Settlement Could Lower Cost of Buying a Home

Deal could boost competition and reduce real estate commissions

Based on the research of John Hatfield and Richard Lowery

Since the National Association of Realtors (NAR) agreed in March to pay $418 million to settle an antitrust lawsuit, researchers at Texas McCombs see potential to curb artificially high real estate commissions.

The class-action suit is one of several claiming that real estate agents have conspired to inflate commissions. Typically paid by sellers, commissions average around 6% and usually get split between buyers’ and sellers’ agents.

The settlement would prevent including information about commissions on multiple-listing services (MLSs), the databases on which homes are posted for sale. That might lead to lower commissions and give consumers some needed relief.

In a new study, John Hatfield, professor of finance, and Richard Lowery, associate professor of finance, examined the common commission-sharing model. Supporting the allegations in the lawsuit, they found it can keep commissions high by promoting collusion among agents.

How Commissions Get Inflated

U.S. real estate commissions are higher than in many other countries, Hatfield reports. They have remained around the same level for three decades, even as the costs of comparable transactions have decreased.

“There is little evidence that the 6% fee represents the true cost of facilitating a real estate transaction,” Hatfield says.

From the standpoint of economic theory, that’s a puzzle. The market for real estate brokers is not concentrated, which means that competition should drive down agency fees — helping out home buyers, when prices are at all-time highs.

Why hasn’t it? In Hatfield and Lowery’s model, developed with Scott Kominers of the Harvard Business School, the researchers find that shared knowledge of prices can breed collusion. When one broker tries to undercut agreed-on commission rates, other brokers can refuse to do business with them.   

“If you do not offer the customary 3% to buyer agents, then buyer agents will steer their clients away from you, your house will take longer to sell, and it is less likely to sell at all in 180 days,” Hatfield says.

Other research by Hatfield has found real-world evidence of steering. He found properties with lower commissions were 5% less likely to sell and took 12% longer to sell.

What the Settlement Does and Does Not Do

Hatfield notes that the settlement does not directly limit commissions. Instead, it prohibits sellers from listing buyers’ agent commissions on MLS databases. Sellers’ agents can still communicate about them, and split them with buyers’ agents, outside of the MLS.

Such communication might bring commissions down, Lowery says. “Our analysis suggests that having buyers and their agents negotiate fees directly, instead of having the fees paid to the buyer agent by the seller, can indeed lower overall costs for real estate transactions.

“But details matter, and the exact nature of the settlement and how it is interpreted will play a large role in determining whether this actually comes to pass.”

Hatfield suggests that buyers get involved in negotiating their agents’ commissions. “It seems that buyers in general don’t understand how their buyer agents are paid,” he says.

“Maybe, if more people understood this, they would know they can negotiate with their buyer agent for part of the commission the seller pays to the seller agent, in a way that would give them a better deal and also eliminate steering by their buyer agent.”

Lowery hopes the NAR settlement is just a first step and will lead to further reforms. “Many of the old practices and difficulties seem to exist to serve the interests of intermediaries rather than consumers,” he says. “The real estate market seems ripe for modernization.”

“Collusion in Brokered Markets” is published in The Journal of Finance.

Story by Suzi Morales