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There's a good reason why so many Americans — 1.6 million according to one estimate — work as real estate brokers or agents. Barriers to entry are low. No college degrees are needed. The standard commission, 5 to 6 percent of the purchase price, is split between the seller's agent and the buyer's agent. It is one of the highest rates in the world.
But there is a long-awaited shake-up on the horizon.
In a seismic settlement last month, the National Association of Realtors (NAR), the powerful industry trade organization, agreed to abandon a long-standing rule requiring home sellers to compensate a buyer's agent. This was required to list a property in a database known as the Multiple Listing Service (MLS). The latter aggregates properties for sale regionally and is controlled by NAR.
The deal still needs approval from a federal court. But it has the potential to drive down commission rates and force hundreds of thousands of agents out of the industry.
Home buyers and sellers will be the clear winners. These changes could cut the $100 billion in mortgage fees Americans pay annually by as much as 30 percent, according to a study by the Consumer Federation of America, a watchdog.
Determining which companies will suffer most from lower commissions is less clear. But that did not stop investors from heading for the exit. Shares in online listing sites Zillow and Redfin have fallen 15 percent and 33 percent, respectively, this year. Real estate brokerage Compass is holding on to a 2 per cent gain but remains 83 per cent down from its 2021 peak.
The buy-side agent's commission pool will decrease further. If buyers had to decide whether to pay these brokers themselves, many would opt out. In countries such as the United Kingdom, France and Australia, buyers rarely use intermediaries.
Among the listed real estate companies, Compass appears to be the most directly at risk. The buy side accounted for more than half of its closed trades, according to analysts at Gordon Haskett. At Zillow, those commissions represented about 48 percent of total revenue in the second half of 2023, JPMorgan said. At Redfin, the number is slightly lower.
Zillow and Redfin could benefit if more sellers decide to take their listings directly online. But they still need agents — especially those who sell real estate as a side hustle — to stay put, rather than go the route of travel agents.
pan.yuk@ft.com
