Washington - Steve Murray sometimes gets together with
other old-timers in the real estate industry, shares some wine and inevitably
gets around to remarking, "I sure would've thought it would've changed
more by now."
Murray, president of consulting firm Real Trends, has
been tracking for 40 years how US real estate agents do their jobs. 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 pummelled the middlemen in many
industries - decimating travel agents, stomping stock-trading fees, cracking
open the heavily regulated taxi industry - 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.
"There's not a shred of evidence that the internet
is having an impact," Murray said, sounding like he almost can't believe
it himself.
The stickiness of the real estate commission is a source
of fascination for economists and curiosity for consumers who are doing an
increasing share of the home-buying legwork themselves online. It also offers
potential lessons for workers in other industries worried about the Internet's
destructive powers. The Web has changed how agents hustle for a share of the
estimated $60 billion paid each year in residential real estate commissions.
But it hasn't taken their jobs. In fact, the number of agents has grown 60
percent in the past two decades.
It wasn't supposed to be like this.
Read also: Luxury home sales buck growth trend
Experts have been predicting the demise of real estate
agents for years. Consider the title of a 1997 article in the Journal of Real
Estate Portfolio Management: "The Coming Downsizing of Real Estate: The
Implications of Technology."
In the mid-2000s, the arrival of real estate tech
start-ups like Zillow, Redfin and Trulia spurred a fresh dose of anticipation.
"Realtors' sacrosanct commission rates of 6 percent may be in
danger," warned "60 Minutes" in 2007. Jeff Jarvis, a City
University of New York professor who examines the Internet's effects, wrote a
2006 blog post predicting, "Real estate agents are next."
Agents thought so, too.
"The industry was fearful of the internet. They
didn't think they'd have jobs," said Leonard Zumpano, a retired finance
professor who for years ran the University of Alabama's Real Estate Research Centre.
Automated
The Web automated and simplified huge swaths of a process
that once was complicated and time-consuming. With a few taps on a smartphone,
home buyers and sellers now can find information that once required digging
through musky deed books at the county recorder's office. And the new
technology has made agents more efficient. In many ways, their job is easier
now.
Yet agents stand to earn more in commissions today than
in the pre-internet era, because of stable commission rates and surging home
values.
In 1997, the typical commission on a median-priced US
home, adjusted for inflation, was $16 600.
Today, that commission is $20 131.
"It's a mystery to me," Zumpano said. "I
would've expected commissions to go down."
In 2005, the Justice Department and the Federal Trade
Commission held a workshop to talk about why commissions had not fallen more.
The American Bankers Association argued that the commission rate could be cut
in half in a truly competitive market. Attendees at the workshop appeared to
place great faith in the power of the internet to lower commissions.
In a typical home sale, the commission is paid out of the
seller's proceeds and split between the seller's and buyer's agent. The rate is
negotiable. But the traditional rate has held firm, even as an agent's main
advantage - information - has been eroded by the Internet.
Experts don't have a good answer for why these
commissions have survived the internet's onslaught. They point to several
potential factors. A home sale is a massive financial transaction. It's
complicated. And it doesn't happen often, with home buyers staying put for an
average of 12-to-13 years. So intimidated consumers keep turning to agents for
help.
Read also: Luxury home mainstays that are dying out
Regulations may have slowed the pace of change. Twenty
states and the District of Columbia set minimum levels of service for agents,
dissuading brokers willing to do less for lower fees. Ten states also ban
agents from rebating a portion of the commission to their clients. But
commission rates do not vary wildly among these states, analysts say.
The National Association of Realtors also has worked to
reinforce the role of agents through lobbying and advertising, sometimes in
unconventional ways. Last year, the group struck a deal with the ABC sitcom
"Modern Family" to work into an episode that character Phil Dunphy is
a true real estate expert - a licensed Realtor. And national broker Century 21
is running ads with the tagline, "Good luck, robots," adding
"there's no robot for insight or hustle or a handshake."
The efforts appear to be working. The association reports
89 percent of home sellers used an agent in 2016 - on par with the previous
five years. At the same time, for-sale-by-owner transactions fell to their
lowest rate - 8 percent - since the association began tracking the data in
1981.
"Who is going to write a contract? Fill out a
disclosure statement? Anticipate what's coming on the market?" asked
association president Bill Brown. "There's a human element to buying and
selling a home that can't be replaced."
But the internet is expert at discounting that human
element.
That was the worry that greeted Zillow when it was
launched in 2006 with executives from Expedia and Hotwire, travel sites that
were on their way to pushing out human travel agents.
"There was fear in the beginning," Zillow chief
marketing officer Jeremy Wacksman said.
Agents fought to keep Zillow from accessing private
databases known as the multiple listing service - where agents post homes for
sale and which many considered an agent's ultimate advantage. Zillow eventually
tapped those listings. But it decided not to challenge the industry head-on,
opting to focus on real estate ads.
The reception was harsher for Redfin, a tech-heavy broker
in Seattle that tried to cut agent commissions. It started out selling homes
for a flat $3,000 fee and rebated part of the home buyer agent's commission.
"Competing agents have threatened us with violence,
intimidated our customers and tried to block their offers," Redfin chief
executive Glenn Kelman said in testimony before Congress in 2006.
Redfin changed course. Today, Redfin more closely
resembles a traditional broker. It has its own local agents. It sells homes for
a 1 to 1.5 percent commission. Redfin agents are paid a salary and a bonus tied
to customer satisfaction.
Redfin remains a small player, with 1-to-2 percent of the
U.S. market. But in some big cities such as Chicago, Seattle and Washington it
holds a 5 percent share. Kelman said he believes Redfin will continue to grow
as a new generation of buyers and sellers enters the market.
"Kids who grew up buying textbooks on Amazon are now
buying houses on Redfin," Kelman said.
Not standing still
Other agents are not standing still. They have adopted
technology, too.
A peek at Samina Chowdhury's smartphone shows how.
A veteran agent in Ellicott City, Maryland, Chowdhury has
one app that scans closing documents and one that writes contracts. Another
accepts digital signatures. She has an app that allows her to keep tabs on
sales leads and another to unlock residential lockboxes. She uses an online
video editor for making home tour videos. And while Chowdhury speaks five
languages, if she runs into trouble she can call up a translation program.
"None of these technologies were here 10 years
ago," she said.
Chowdhury has seen other agents struggle with the pace of
change. But she's done well. She estimates that she made $300,000 last year.
The push of technology into real estate is what motivated
Chris Speicher to leave his job at Microsoft to join his wife, Peggy Lyn
Speicher, as a real estate agent. He figured he could help.
"It's no longer about going to the real estate agent
because they hold 'the truth' - they have the data," Chris Speicher said.
They work in a team model, with staff divided among different
duties. They target potential home buyers with online ads. They get leads from
Zillow. Last year, the Bethesda, Maryland-based team helped close $100 million
in deals.
But Speicher, like many agents, feels the pressures of
change, too. He has noticed more pushback from home-buying customers, driving
that commission down closer to 2.5 percent.
Murray, of Real Trends, found that commission rates tend
to fluctuate with the health of the housing market - almost as if the internet
hadn't happened.
In 2005, at the housing market's height, buying and
selling were easy. The market was tight. And the national average commission
stood at a low 5.02 percent. Four years later, during the housing crash, with
almost twice as many houses on the market, commissions rose to 5.38 percent.
Now the commission rate is falling as the housing market
heats up again, Murray said.
He noted the rate has drifted down 16 percent over the
last 25 years, but surprisingly, all of that decline happened before 2004.
Murray does see one way the internet could attack
commissions: It could consolidate the highly fragmented market for agents.
Today, two-thirds of consumers still find their agents through knowing them or
by a personal referral. But if the internet weakens that bond, popular agents
could win more market share.
"And they're going to cut rates," Murray said.
"They can be more productive now, so they'll do volume instead. They'll be
more prone to discounting."
It will be agents doing what the internet hasn't.