Are Realtors Having an Existential Crisis?

Their trade organization just lost a huge lawsuit. Their commission model is under attack. And there are way too many of them. If they go the way of travel agents, will we miss them when they’re gone?

This week’s episode of Freakonomics Radio is about an industry that often talks about how competitive it is, but that many economists say lies somewhere between a monopoly and a mafia. It's an industry that most of us interact with rarely, but when you do ... the stakes are high.

I'm talking about residential real estate, and especially the agents who help people buy and sell homes. It’s a profession that attracts hundreds of thousands of new participants every year, and sees just as many wash out. Their trade organization, the National Association of Realtors, just settled an antitrust lawsuit that requires it to pay hundreds of millions of dollars in damages, and change the way Realtors charge their customers.

If you've read Freakonomics, you might remember a research paper that my co-author Steve Levitt published with fellow economist Chad Syverson, which found that real estate agents do not necessarily act in the best interest of their clients. When you are selling a home, they argued, an agent may push you to accept the first decent offer, rather than hold out for a better price. Most agents work on commission, which means they are only paid when there’s a sale. Historically, the commission has been roughly six percent, which is split between the seller’s agent and the buyer’s agent. Each of those agents often kick back half of their half fee to their brokerage. Which means that the seller’s agent earns roughly one-and-a-half percent of the sale — not enough, Syverson and Levitt argued, to help the seller max out.

You may be wondering: Why do real estate agents get paid on a percentage basis in the first place? Why not an hourly rate, like lawyers and accountants and electricians and consultants and — well, like a lot of people? Despite a lot of legal wrangling, those commissions have remained relatively steady for decades. Home prices, meanwhile, have continued to rise; the current median price in the U.S. is around $400,000, double what it was 20 years ago. The same percent commission on a higher price means ... a higher commission. As Syverson puts it in the episode:

There’s nothing really you can look at in the cost of selling a house that would scale up one-for-one with the price of the house. It shouldn’t be twice as expensive to sell a house that costs twice as much.

So does this mean that most Realtors are getting filthy rich? It does not. Their median income is around $45,000, but about a third make less than $20,000. And yet new entrants continue to flood the market.

So why do we have so many real estate agents in this country? Why do we pay them so much whenever we buy or sell a home? And how will that new settlement change things? I hope you enjoy finding out in this week's episode.

You can hear this week’s episode of Freakonomics Radio, “Are Realtors Having an Existential Crisis?”, on Apple Podcasts, Spotify, or wherever you listen to podcasts. A full transcript is available on our website.

---

Also on the Freakonomics Radio Network this week

People I (Mostly) Admire: Why Numbers are Music to Our Ears (Update)

Sarah Hart investigates the mathematical structures underlying musical compositions and literature. Using examples from Monteverdi to Lewis Carroll, Sarah explains to Steve how math affects how we hear music and understand stories.
Apple Podcasts | Spotify | transcript

The Economics of Everyday Things: Hotel Art

A watercolor of a harbor? A black-and-white photo of a pile of rocks? Some hotels are trying to do better. Zachary Crockett unpacks.
Apple Podcasts | Spotify | transcript