Back in 2002 when I was first interested in buying a house, I went on the Internet and found lots of houses for sale, directly from the sellers. I bought the house I own right now directly from the seller. At the time, I was convinced that the days of real estate agents were counted. I remember telling a friend who wanted to go into real estate that the Internet would soon kill this industry.
It made sense. Idiots like myself could buy houses from other idiots, that is people without any training in real estate, without any other intermediary than the Internet. How long could the real estate agents last?
Real estate agents don’t inspect houses, they do not have power of attorney, they do not provide deeds, they do not provide the financing, they do not provide the insurance. Real estate agents may take the pictures and post them on the Internet, but iPhones take decent pictures.
A home inspection (not covered by the agent’s fees) might cost you $300. A lawyer will charge you a flat fee to represent you in the transaction (maybe $1000, not covered by the agent’s fees). The bulk of the transaction costs are taken up by the real estate agent.
Yet real estate agents are still with us, charging 5% in commission. That’s a sweet deal: sell a single home and you can charge half of what many people make in half a year.
It hurts my ego to admit that I was badly wrong: the Internet has not affected real estate agents in the least.
You’d think people would be eager to keep the commission fee for themselves (it is tens of thousands of dollars!). The Washington Post tell us that nothing of the sort is happening:
And over the past decade, the Internet has disrupted almost every aspect of a transaction that sits at the core of the American Dream. Everyone now has free access to information that used to be impossible to find or required an agent’s help. But as a new home-buying season kicks off, one thing remains mostly unchanged: the traditional 5-to-6-percent commission paid to real estate agents when a home sells. While the Internet has pummeled the middlemen in many industries â€” decimating travel agents, stomping stock-trading fees, cracking open the heavily regulated taxi industry â€” the average commission paid to real estate agents has gone up slightly since 2005, according to Real Trends. In 2016, it stood at 5.12 percent. â€œThere’s not a shred of evidence that the Internet is having an impact,â€ Murray said, sounding like he almost can’t believe it himself.
The article argues that the sale of a home is a complicated transaction. Oh! Come on! That’s a pathetic explanation: planning a trip abroad is complicated and, yet, we have no qualm doing away with travel agents and using the Internet instead. Of course, the transaction cost is higher which makes it worthwhile to pay someone to help. But 5% of the transaction is lot. In Canada, that’s about $25,000 to sell a single house (5% of $500,000): the price of a brand new car. And selling and buying houses is really not that complicated. It is not $25,000-complicated.
Recall that real estate agents do not provide home inspection, insurance, financing, legal titles… all of these things are separate expenses provided by separate people.
Whether real estate agents have expenses, and how much of the 5% they pocket is irrelevant. The fact is that this 5% has remained the same for decades. This means that, in real dollars, real estate agents cost the same today as they did decades ago.
To put it another way, the productivity of real estate agents has, if anything, decreased in recent decades despite all the technological progress. In comparison, all industries confounded, productivity grows by about 1% a year. That’s why Americans, on average, are much richer than they were decades ago.
On average, workers are at least 20% more productive today than they were 20 years ago. But not real estate agents.
Another way to describe a stagnation or decline in productivity is to say that real estate agents, despite all their new tools, are not getting any better over time, and are probably getting slightly worse since their cost is rising.
They have cheap mobile phones, the Internet, databases, fancy software… all of that has not, in the least, made them more productive.
How well do the real estate agents serve the interest of their clients? Maybe not so well:
Those selling without an estate agent were more satisfied and the gap between sales price and asking price was smaller than for those selling through a real estate broker. (StamsÃ¸, 2015)
Our central finding is that, when listings are not tied to brokerage services, a seller’s use of a broker reduces the selling price of the typical home by 5.9% to 7.7%, which indicates that agency costs exceed the advantages of brokers’ knowledge and expertise by a wide margin. (Bernheim and Meer, 2012)
Many real estate agent recommend that sellers lower their prices (thus making their job much easier) on the belief that buyers are going to bid on the house. Yet this is a terrible strategy for their clients:
While the (…) recommendations of real estate agents (…) favor underpricing, alluding to a potential herding effect, our market data do not provide any support for this strategy. (Bucchianeri and Minson, 2013)
Can you do better with a cheap, flat-fee broker? It seems you can:
Brokers with a flat-fee structure who charge an up-front fee (which is substantially lower than the average fee of traditional brokers) and leave the viewings to the seller sell faster and at – on average – 2.7 percent higher prices. (Gautier et al. 2017)
So knowing all this… why hasn’t the Internet at least forced the real estate agents to lower their commission fees? If Uber was able to break the cab driver’s back, why can’t we come up with the equivalent for real estate?
I have nothing against real estate agents, I am just curious. And please, don’t tell me it is the “human element”. People don’t go around hugging their real estate agents, not any more than they hugged their travel agents.
Update: A comment by Panos Ipeirotis suggests that travel booking sites also charge a large percentage (15%-20%) on hotel reservations while AirBnB charges 6% to 12%. This would mean that real estate agents might not be such outliers. I went looking for signs that travel agents had disappeared and it seems that there are still many of them, though their work was transformed over time. This makes me question the belief that “the Internet has pummeled the middlemen in many industries” as stated in the Washington Post.