Last week, the National Association of Realtors, one of the country’s largest industry associations, reached a groundbreaking $418 million settlement over an alleged conspiracy to inflate real estate agents’ commissions. Some have said the deal spells the end of real estate agents as we know them. But an award-winning finance professor who specializes in real estate economics says the end of this particular profession is long overdue.
In fact, Andrew C. Spieler, distinguished professor of economics and finance at Hofstra University, compares real estate agents to travel agents. Like travel agents, real estate agents were once the “gatekeepers” of information. They had access to MLS listings that consumers couldn’t find on their own, so buyers had to be much more “dependent” on their agents to even begin their home search, Spieler says Fortune.
“You really don’t need them,” he says of both travel agents and real estate agents. “I mean, there are still some out there, but it will squeeze the industry.” Spieler is an award-winning academic who has won numerous industry awards for his real estate research.
It’s not rocket science, he says. It’s the Internet. Online, home buyers have access to almost all the information they would need to purchase a home. On websites like Zillow and Realtor.com, consumers get almost all the details they would like to know, in addition to photos of the property.
Questioning the use of real estate agents was “inevitable even without the deal,” Spieler says. “If you think about what an agent does for you, I think it’s very different than what he did for you because there’s so much more information available on the Internet.”
Before the advent of the Internet (and online real estate markets, more specifically), homebuyers had to be much more “dependent” on their real estate agents to even show them inventory, he says. In fact, it was difficult to even start looking for a home “unless you were driving by and someone had a for sale sign.” In the past, real estate agents would simply print out MLS listings (which only they had access to) or “if you’re lucky, [they’d] email it to you,” Spieler says.
“Now that part of the process has been completely removed,” he says. “Buyers are much more informed. And for me the question is, ‘What am I paying for as a buyer?'”
In fact, a real estate agent’s main goal now is to get the transaction done with “the least stress,” Spieler says. They can, however, be useful in situations where buyers or sellers need to make a quick move to avoid a “misstep” in the transaction.
Let’s talk about commissions
Going back to the NAR deal itself, another major concern that buyers and sellers have today when using real estate agents is commission rates. NAR has agreed to pay $418 million in damages in several antitrust lawsuits, including the $1.8 billion verdict handed down on Halloween last year. They found that NAR and other brokers conspired to inflate real estate agents’ commissions. While NAR continues to deny any wrongdoing in these cases, the organization said it will bar broker compensation offers on MLS and require users to complete written representation agreements with buyers.
Commission rates can be particularly harsh for buyers and sellers of expensive properties. Let’s take a $2 million house for example. At a standard 4% commission rate, the real estate agents on the transaction would take home $80,000 (although that figure is spread between the buyers’ agent, the sellers’ agent, and a broker). Typically, the commission rate is between 4% and 6% of the transaction price.
“It’s a lot to pay,” Spieler says. “And for what? Sometimes you sell the house pretty quickly. You find the person and you’re shuffling some cards. That’s a lot of money if you think about it.”
In total, analysts suggest Americans pay about $100 billion in real estate commissions each year, but the outcome of the NAR settlement could reduce that by 30%. With such a steep drop in commission earnings, some experts say it could spell the end of real estate agents or, as Spieler puts it, a serious “squeeze” or downsizing of the profession. Currently, there are approximately 1.5 million real estate agents in the United States
Other real estate experts, however, say the NAR deal won’t change much in the long term.
“I think we’re in for a bit of a shakeup, but ultimately we’ll find a workaround by getting back to the point where we’re doing business very similar to what we do today,” Ken Johnson, a former broker and current associate dean of Florida’s business school, said. Atlantic University FortuneIt’s Alena Botros.
What the NAR settlement indicates, however, is that real estate agents may start earning less on commissions. While real estate agents may hope for more transactions, they are not a “commodity” like stocks, Spieler says. And with historically low inventory levels, there are fewer deals to go around.
Doing so “will push some people out” of the real estate profession, Spieler says, which means “less profits in the industry. I expect you’ll definitely see a squeeze in agents.