Editor’s note: In this four-part series, Inman News examines the effect of the housing slowdown on everyday real estate business. We’ve asked brokers and agents what they are doing differently with marketing now that listing times are longer, how they are keeping an edge, and how a slowdown may or may not be impacting commission rates. (Read Part 1, Part 2 and Part 3.)
The housing market slows down — real estate commissions go up. It’s a pattern that agents are witnessing in markets across the country.
Real estate agents in declining markets are reporting that the compensation offered to agents and brokers representing buyers appears to be on the rise, as listing agents seek to attract more attention to for-sale homes in the face of declining sales and rising inventory
“Sellers I’m dealing with are actually eager to pay full commissions to both the listing and the cooperating brokers,” said Nate Sumner, an agent and broker for Pacific Union GMAC Real Estate in Marin County, Calif. “They’re recognizing the value of full-service representation on the listing side and the marketing importance of a full commission to the cooperating broker.”
The trend in higher commissions is accelerating as the buyer’s market gains strength in his business area, Sumner said.
During the real estate boom total real estate commissions fell to about 5 percent of the sale price of a home from a traditional average of about 6 percent, according to research by Real Trends Inc., a real estate information company. The average real estate commission rate in 2001 was about 5.4 percent, and this rate fell to about 5.1 percent in 2002 and 2003.
The company has since ceased public reporting of its commission data, though the president-elect for the National Association of Realtors reported this year that commissions have fallen to a new low of about 4.9 percent, based on the latest data from large real estate companies.
Real estate agents and brokers say this trend has begun to reverse as sales are dropping and for-sale inventory is rising. The National Association of Realtors, in its latest forecast for the year, expects existing-home sales to fall 6.5 percent this year compared to last year, which would be the third-highest sales year on record. Meanwhile, new-home sales are expected to fall 12.8 percent this year and the median existing-home price will grow about 4.3 percent while the median new-home price will rise 0.5 percent.
“Commissions are going up,” said Mary Pope-Handy, a Realtor for Intero Real Estate Services in Los Gatos, Calif., a community near San Jose.
She said that consumers in her market are generally “more bottom-line driven than expense driven. Many now realize that they better hire a good agent and not just someone with a pulse, and that the marketing is expensive and it may be for a prolonged period of time.”
A recent condominium listing in a neighboring community carried a 4 percent commission as compensation for the agent who represents a buyer in the purchase of that condo unit, Pope-Handy said.
In a typical real estate transaction, an agent working with the seller receives the full commission and offers a share of the commission to a cooperating agent who is working with the buyer. This commission share offered to the buyer’s side of the transaction is typically advertised in a multiple listing service, while the total commission rate is not advertised.
While there seems to be a general trend in sellers willing to pay more to sell their homes in the slowing market, Pope-Handy said some sellers “think that because prices are either soft or slightly declining, they are ‘losing money’ compared to six months ago,” based on slowing price appreciation. “So some of them hope to or want to make up the difference in the commission.”
Sumner, who publishes an index that measures local real estate market trends, said commissions in his market appear to be rising in step with the cooling market.
“Sellers I’m dealing with are actually eager to pay full commissions to both the listing and the cooperating brokers,” he said. “They’re recognizing the value of full-service representation on the listing side and the marketing importance of a full commission to the cooperating broker. It’s clear to me that a seller who is anxious to do everything possible in a tough market to assure success is prepared to pay a full, fair commission.”
Steve Cohen, a Realtor for Keller Williams Realty in Boston, said commissions are also rising in his market area. “The micro-trend on fees now is firming, and to some extent increasing.” In August, the Massachusetts Association of Realtors reported a 10.6 percent sales decline and a 1.3 percent decrease in the median price of detached single-family homes in second-quarter 2006 compared to second-quarter 2005.
In the San Diego area, real estate commissions for the buyer’s side of the transaction appear to be on the rise as sales have shrunk, said Barbara Andrews, a Realtor for Century 21 Award in San Diego.
“Our sellers are being flexible about real estate commissions,” Andrews said. “We tell them that it will take longer to sell their home, and that they must offer cooperating brokers full commission if they want to get their home sold. Our sellers are following our recommendations.”
The San Diego Association of Realtors reported that the sales volume of attached, existing-home unit sales in San Diego County fell 38.9 percent and the median sales price dipped 5.2 percent in June 2006 compared to June 2005. Meanwhile, sales of detached existing homes fell 30.1 percent, while the median sales price increased 1.55 percent in June 2006 compared to June 2005.
Tamara Dawn, a Sacramento, Calif., real estate broker, said it definitely does not hurt in a slowing market to offer a higher commission to the cooperating broker who brings in a buyer. “It makes more sense to offer 2 or 3 percent (higher) commission than having to drop their house 5 or 10 percent if someone else’s home is purchased.”
She said that she has a goal to have her listings in the top-five lists of agents who are representing buyers, so that “almost every agent out there with a buyer is willing to show your property.” Higher commissions can help to smooth any road bumps that pop up in the transaction, she said.
While typical real estate commissions had crept down during the formerly hot seller’s market in the Sacramento area, Dawn said she chose not to lower her rate. “I went in clear that I was worth what I was asking.”
Marina Sarabia, a Realtor for Coldwell Banker Residential Real Estate in Fort Lauderdale, Fla., who is part of a Realtor team with Kathleen Costanza, also said real estate commissions in her area “are absolutely going up,” and clients “are paying us what we ask because now they need us more than ever.”
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