
Conclusion
In summary, while the shift in commission structures within the real estate industry is poised to raise home prices, it also presents opportunities for buyers and sellers alike. As transparency increases and competition drives down transaction costs, the overall market may experience a significant transformation. Understanding these dynamics will be essential for all stakeholders as they navigate the evolving real estate landscape.
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