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Why NAR, not the FHA, should have a sale

How a real estate commission-cut would increase housing supply and lower house prices
  • Instead of further stoking demand, NAR should increase supply by requesting its members to lower real estate commissions by 2 percent.
  • This would address a pressing supply-side problem pointed out by NAR’s release -- a dearth of new listings, inadequate supply and prices rising twice as fast as incomes.

Reposted with permission from AEI’s International Center on Housing Risk.

With today’s update on Existing Home Sales for March, the National Association of Realtors (NAR) again asked the Federal Housing Administration to lower premiums, effectively a call to put taxpayers at greater risk.

Instead of further stoking demand, NAR should increase supply by requesting its members to lower real estate commissions by 2 percent. This would address a pressing supply-side problem pointed out by NAR’s release — a dearth of new listings, inadequate supply and prices rising twice as fast as incomes.

Let’s look at what NAR reported.

On the supply side, the release noted that we are now entering the 43rd month of a seller’s market, with high buyer demand keeping inventory low. This strong demand is reflected in the strong home sales reported for March, for which sales rose 5.1 percent compared to February and 1.5 percent year-over-year.

What was missed is that this trend has been going on for almost two years now.

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Sales in 2015 (not seasonally adjusted) were up 7 percent compared to 2014. First-quarter sales for 2016 were up 4.4 percent compared to the prior year, even when discounting for this year’s leap day, setting us up for a potentially record-setting spring buying season in terms of volume.

But home prices, already up for 49 straight months, will rise even further. As Lawrence Yun, NAR’s chief economist noted, prices are rising twice as fast as incomes.

But despite all this, NAR continues to fail to connect the obvious dots.

It is looser underwriting, especially from the Federal Housing Administration (FHA), combined with a strengthening economy, a constrained supply, and low interest rates that is driving house prices up much faster than wages or inflation. Yet NAR’s release continues to lobby for even looser underwriting, as evidenced by NAR President Tom Salomone’s call for even further FHA mortgage insurance premium reductions.

The problem is obviously that too much loose lending fueled demand chasing too little supply. What is needed is not more demand, but more supply.

This is where NAR could help. After all, Yun noted “affordability and the low availability of starter homes is still a major barrier.”

By cutting the average sales commission, NAR could lower the cost of selling a home, thereby enticing more homeowners to put their current property up for sale. This would increase supply, particularly at the lower end of the market, which would help first-time buyers who have been most hard hit by the recent house price increases.

Just like any sale brings in new customers, NAR’s sale on commissions would single-handedly boost entry level supply, without driving up prices, as the NAR’s calls for credit loosening have done.

Tobias Peter is a research analyst at the International Center for Housing Risk at the American Enterprise Institute.

Email Tobias Peter