Thats ok, they all knew they were in a bubble and so saved for a rainy day. After all, every 7 to 10 years, its the same thing in California..... and realtors have a great historical memory...
Lemme get this straight: At the peak of the bubble, almost 1% of GDP was going to brokers' commissions? And an additional fraction to appraisers, mortgage brokers, lawyers and escrow agents? Holy cow, I always knew that R.E. had high transaction costs, but when you're hitting 1% of GDP, that's a pretty huge drag on growth. Oh wait, this just in... economists say that no matter what service you're paying for, as long as you get what you pay for, it's all good!
Still, I'd love to know what fraction of GDP stockbrokers collected, just to compare...
The BEA data on brokerage commissions is only a rough approximation. It makes an assumption about the commission rate (e.g., 6%) and applies that to total sales volume in dollars.
That's wrong for two reasons. First, the average commission rate is likely less than 6%. RealTrends, an industry analysis company, reported average commission rates of just north of 5% over the past few years. While RealTrends is also biased (downward for reasons I won't go into), it's probably closer to the truth than just assuming 6%. Second, not all transactions are broker assisted. NAR reports that about 88% of total transactions were broker assisted.
The right formula is: commission rate * total sales volume * percent of broker assisted transactions.
Nevertheless, using the above info, in 2005, broker commissions were around $96B -- still almost 1% of GDP.
"Our economy is fundamentally sound" - brought to you by hank and dubya. It's obvious from the charts and the CDS market and IB behavior on wall st just how sound our economy is. Ponzinomics.
Ralph Cramdown, yes, at the peak of the bubble - in Q3 2005 - broker's commissions were running at about $116 billion annual rate, and GDP was $12.5 trillion (annual rate). That is almost 1% of GDP!
get sum, I couldn't find that in the notes at the BEA. As I noted, commissions weren't 6% at the peak of the bubble (at least not in the bubble areas), so if the BEA used 6%, that is an overestimate.
Could you direct me to the BEA note that says this is how they come up with that estimate? Thanks.
If former Senator Phil Gramm was a lobbyist for the realtor groups instead of UBS this would have never happened. Gramm is one of the architects of the Gramm-Leach-Bliley law that repealed the last pieces of Glass-Steagall. He is from Texas of course.
It will be interesting to see what services Brokers will provide at a 1-2% commission rate when fees are split 50-50 between listing broker and selling Broker.Anyone think this might affect advertising?
CR - There is no note from BEA. I learned this from calling them and speaking directly with the person at BEA responsible for the calculation. My understanding from the call is that they currently use 6% and have been for a while, but that assumption is updated from time to time.
I would also note that the empirical literature shows some evidence -- which is certainly supported by anecdotes -- that commission rates are counter-cyclical with sales prices but commission dollars are not. In other words, commission rates adjust, but not enough to offset higher commission dollars in an up market. In the current bust, commission rates will likely go up, but sales prices will drop even more so that commission dollars per transaction will drop.
It is an ongoing puzzle in the econ community as to why commission rates are not more flexible -- especially in a market where entry is seemingly quite easy (e.g., all you need is a license).
In any case, one hope is that more competition from Internet based brokers will help lower commissions. The recent settlement with NAR should help these Internet based brokers thrive.
Tom Stone -- Part of the idea of more broker competition and innovation is that the bundle of services offered by traditional brokers will be broken up. Internet based brokers charge lower commissions b/c they provide a platform on which home buyers can do more of the work on their own (e.g., search for houses). Since the broker does less, they'll willing to charge less. This is not unlike online stock brokers or airfare websites. A lot of consumers would be happy to have brokers do nothing more than help them through the settlement, but they'd rather not pay 6% for that service alone.
Obviously some agents are worth the high commission because they exert good "client control" and have access to other good realtors and their clients. But the other 90% are all interchangeable.
Gramm is one of the architects of the Gramm-Leach-Bliley law that repealed the last pieces of Glass-Steagall. ~ FFDIC
Even better yet. Back in April, Terry Gross had Prof. Michael Greenberger on her show (he directed the Division of Trading and Markets from 1997-99) to explain the credit market fiasco, and on Gramms role in deregulating derivatives:
GROSS: And there's no regulation?
Prof. GREENBERGER: There is no regulation. In fact, when I was in the government, we argued very strenuously that these kinds of hidden bets could be very disruptive to the financial system, and they played as important a role as securities and bonds did,which are regulated. We wanted them to be regulated. That was a battle that we lost out on, and essentially, in December 2000 on the floor of the Senate, Phil Gramm, chairman of the Senate Finance Committee,introduced a piece of legislation that completely deregulated these markets, not only at the federal level but, for the most part, at the state level. So they are completely outside the law, so to speak.
GROSS: And what was this legislation?
Prof. GREENBERGER: It was called the Commodity Futures Modernization Act. It was a 262-page bill, and it was added as a rider to an 11,000-page omnibus appropriation bill as Congress was recessing for Christmas in 2000. I would say there was no one, except the drafters of the bill, who understood what it did, and I can assure you that the drafters of the bill were not members of Congress. They were the lawyers for the investment banks on Wall Street. They convinced Senator Gramm to introduce this, they freed the system from any regulation, and we've been embarking on financial fiascoes ever since. TypePad
get sum, thanks. Yeah, I've noticed the counter cyclical nature of commissions - and it makes sense to me.
During a boom, agents compete for listings like crazy - it's like printing money - and they offer huge discounts (4.5% was common around here). But during a bust, everyone wants the "best" agent, and are willing to pay the full commission.
Get sum,understood.And a good thing to have a choice among various levels of service and price.But I do think this kind of competition will affect newspaper ad revenue.Real Estate ads are a huge source of ad revenue for my local paper,which is totally unrelated to the fact that the monthly real estate report is written by coldwell banker...I work in the real estate industry and would like to see a lot more transparency.Many people in the industry are disgusted with the NAR and CAR and would like to see their stranglehold broken.Where I am in CA you can not get access to the MLS unless you join NAR and CAR,this policy is explicitly to keep unethical people out of the field.mmmmm,further comment by me would be intemperate.
how much seasonality is in the 1Q2008 drop in the annual run rate from 109 to 72? If it is not seasonally adjusted and, and if the run rate stays down for a couple of years, the current business model is toast, anti-trust settlement or not. No one survives that kind of revenue decline, if its semi-permanent, by simple belt tightening and headcount reductions.
I do work at FreedomWorks, a taxpayer advocacy group...we are running a campaign at AngryRenter.com against the housing bailout, you should check it out. We also oppose the Fed's expansion into non-bank lending and we'd like to see the GSEs privatized...and the ratings agencies while we're at it.
On Gramm and GLB-- a lot of the crisis stems from crappy regulatory and monetary policy that shields financial actors from accountability. The problem isn't GLB reform per se, its that the Fed is politicized and isn't allowing investment banks and hedge funds to fail. Even the Fed's interest rate easing this year is a political bailout of ARM holders and their lenders...we're monetizing their losing positions and the whole country is paying for it.
The roots of the current crisis started when Greenspan orchestrated the rescue of LTCM in 1998...before GLB passed.
Anyway, I'm personally interested in these issues as well as professionally -- my comments are my own, and I do rent!
In order to predict the future direction of american society (and I'd say this would be a 50 or so year prediction, maybe more), all you need to know is that under the guise of 'free markets'...
starting in about 1990 we began to ship engineering jobs, manufacturing jobs, analysts job, tech support jobs, and I am told now even lawyer jobs to India, while tenaciously (apparently) preserving real estate sales jobs, and being the employer of first resort for 'business men' throughout the world (hi Pandit).
We will shortly be a nation of beauticians and salesman, and then can get first hand evidence for just how important "sales" was to the transformation of human society from 1800-2000.
The reality is that 'free market capitalism' is failing in an astonishingly rapid flameout. And the reason is because it concentrates power in the hands of ... idiots.
Internet Disintermediation...
First they came for the travel agents, and I didn't speak up because I wasn't a travel agent.
Then they came for the antique dealers, and I didn't speak up because I wasn't an antique dealer.
Then they came for the real estate agents, and I didn't speak up because I wasn't a real estate agent.
Then they came for the Librarians and I didn't speak.... HEY I WORK IN A LIBRARY. Wait!
Jim A: I don't know if you can compare. Agents need to have more than access to the MLS database. They access most houses via a lockbox systems and electronic keys that feed to a database. If you are selling your house on a lockbox at the end of the day you know everyone who has been in your house.
Can you imagine taking time off work to show your house. FISBO's often give up for this reason.
Kudos CR! Your ability to graphically display the economic ramifications of the housing meltdown are unmatched!
Reduced commissions is yet another loss of income and perhaps another nail in the coffin.
I am afraid that the next step needed to keep our economy afloat is for Europe to lower their interest rates so that the rest of the world contributes in pulling us out of this quagmire. Not very hopeful - it is more likely that pigs will fly first.
When we sold our house in 2003 the agent wanted 6%. I said thanks but no thanks - they said 5% - I asked for 4 and settled on 4.5%. Next go round I'll go flat fee.
My wife is a practicing realtor in california. I also have license because it was so easy to get. but I don't practice as I have a regular job. So I have some real information on how much a typical realtor gets and for how much work.
My wife used to work for a company in business admin unit where she earned around upwards of 65K a year with health insurance, 401K plan with 25 cents for a dollar matching (around 4K a year) from her employer, vacations and some other benefits. She got laid off in 2001 and at the same time my job was also in danger as company was downsizing and outsourcing so we decided we need atleast one of our jobs in a different field.
Now. she proved to very good in the new job and have topped the office in gross commissions many quarters in the last 6 years of practice, meaning she is doing much better than most realtors (90) in her office, only 3-4 realtors out of 90 have done better than her in last 5 years with 1 or 2 doing very high end deals and earning upwards of 250K. On the other hand there are atleast 50 realtors in the office who are either part timers, or did very poorly making 1 to 3 deals a year. and that includes some boom years of last 5 years. ones who came in depending solely on this income obviously left after 6 months to be part timers, or totally left the field only to filled in by new reatltors with same fate to be.
She works full time, we don't have any kids so she has lot of time spend on her farming the client areas, cost effective advertising, going to meetings, showing homes, broker tours, helping clients stage their homes etc. She has averaged around 10-11 homes from 2002 to 2006 with very bad last year and this year mking her 5 year total transaction to be If you average her commissions over the last 5 years it is gross around 140K out of which following expenses she has to pay:
30% brokers split and franchise fees (many agents pay as much as 50% in broker split)
her car payment, insurance
gas cost: drives around 15K miles for work
she has health insurance from my job so no worry there.
she saves about 2K to 10K in sepIRA (much less than what she would have done in a job)
business insurance 1.5K to 2K
MLS fees,other services: 2K
home staging/fliers/home advertising: 5K a year
printing, cell phone, internet, laptop, entertaining clients and many other minor costs that add up to matter a lot.
I have made spreadsheets in the past prorating her expense per transaction (assuming 8 transactions a year) and found that after paying income tax, self employed tax and all other costs above she pockets about 1/3 of the gross commission she gets averageg on last 6 years.
A typical home in our area she sells is $700K x 8 =$5.6 million.
She has more than 50% listing amongst her sales.
Commission averages around 2.5% (her 2 current listing is 1.5% and 1.75% for her)
Gross commision : 140K
Broker split: 1/3
expenses: 1/4 to 1/3
take home: little upward of 1/3rd
I work as engineer in an industry that requires lot of time at job. She does have some free times during the week days but overall for the week she spends about 10 hours or so more than I do on my job.
I agree total sales commission is lot but too many pies to be divided into. Secondly, as home prices went up to triple in a decade, commissions went down and number of agents in Claifornia also tripled meaning an average agent actually makes less gross commission than he did 10 years ago. Now many are leaving the business so full timers who can bear the pain of down years like my wife can stick around and do better. Although she had thought about going back to job since last year. Per my calculations, totalling for last 6 years, she would have had slightly better total compensation from the regular job than she did now.
To be honest, when I read couple of books to take the license I got the impression that if one follows the book in practice, this could be a very ethical business. few agents have built their business around that but many others are just desperate to close the next deal and win the next client so much that they forget the "service" and "agency" part of the business.
My impressions is that like any other marketing (so much money spent on it) in other fields, the whole emphasis is to win the client, have him on your side of the transaction rather than you being on his side. That is very detrimental to the clients. Some clients run agent to agent to find the least commission or biggest money back...at the end it becomes a game of how the commission is going to split between all the parties...frankly a client who wants half of the commission back to himself loses the agent to be on his side. with above commisison split scenario, I can't believe how an agent can serve such a client after giving 1/3 or half of his commission in cash to him. I have often seen buyers spending more time negotiating with their agents than with the seller to save money.
Few years ago, I thought with the help of internet, real estate agency may be out of business alltogether. but my experience tells me now that is impossible. unless government makes selling home as easy as buying a TV from Best Buy...if that happens, more fraud will happen in this business than we see now. We have a tendecy to blame the first person in the line fo fire..which is the agent...e.g. we blame the gas station operators to hike up the gasoline prices when truth is for from it. Majority of the gas station opertators in america are under deep shit since the gasoline started going up. Master card and Visa card make more in commission per gallon of gas sold than the gas station owner does.
Sorry about the long post. I am open to any new insights from you guys.
It is an ongoing puzzle in the econ community as to why commission rates are not more flexible
Really? Maybe I should be an economist! First, you've got a buying broker and a selling broker. Nobody is in any position to exert downward pressure on what the buyer's broker gets paid -- if 2.5% is customary in your market, offering 2% is just putting a big sign on your MLS listing saying "sell somebody else's house!" The vendor is probably under the misapprehension that the vendor's agent does most of the work, so he's thinking that paying his agent much less than the buyer's agent is going to be a disincentive, plus offering 1/6th less commission is offering HIS agent 1/3 less commission, since the buyer's agent's can't really be changed.
And of course, many places have legislation outlawing commission structures offering real incentives ("1% of anything up to $300k and 10% of anything over that").
The only way to lower then is to double-end, but everybody knows it takes two agents to fleece a -- er -- sell a house.
When 1% of a country's total production is real estate commissions, you know something is seriously f'ed up. This is complete deadweight loss in an economy - its as if 1% of our GDP was fixing broken windows.
Case-Shiller overstated the price increase in recent years
It seems stupid for the NAR to have overstated the price increase during the bubble. That might stoke the bubble in the short-term, but in the long-run it hurts them when people compare today's prices to their bogus numbers. It causes them to lose all credibility.
A rational NAR would tell the truth to keep sales stable because a drop in sales hurts them worse than price fluctuations.
It will be interesting to see what services Brokers will provide at a 1-2% commission rate when fees are split 50-50 between listing broker and selling Broker.Anyone think this might affect advertising?
It always seemed to me like the seller should pay for advertising. The realtors should get paid for selling. Having the fee cover advertising needlessly complicates things.
lucylu: sellers agents don't do that. At best, they have their secretary give out the number to anyone claiming to be an agent.
When we sold our house, the agent took a few pictures (they were crappy, so we took our own and sent them to him to replace in the mls listing, which he never did). He brought one couple through. 7 other Buyer's agents brought 10 couples through (my wife had to remove the dogs from the house, so she stayed within eyesight). Surprise surprise, the buyer was from one of the other agents. Other than entereing us for the MLS, he did no other advertising. At 5% he "earned" a part of $9500 depending on how much he gave the buyer's agent. Likely total work of 10 hours is a high estimate.
They Buyer's agents who ferry the people around to look at all of the houses, and spend time trying to get in contact with other agents to get the combo to the lockbox, etc do some work. Our agent did about 20 hours of work for probably about the same amount of work.
Half the hourly rate of our selling agent, but assuming 950050%(to seller)50%(to franchise) still yields over $100/hour for administrative/taxi work. We'd all be better dropping the commision and going to flat/hourly fees that they could vary by reputation.
The loss of the mls monopoly is going to hurt the NAR, and I can only grin.
I'll start feeling bad when there's virtual agents via phone from India (like the virtual personal assistant services); that's the next step.
We are running a campaign at AngryRenter.com against the housing bailout
From a PR standpoint, I think the campaign should be called HappyRenter.com. The name Happy Renter underscores that people are renters, homedebtors, home owners, or landlords by choice. People are free to change from one to another category according to what makes them happy. Homedebtors got to be debtors by choice, not by being born with a disability.
I believe in the government spending money to help the needy. It blows my mind to think some of that money is going to help people in $400,000 homes and the people who lent them the money. I'm not angry, though, because it will be a tiny fraction of gov't spending and it won't be enough to make up for people's stupidity.
So I have some real information on how much a typical realtor gets and for how much work.
Thanks for the informative post. I fall into the trap sometimes of thinking of Realtors as the bad guys.
As an engineer too, though, I think the system of trading houses could be tweaked and improved. You're right the pie gets split many ways. I wonder if realtors will respond by braking free from their franchises, separating their commissions from advertising/staging costs, and finding innoviative ways to help people trade houses. I am just an outside observer, but my gut feeling is it shouldn't be so costly to trade houses.
While I haven't read the ruling, reports I have heard make me believe the Justice Department rolled over on this one, i.e., the Realtors "won". The "freedom" to access MLS listings does not extend to advertising-funded internet competition, only commission-based competition.
My conclusion: Realtors were able to stall any action for 4 years, then get a favorable ruling in the waning months of the Bush administration that allows them to continue blocking non-commission-based business model competition.
Still, I'd love to know what fraction of GDP stockbrokers collected, just to compare...<
I've heard figures that wall street extracts about 1/3 of the total returns on capital, trying to get above average returns for customers. That is, if stocks are averaging 6%, the net return after expenses is 4%.
This is part of the standard index fund argument, which is widely available.
what a loooong post.
but you rite lik shite
and yo' fulluvit bro...
all those expenses and IRA's & wotnot - all bleddy tax deduckible, man, YOU know...
and man, if a desidude 'plains about not savin' & not makin' enuf - you know you gotta get to the salt lick, dude...
The professor from Western Michigan University figures commissions will decline by 25% to 50%. Who knows? You can bet that those commission dollars are going to end up in fewer pockets as the big boys move into the market.
My kid brother sold real estate for Zip Realty, the largest online brokerage, and can tell you the model doesn't work well for most of their 2000 agents, who, in return for all the work their buyers can do online, receive less than a 30% split of the selling side commission. Most are starving at this rate, even doing 2 transactions per month. Keep in mind, buyers do not pay any commissions, only sellers, and that 5-6% broker fee is split between listing side and selling side. Nevertheless, the Internet is quickly eclipsing newspaper ads as the prime vehicle for marketing homes, and the papers will suffer tremendously as a result.
In LA it's (was) pretty common to pay 5% or even slightly less during the boom. Now that the bust ins in full swing though, it seem like most of the rates have moved back up to 6%. During the boom seller agent would keep 3% as the listing was more valuable and the buying agent would get the scraps. Now it's the reverse as somebody actually representing a buyer is in the power position as everybody wants to sell.
we are about to list a property in california to sell for a couple million. (i know, poor us - but we paid a ton for it and have put all of our savings into it for 10 years and it is everything we have to retire on) i cannot stomach paying even 4% when the 2006 median nationwide commission is $11,600. even my broker friends have told me there isn't more work to do on a high end house. as prices have risen out of control throughout the us, why isn't a reasonable flat rate a viable option.
Thats ok, they all knew they were in a bubble and so saved for a rainy day. After all, every 7 to 10 years, its the same thing in California..... and realtors have a great historical memory...
So Sad.
Congress needs to act fast to bail out these poor people.
Lemme get this straight: At the peak of the bubble, almost 1% of GDP was going to brokers' commissions? And an additional fraction to appraisers, mortgage brokers, lawyers and escrow agents? Holy cow, I always knew that R.E. had high transaction costs, but when you're hitting 1% of GDP, that's a pretty huge drag on growth. Oh wait, this just in... economists say that no matter what service you're paying for, as long as you get what you pay for, it's all good!
Still, I'd love to know what fraction of GDP stockbrokers collected, just to compare...
Short the Brokers!
The BEA data on brokerage commissions is only a rough approximation. It makes an assumption about the commission rate (e.g., 6%) and applies that to total sales volume in dollars.
That's wrong for two reasons. First, the average commission rate is likely less than 6%. RealTrends, an industry analysis company, reported average commission rates of just north of 5% over the past few years. While RealTrends is also biased (downward for reasons I won't go into), it's probably closer to the truth than just assuming 6%. Second, not all transactions are broker assisted. NAR reports that about 88% of total transactions were broker assisted.
The right formula is: commission rate * total sales volume * percent of broker assisted transactions.
Nevertheless, using the above info, in 2005, broker commissions were around $96B -- still almost 1% of GDP.
Another reason to wait to buy a house-- commissions are going to drop!
"Our economy is fundamentally sound" - brought to you by hank and dubya. It's obvious from the charts and the CDS market and IB behavior on wall st just how sound our economy is. Ponzinomics.
Ralph Cramdown, yes, at the peak of the bubble - in Q3 2005 - broker's commissions were running at about $116 billion annual rate, and GDP was $12.5 trillion (annual rate). That is almost 1% of GDP!
Best Wishes.
angry renter.... are you a paid poster?
get sum, I couldn't find that in the notes at the BEA. As I noted, commissions weren't 6% at the peak of the bubble (at least not in the bubble areas), so if the BEA used 6%, that is an overestimate.
Could you direct me to the BEA note that says this is how they come up with that estimate? Thanks.
Best Wishes.
From a UK perspective, a 6% broker commission for selling your house is a massively-overpriced joke; that's 2-4 times the prevailing rate here.
Why is the US so expensive in this respect?
One of the best things about the housing bust is seeing these realtor leeches turned out and having to get an honest job.
If former Senator Phil Gramm was a lobbyist for the realtor groups instead of UBS this would have never happened. Gramm is one of the architects of the Gramm-Leach-Bliley law that repealed the last pieces of Glass-Steagall. He is from Texas of course.
It will be interesting to see what services Brokers will provide at a 1-2% commission rate when fees are split 50-50 between listing broker and selling Broker.Anyone think this might affect advertising?
Couldn't have happened to a nicer set of people. For shame.
Why is the US so expensive in this respect? ~ dan
Because in the U.S., we put a high value on the appearance of Free Markets!
But what we value even more are Lobbyists. In fact, they run our country.
CR - There is no note from BEA. I learned this from calling them and speaking directly with the person at BEA responsible for the calculation. My understanding from the call is that they currently use 6% and have been for a while, but that assumption is updated from time to time.
I would also note that the empirical literature shows some evidence -- which is certainly supported by anecdotes -- that commission rates are counter-cyclical with sales prices but commission dollars are not. In other words, commission rates adjust, but not enough to offset higher commission dollars in an up market. In the current bust, commission rates will likely go up, but sales prices will drop even more so that commission dollars per transaction will drop.
It is an ongoing puzzle in the econ community as to why commission rates are not more flexible -- especially in a market where entry is seemingly quite easy (e.g., all you need is a license).
In any case, one hope is that more competition from Internet based brokers will help lower commissions. The recent settlement with NAR should help these Internet based brokers thrive.
Tom Stone -- Part of the idea of more broker competition and innovation is that the bundle of services offered by traditional brokers will be broken up. Internet based brokers charge lower commissions b/c they provide a platform on which home buyers can do more of the work on their own (e.g., search for houses). Since the broker does less, they'll willing to charge less. This is not unlike online stock brokers or airfare websites. A lot of consumers would be happy to have brokers do nothing more than help them through the settlement, but they'd rather not pay 6% for that service alone.
Phil Gramm is a tumorous growth indicative of the sickness of our system.
The good news is, he is also conspicuously attached to John McCain and will have to be excised in a very public manner.
Take it, barely, take it!
Why is the US so expensive in this respect?
Because it can be?
Soaring volume in response to increased prices is some peoples definition of a (single) bubble.
Obviously some agents are worth the high commission because they exert good "client control" and have access to other good realtors and their clients. But the other 90% are all interchangeable.
Gramm is one of the architects of the Gramm-Leach-Bliley law that repealed the last pieces of Glass-Steagall. ~ FFDIC
Even better yet. Back in April, Terry Gross had Prof. Michael Greenberger on her show (he directed the Division of Trading and Markets from 1997-99) to explain the credit market fiasco, and on Gramms role in deregulating derivatives:
GROSS: And there's no regulation?
Prof. GREENBERGER: There is no regulation. In fact, when I was in the government, we argued very strenuously that these kinds of hidden bets could be very disruptive to the financial system, and they played as important a role as securities and bonds did,which are regulated. We wanted them to be regulated. That was a battle that we lost out on, and essentially, in December 2000 on the floor of the Senate, Phil Gramm, chairman of the Senate Finance Committee,introduced a piece of legislation that completely deregulated these markets, not only at the federal level but, for the most part, at the state level. So they are completely outside the law, so to speak.
GROSS: And what was this legislation?
Prof. GREENBERGER: It was called the Commodity Futures Modernization Act. It was a 262-page bill, and it was added as a rider to an 11,000-page omnibus appropriation bill as Congress was recessing for Christmas in 2000. I would say there was no one, except the drafters of the bill, who understood what it did, and I can assure you that the drafters of the bill were not members of Congress. They were the lawyers for the investment banks on Wall Street. They convinced Senator Gramm to introduce this, they freed the system from any regulation, and we've been embarking on financial fiascoes ever since.
TypePad
get sum, thanks. Yeah, I've noticed the counter cyclical nature of commissions - and it makes sense to me.
During a boom, agents compete for listings like crazy - it's like printing money - and they offer huge discounts (4.5% was common around here). But during a bust, everyone wants the "best" agent, and are willing to pay the full commission.
Thanks again!
Get sum,understood.And a good thing to have a choice among various levels of service and price.But I do think this kind of competition will affect newspaper ad revenue.Real Estate ads are a huge source of ad revenue for my local paper,which is totally unrelated to the fact that the monthly real estate report is written by coldwell banker...I work in the real estate industry and would like to see a lot more transparency.Many people in the industry are disgusted with the NAR and CAR and would like to see their stranglehold broken.Where I am in CA you can not get access to the MLS unless you join NAR and CAR,this policy is explicitly to keep unethical people out of the field.mmmmm,further comment by me would be intemperate.
how much seasonality is in the 1Q2008 drop in the annual run rate from 109 to 72? If it is not seasonally adjusted and, and if the run rate stays down for a couple of years, the current business model is toast, anti-trust settlement or not. No one survives that kind of revenue decline, if its semi-permanent, by simple belt tightening and headcount reductions.
Personally, I'm glad to see this.
askin writes:
angry renter.... are you a paid poster?
Maybe it's Dick Armey himself!
Hi askin, no, I'm just procrastinating.
I do work at FreedomWorks, a taxpayer advocacy group...we are running a campaign at AngryRenter.com against the housing bailout, you should check it out. We also oppose the Fed's expansion into non-bank lending and we'd like to see the GSEs privatized...and the ratings agencies while we're at it.
On Gramm and GLB-- a lot of the crisis stems from crappy regulatory and monetary policy that shields financial actors from accountability. The problem isn't GLB reform per se, its that the Fed is politicized and isn't allowing investment banks and hedge funds to fail. Even the Fed's interest rate easing this year is a political bailout of ARM holders and their lenders...we're monetizing their losing positions and the whole country is paying for it.
The roots of the current crisis started when Greenspan orchestrated the rescue of LTCM in 1998...before GLB passed.
Anyway, I'm personally interested in these issues as well as professionally -- my comments are my own, and I do rent!
The RE agents should look at the travel agents and be very afraid about now.
In order to predict the future direction of american society (and I'd say this would be a 50 or so year prediction, maybe more), all you need to know is that under the guise of 'free markets'...
starting in about 1990 we began to ship engineering jobs, manufacturing jobs, analysts job, tech support jobs, and I am told now even lawyer jobs to India, while tenaciously (apparently) preserving real estate sales jobs, and being the employer of first resort for 'business men' throughout the world (hi Pandit).
We will shortly be a nation of beauticians and salesman, and then can get first hand evidence for just how important "sales" was to the transformation of human society from 1800-2000.
The reality is that 'free market capitalism' is failing in an astonishingly rapid flameout. And the reason is because it concentrates power in the hands of ... idiots.
Internet Disintermediation...
First they came for the travel agents, and I didn't speak up because I wasn't a travel agent.
Then they came for the antique dealers, and I didn't speak up because I wasn't an antique dealer.
Then they came for the real estate agents, and I didn't speak up because I wasn't a real estate agent.
Then they came for the Librarians and I didn't speak.... HEY I WORK IN A LIBRARY. Wait!
Jim A: I don't know if you can compare. Agents need to have more than access to the MLS database. They access most houses via a lockbox systems and electronic keys that feed to a database. If you are selling your house on a lockbox at the end of the day you know everyone who has been in your house.
Can you imagine taking time off work to show your house. FISBO's often give up for this reason.
Kudos CR! Your ability to graphically display the economic ramifications of the housing meltdown are unmatched!
Reduced commissions is yet another loss of income and perhaps another nail in the coffin.
I am afraid that the next step needed to keep our economy afloat is for Europe to lower their interest rates so that the rest of the world contributes in pulling us out of this quagmire. Not very hopeful - it is more likely that pigs will fly first.
When we sold our house in 2003 the agent wanted 6%. I said thanks but no thanks - they said 5% - I asked for 4 and settled on 4.5%. Next go round I'll go flat fee.
My wife is a practicing realtor in california. I also have license because it was so easy to get. but I don't practice as I have a regular job. So I have some real information on how much a typical realtor gets and for how much work.
My wife used to work for a company in business admin unit where she earned around upwards of 65K a year with health insurance, 401K plan with 25 cents for a dollar matching (around 4K a year) from her employer, vacations and some other benefits. She got laid off in 2001 and at the same time my job was also in danger as company was downsizing and outsourcing so we decided we need atleast one of our jobs in a different field.
Now. she proved to very good in the new job and have topped the office in gross commissions many quarters in the last 6 years of practice, meaning she is doing much better than most realtors (90) in her office, only 3-4 realtors out of 90 have done better than her in last 5 years with 1 or 2 doing very high end deals and earning upwards of 250K. On the other hand there are atleast 50 realtors in the office who are either part timers, or did very poorly making 1 to 3 deals a year. and that includes some boom years of last 5 years. ones who came in depending solely on this income obviously left after 6 months to be part timers, or totally left the field only to filled in by new reatltors with same fate to be.
She works full time, we don't have any kids so she has lot of time spend on her farming the client areas, cost effective advertising, going to meetings, showing homes, broker tours, helping clients stage their homes etc. She has averaged around 10-11 homes from 2002 to 2006 with very bad last year and this year mking her 5 year total transaction to be If you average her commissions over the last 5 years it is gross around 140K out of which following expenses she has to pay:
30% brokers split and franchise fees (many agents pay as much as 50% in broker split)
her car payment, insurance
gas cost: drives around 15K miles for work
she has health insurance from my job so no worry there.
she saves about 2K to 10K in sepIRA (much less than what she would have done in a job)
business insurance 1.5K to 2K
MLS fees,other services: 2K
home staging/fliers/home advertising: 5K a year
printing, cell phone, internet, laptop, entertaining clients and many other minor costs that add up to matter a lot.
I have made spreadsheets in the past prorating her expense per transaction (assuming 8 transactions a year) and found that after paying income tax, self employed tax and all other costs above she pockets about 1/3 of the gross commission she gets averageg on last 6 years.
A typical home in our area she sells is $700K x 8 =$5.6 million.
She has more than 50% listing amongst her sales.
Commission averages around 2.5% (her 2 current listing is 1.5% and 1.75% for her)
Gross commision : 140K
Broker split: 1/3
expenses: 1/4 to 1/3
take home: little upward of 1/3rd
I work as engineer in an industry that requires lot of time at job. She does have some free times during the week days but overall for the week she spends about 10 hours or so more than I do on my job.
I agree total sales commission is lot but too many pies to be divided into. Secondly, as home prices went up to triple in a decade, commissions went down and number of agents in Claifornia also tripled meaning an average agent actually makes less gross commission than he did 10 years ago. Now many are leaving the business so full timers who can bear the pain of down years like my wife can stick around and do better. Although she had thought about going back to job since last year. Per my calculations, totalling for last 6 years, she would have had slightly better total compensation from the regular job than she did now.
To be honest, when I read couple of books to take the license I got the impression that if one follows the book in practice, this could be a very ethical business. few agents have built their business around that but many others are just desperate to close the next deal and win the next client so much that they forget the "service" and "agency" part of the business.
My impressions is that like any other marketing (so much money spent on it) in other fields, the whole emphasis is to win the client, have him on your side of the transaction rather than you being on his side. That is very detrimental to the clients. Some clients run agent to agent to find the least commission or biggest money back...at the end it becomes a game of how the commission is going to split between all the parties...frankly a client who wants half of the commission back to himself loses the agent to be on his side. with above commisison split scenario, I can't believe how an agent can serve such a client after giving 1/3 or half of his commission in cash to him. I have often seen buyers spending more time negotiating with their agents than with the seller to save money.
Few years ago, I thought with the help of internet, real estate agency may be out of business alltogether. but my experience tells me now that is impossible. unless government makes selling home as easy as buying a TV from Best Buy...if that happens, more fraud will happen in this business than we see now. We have a tendecy to blame the first person in the line fo fire..which is the agent...e.g. we blame the gas station operators to hike up the gasoline prices when truth is for from it. Majority of the gas station opertators in america are under deep shit since the gasoline started going up. Master card and Visa card make more in commission per gallon of gas sold than the gas station owner does.
Sorry about the long post. I am open to any new insights from you guys.
It is an ongoing puzzle in the econ community as to why commission rates are not more flexible
Really? Maybe I should be an economist! First, you've got a buying broker and a selling broker. Nobody is in any position to exert downward pressure on what the buyer's broker gets paid -- if 2.5% is customary in your market, offering 2% is just putting a big sign on your MLS listing saying "sell somebody else's house!" The vendor is probably under the misapprehension that the vendor's agent does most of the work, so he's thinking that paying his agent much less than the buyer's agent is going to be a disincentive, plus offering 1/6th less commission is offering HIS agent 1/3 less commission, since the buyer's agent's can't really be changed.
And of course, many places have legislation outlawing commission structures offering real incentives ("1% of anything up to $300k and 10% of anything over that").
The only way to lower then is to double-end, but everybody knows it takes two agents to fleece a -- er -- sell a house.
When 1% of a country's total production is real estate commissions, you know something is seriously f'ed up. This is complete deadweight loss in an economy - its as if 1% of our GDP was fixing broken windows.
Case-Shiller overstated the price increase in recent years
It seems stupid for the NAR to have overstated the price increase during the bubble. That might stoke the bubble in the short-term, but in the long-run it hurts them when people compare today's prices to their bogus numbers. It causes them to lose all credibility.
A rational NAR would tell the truth to keep sales stable because a drop in sales hurts them worse than price fluctuations.
It will be interesting to see what services Brokers will provide at a 1-2% commission rate when fees are split 50-50 between listing broker and selling Broker.Anyone think this might affect advertising?
It always seemed to me like the seller should pay for advertising. The realtors should get paid for selling. Having the fee cover advertising needlessly complicates things.
lucylu: sellers agents don't do that. At best, they have their secretary give out the number to anyone claiming to be an agent.
When we sold our house, the agent took a few pictures (they were crappy, so we took our own and sent them to him to replace in the mls listing, which he never did). He brought one couple through. 7 other Buyer's agents brought 10 couples through (my wife had to remove the dogs from the house, so she stayed within eyesight). Surprise surprise, the buyer was from one of the other agents. Other than entereing us for the MLS, he did no other advertising. At 5% he "earned" a part of $9500 depending on how much he gave the buyer's agent. Likely total work of 10 hours is a high estimate.
They Buyer's agents who ferry the people around to look at all of the houses, and spend time trying to get in contact with other agents to get the combo to the lockbox, etc do some work. Our agent did about 20 hours of work for probably about the same amount of work.
Half the hourly rate of our selling agent, but assuming 950050%(to seller)50%(to franchise) still yields over $100/hour for administrative/taxi work. We'd all be better dropping the commision and going to flat/hourly fees that they could vary by reputation.
The loss of the mls monopoly is going to hurt the NAR, and I can only grin.
I'll start feeling bad when there's virtual agents via phone from India (like the virtual personal assistant services); that's the next step.
We are running a campaign at AngryRenter.com against the housing bailout
From a PR standpoint, I think the campaign should be called HappyRenter.com. The name Happy Renter underscores that people are renters, homedebtors, home owners, or landlords by choice. People are free to change from one to another category according to what makes them happy. Homedebtors got to be debtors by choice, not by being born with a disability.
I believe in the government spending money to help the needy. It blows my mind to think some of that money is going to help people in $400,000 homes and the people who lent them the money. I'm not angry, though, because it will be a tiny fraction of gov't spending and it won't be enough to make up for people's stupidity.
economists say that no matter what service you're paying for, as long as you get what you pay for, it's all good!
Uh, no. Economists are well aware of frictions.
AngryRenter.com
This is a Republican astroturf org. The adjective Angry is entirely appropriate.
When 1% of a country's total production is real estate commissions, you know something is seriously f'ed up.
A mere blip compared to the drag of a financial sector that, until recently, was the largest sector in the market.
So I have some real information on how much a typical realtor gets and for how much work.
Thanks for the informative post. I fall into the trap sometimes of thinking of Realtors as the bad guys.
As an engineer too, though, I think the system of trading houses could be tweaked and improved. You're right the pie gets split many ways. I wonder if realtors will respond by braking free from their franchises, separating their commissions from advertising/staging costs, and finding innoviative ways to help people trade houses. I am just an outside observer, but my gut feeling is it shouldn't be so costly to trade houses.
While I haven't read the ruling, reports I have heard make me believe the Justice Department rolled over on this one, i.e., the Realtors "won". The "freedom" to access MLS listings does not extend to advertising-funded internet competition, only commission-based competition.
My conclusion: Realtors were able to stall any action for 4 years, then get a favorable ruling in the waning months of the Bush administration that allows them to continue blocking non-commission-based business model competition.
I've heard figures that wall street extracts about 1/3 of the total returns on capital, trying to get above average returns for customers. That is, if stocks are averaging 6%, the net return after expenses is 4%.
This is part of the standard index fund argument, which is widely available.
bantabhai
The professor from Western Michigan University figures commissions will decline by 25% to 50%. Who knows? You can bet that those commission dollars are going to end up in fewer pockets as the big boys move into the market.
I can't say I'm sorry for the realtors, though.
The Fresh Air interview with Michael Greenberger that mojo talks about is here.
Can't afford the Ramen anymore Realwhores?
What scum. I dealt with many realwhores the last several years and not one of them was worth a damn. Trash greedy whores. Did I leave anything out?
LOL!
UK commissions are 1%-2%, confirming Dan above. At a 6% commission rate, realtors spend most of their time trying to drum up listings.
My kid brother sold real estate for Zip Realty, the largest online brokerage, and can tell you the model doesn't work well for most of their 2000 agents, who, in return for all the work their buyers can do online, receive less than a 30% split of the selling side commission. Most are starving at this rate, even doing 2 transactions per month. Keep in mind, buyers do not pay any commissions, only sellers, and that 5-6% broker fee is split between listing side and selling side. Nevertheless, the Internet is quickly eclipsing newspaper ads as the prime vehicle for marketing homes, and the papers will suffer tremendously as a result.
In LA it's (was) pretty common to pay 5% or even slightly less during the boom. Now that the bust ins in full swing though, it seem like most of the rates have moved back up to 6%. During the boom seller agent would keep 3% as the listing was more valuable and the buying agent would get the scraps. Now it's the reverse as somebody actually representing a buyer is in the power position as everybody wants to sell.
All pretty obvious stuff.
we are about to list a property in california to sell for a couple million. (i know, poor us - but we paid a ton for it and have put all of our savings into it for 10 years and it is everything we have to retire on) i cannot stomach paying even 4% when the 2006 median nationwide commission is $11,600. even my broker friends have told me there isn't more work to do on a high end house. as prices have risen out of control throughout the us, why isn't a reasonable flat rate a viable option.