Market forces knock ominously on US realtors’ door

Discounted homebuying. The United States has more than 1.5 million realtors helping people buy and sell homes – more agents than there are currently homes for sale. That odd imbalance is the result of decades of distortions that have benefited the real-estate industry at the expense of its customers. A recent ruling promises to change the way homebuying works, creating some winners, and many losers both in the industry and around it.

Real-estate brokerage is an example of how market forces don’t always prevail. In a typical transaction in the United States, both buyer and seller will have an agent, unlike in the United Kingdom where usually only the seller does. However, the agent acting for a US buyer often takes their fee from the seller, not the buyers themselves. That is now changing. In March, the National Association of Realtors agreed to settle antitrust litigation regarding commissions, and if courts approve the settlement, a homebuyer will soon have a more direct way to negotiate with their agent.

That seems like an obvious thing buyers would want. So what took so long? For starters, realtors spend an enormous amount of money lobbying lawmakers, who also have little incentive to push for change given more pressing political topics like climate change and substance abuse. NAR spent $52 million last year alone, according to Opensecrets, almost twice as much as the lobbying group that represents beer, wine, and liquor makers, and six times that of American Petroleum Institute.

Home-purchase fees are an example, though, of how discovering a fair price for a service can be fiendishly complex. Domiciles are typically a person’s most important investment – home equity accounted for 45% of the median U.S. homeowner’s net worth in 2021, according to Pew Research. But the challenges to effectively valuing a broker’s services include financial literacy, and lack of expertise. Traders in an investment bank spend their working lives learning how to price assets with pinpoint precision, helped by intricate, well tested models. The average homeowner – who will buy a home just once every 13 years– is in a very different situation.

Social dynamics are at work, too. Homebuying is more engaged and personal than shopping for groceries, and buyers often find their realtors among their friends and family. Pressuring a close contact to lower their fees may not be easy. According to NAR, 39% of sellers pick their adviser based on a personal referral, and it’s likely that buyers follow similar patterns.

Letting buyers negotiate their fees doesn’t mean lower fees for brokers across the board. Better advisers may get more than they currently do – and many time-poor buyers will flock to those with expertise because doing so seems more likely to bring a successful deal. At the other end, some brokers will be forced to compete on price, driving many out of the business.

But if disentangling payments chips away at the overall fee pool, there will be other losers. One such is likely to be Zillow, the digital platform that shows listed homes and connects interested parties to brokers. Bernstein Research estimates the total fee pool could decline 20% in a worst-case scenario, and reckons that if Zillow’s revenue falls by just half that, it would wipe 30% off its adjusted EBITDA. Zillow’s market capitalization of $10.5 billion has lost around $670 million since the week before the ruling, so investors aren’t yet pricing that in.

It could even be more dire. Other industries have gone through similar iterations where clients become more empowered to negotiate fees. In 2018, new rules were implemented that required payments for stock research to be separated from trading executions, changing the way banks in Europe and the United States charged clients. Brokerages were paid for the value of their analysis rather than softer payments that comingled trading. Early research has shown that the quality of the analysis has gone up. So in theory, the better analysts were rewarded. But in the 18 months following the ruling, overall spending dedicated to research declined an estimated 30%.

As Bernstein notes, much of the future is unknown. But the two industries have similarities. Both reward relationships, service, and, also, relied for too long clients paying an untransparent for something they can’t easily value. Removing barriers makes markets more efficient. Those benefiting from such inefficiencies will start to pay. At least, in so far as brokers are also homeowners, they too can expect a fairer shake at good advice.