Since the National Association of Realtors (NAR) agreed in March to a $418 million settlement to resolve an antitrust lawsuit, scholars at Texas McCombs believe there’s an opportunity to address the problem of artificially high real estate commissions. The lawsuit alleges that real estate agents have colluded to keep commission rates high. These commissions, typically about 6% of the sale price, are paid by sellers but shared between the agents representing the buyer and the seller. Under the settlement terms, details of commissions must be excluded from the multiple-listing services (MLSs), which are the platforms where properties are listed for sale. This change could lead to reduced commission rates and offer some relief to consumers.

John Hatfield, a professor of finance, and Richard Lowery, an associate professor of finance, have investigated the prevalent commission-sharing arrangement in their latest research. Their findings support the claims made in the lawsuit, indicating that such arrangements facilitate high commissions by enabling collusion among agents. The established norms of sharing commissions among agents can act as a barrier to reducing costs, as it promotes a pricing agreement that keeps fees uniformly high across transactions.

In the United States, real estate commissions are notably higher than in many other countries and have remained consistent for the last thirty years despite the decreasing costs of comparable transactions. “The 6% commission fee does not accurately reflect the true costs of carrying out a real estate transaction,” states Hatfield. This discrepancy poses a significant question from an economic perspective, mainly because a few players do not dominate the real estate brokerage market. Theoretically, this should drive down fees through competition, which would be particularly beneficial for home buyers in a market where prices are at record highs.

However, this reduction in fees has not materialized. In a model developed by Hatfield and Lowery, along with Scott Kominers from Harvard Business School, they propose that widespread knowledge of commission rates can lead to collusion. If a broker attempts to lower their rates below the standard, other brokers might ostracise them. This can extend the time needed to sell a property and reduce the likelihood of its sale within 180 days. This model demonstrates how the transparency of commission rates, rather than fostering competition, may enable brokers to maintain high fees by agreeing tacitly not to undercut each other.

Hatfield has also conducted studies that show real-world instances of such ‘steering’. He discovered that properties with lower offered commissions were 5% less likely to be sold and took 12% longer. This suggests that the commission structure affects not only the costs but also the efficiency and speed of real estate transactions. It highlights the need for changes in how commissions are discussed and set within the industry.

While the settlement does not directly cap commissions, it forbids the inclusion of buyer agent commission details on MLS listings. However, seller agents can still discuss and share these commissions with buyer agents outside of the MLS context. “This type of communication could potentially reduce commissions,” suggests Lowery. “Our analysis indicates that allowing buyers and their agents to negotiate fees directly, rather than having them handled by the seller, could indeed lower the costs associated with real estate transactions. However, the effectiveness of this will depend significantly on the specific details of the settlement and its interpretation.” Hatfield recommends that buyers actively negotiate commissions with their agents, which could lead to more competitive pricing and reduced overall costs in real estate transactions.

More information: John Hatfield et al, Collusion in Brokered Markets, Journal of Finance. DOI: 10.1111/jofi.13432

Journal information: Journal of Finance Provided by University of Texas at Austin