Agent commission rates don’t change consistently with home prices, showing that the current commission structure is “inequitable and inefficient,” according to a new report from nonprofit consumer watchdog the Consumer Federation of America.
The report, “The Relationship Between Home Prices and Real Estate Commission Rates: Implications For Consumers and Public Policy,” compared home prices and buyer broker commission rates in 17,805 sales in 2021 and early 2022 in 35 U.S. cities and found “no consistent relationship” between the two.
In 10 of the cities, commission rates were identical in the vast majority (84 percent to 96 percent) of transactions, regardless of home price, so “meaningful comparisons could not be made,” the report said.
In five of the cities, commission rates varied little by home price. For example, in Chicago, no matter what the price, between 75 and 81 percent of homes offered a commission rate of 2.5 percent or more.
In eight of the cities, higher-priced homes tended to carry higher commission rates than lower-priced homes while in another eight cities, higher-priced homes tended to carry lower commission rates, according to the report.
The report noted that the findings are contrary to studies from more than a decade ago, including one funded by the National Association of Realtors in 2009, that found that commission rates decline as home sale prices rise. The researchers in the NAR-supported study cited this finding as “generally consistent with some degree of price competition.”
But that appears to no longer be the case in most cities, defying common sense, according to CFA.
“At the same commission rate, brokers selling a million-dollar home receive 10 times the compensation of those selling a $100,000 property,” said Stephen Brobeck, a CFA senior fellow and the report’s author, in a statement.
“One would expect that commissions on expensive homes would be discounted. Yet that usually is not the case for buy-side commissions. In some cities, those selling high-priced homes pay higher commission rates.”
“The research provides additional evidence that the structure of agent compensation is both inequitable and inefficient,” Brobeck added.
In the real estate industry, buyer broker commissions are not directly based on the skills, experience, or quality of service provided by the buyer agent, nor on the amount of time and effort that agent puts in. The complexity of the sale is also not a factor. This is because a mandatory NAR rule that is currently being contested in multiple federal antitrust lawsuits requires that every buyer broker be offered the same commission in order to submit a listing into a Realtor-affiliated multiple listing service.
Realogy, who is a co-defendant with NAR in the antitrust suits, has publicly called for NAR to end the requirement. CFA has previously called for a ban on sellers offering buyer agents a commission period, saying the practice constitutes “unfair restraint of trade.”
“The report suggests that uncoupling listing agent and buyer agent commission rates would significantly increase rate competition and eventually lower fees paid by both sellers and buyers,” CFA said. “Uncoupling would also begin to align rates more closely with agent quality of service. Today, there is little relationship between rates and agent service.”
CFA noted that some brokers have argued that selling a higher-priced home takes more time and skill than selling a more modestly-priced home. The report suggests that that difference may exist for multimillion-dollar homes that may require more careful buyer screening, more personal service, and very expensive advertising.
“However, very few homes in our sample sold for more than $2 million,” the report said.
And the report cites other brokers who have said that it takes no more effort to sell a home listed for between $600,000 and $800,000 than one listed for between $200,000 and $400,000.
“As one broker put it: ‘Generally speaking, an $800,000 house is no more work than a $300,000 house,'” the report said.
The report placed the lack of a consistent connection between commission rates and home prices at the feet of NAR’s history of price-fixing, the above-mentioned commission rule, and documented agent steering of clients away from low commission properties.
The report also listed several reasons that most sellers of multimillion-dollar homes don’t negotiate lower commissions, including:
- Limited seller information about agent compensation, as documented by consumer surveys and by research on the lack of information on rates provided by agents and firms.
- Preoccupation of sellers, especially those trying to match the sale of one home with the purchase of another, with sale price and timing.
- Concern that trying to negotiate a lower commission rate will result in less than optimal agent service.
- Unwillingness of most listing agents to negotiate lower commissions – about three-quarters of agents in an earlier CFA survey.
“The typical commission on a million-dollar home would purchase not one, but two new cars,” Brobeck said. “Yet, especially in a housing market with inflated prices, 5-6 percent rates also discourage first-time homeownership since purchasers typically pay about half this rate through higher sale prices.”
In an emailed statement, NAR spokesperson Mantill Williams told Inman, “Contrary to what CFA suggests, the market determines commission rates. Commissions are – and have always been – negotiable. Consumers have choices regarding the amount they pay and to whom they pay it. There is unprecedented competition among real estate agents in the market, especially when it comes to the service and commission options available to consumers.”
Williams pointed to a recent study by Freddie Mac alum Ann Schnare that was paid for by real estate franchisor HomeServices of America, NAR’s co-defendant in the above-mentioned federal antitrust suits.
“[The study] found that forcing homebuyers to pay real estate agents directly out of pocket would harm consumers and the U.S. economy,” Williams said.
“Such a change would also require buyers to produce additional funds at closing and/or increase the size of the mortgage — as prices and interest rates are already squeezing buyers — increasing existing racial and economic homeownership disparities, particularly among Black, Hispanic/Latino, first-time, and low- and middle-income buyers.”
Editor’s note: This story has been updated with comments from NAR.