Emboldened by a hot real estate market, sellers push real estate agents to cut commissions

It’s a seller’s market. And that could be bad news for real estate agents who represent home buyers.

A report of the real estate brokerage company Redfin RDFN,
+2.35%
published this month shows that buyers’ agent fees are changing significantly. The average commission rate for these agents was 2.63% of the selling price of a home in the three months to November 30, up from 2.69% a year earlier.

The commission rate was the lowest ever, according to Redfin. The company, which boasts of its own low fees for potential home sellers, began tracking compensation data in 2017.

Of course, real estate agents do not leave empty-handed. House prices have risen so rapidly that they have compensated for the lower commission rate. In dollars, the average seller paid the buyer’s agent $12,415; compared to $11,609 in 2020.

Sellers call the shots

This drop in buyer’s agent fees is a reflection of the power of sellers, since they are the ones who pay these fees.

The inventory of homes for sale has hovered near record lows over the past year. It’s largely a byproduct of years of underbuilding after the Great Recession. Houses were being built at a much slower rate than households were being formed. So when a generation of millennials suddenly started reaching the stage in life where buying a home made sense, they found themselves competing for scraps.

Sellers are well aware of this and use it to their advantage. “Sellers know their home is a hot commodity and will likely attract multiple offers no matter what, so they started offering buyer’s agents a 2% or 2.5% fee instead. by 3%,” said Joe Hunt, Redfin’s Phoenix market manager. said in the report.

As Hunt said, “Why would you offer 3% when you know you could offer less and sell your house for the same price?”

The real estate sector becomes more transparent

Another factor explaining the drop in the commission rate charged by buyers’ agents is the increasing transparency regarding these fees.

Historically, sellers could expect to pay 6% of the house price in commissions split between buyers’ and sellers’ agents. This arrangement has been criticized in recent years. Several class action lawsuits have been filed against groups of realtors, including the National Association of Realtors, arguing that the setup is unfair to consumers. And the Department of Justice has begun to investigate the matter.

“The DOJ lawsuits and investigation are not currently having a major influence on commission rates, but the industry is watching closely to see if they could cause buyers to become responsible for paying their own agents,” Redfin chief economist Daryl Fairweather said in the report. “If that happens, buyers will likely be much more eager to negotiate commissions.”

A recent study of the Consumer Federation of America has suggested that Americans could save an estimated $100 billion a year in commissions paid to real estate agents if the buyer’s and seller’s agent commission were not tied. Much of this savings would come from lower house prices – sellers would feel less pressure to charge buyers a higher price for their property if they weren’t responsible for paying the two agents.

The real estate industry has taken steps to improve transparency around fees. Notably, the National Association of Realtors released a new policy in November that will require multiple listing service platforms to allow brokerages to post commissions for buyers’ agents. The change took effect at the beginning of the year.

Penny D. Jackson