The Consumer Federation of America (CFA) released a new report titled “A Surfeit of Real Estate Agents: Industry and Consumer Impacts,” which delves into the negative consequences of having too many agents vying for a limited pool of home sales.
A Saturated Market:
- Over 1.5 million residential agents, including brokers, compete for just 5 to 6 million annual home sales in the US. This translates to roughly 250–300 agents for every 100 homes sold. Some estimate active agents are even more in the US, over 3,000,000, while inventory is at historical lows, with not much improvement in sight, that could be enough to turn around the market by providing enough homes for sale.
- Economic Inefficiencies: Agents spend excessive time searching and fighting for for clients, leading to wasted resources.
- Low Incomes: Many full-time agents struggle financially due to fierce competition and limited sales.
- Frustration: Both inexperienced agents and their clients face challenges due to lack of expertise.
- Damaged Reputation: The industry’s image suffers due to the presence of underperforming agents.
- High Commission Rates: The abundance of agents reinforces the prevalence of relatively high and uniform commission rates, potentially limiting consumer savings. High commissions also attract more into the industry, with a low barrier of entry.
Real estate commissions are traditionally a percentage of the sale price of a home, typically paid by the seller and split between the buyer’s and seller’s agents. In the United States, the average commission rate is around 5-6%, though it can vary depending on the location, the type of property, and the negotiation skills of the agents involved.
Here are some of the reasons why real estate commissions are so high:
- The cost of living: Real estate agents are like any other business owner, and they need to cover their overhead costs, which include things like office space, marketing, and technology. In many parts of the country, the cost of living is high, which means that agents need to charge higher commissions in order to make a living.Opens in a new windowmeric.mo.govCost of living in the United States
- The complexity of the transaction: Buying and selling a home is a complex process that involves a lot of paperwork, negotiations, and deadlines. Real estate agents are experts in this process, and they can save their clients a lot of time and stress. Their expertise and guidance come at a price, reflected in the commission.Opens in a new windowwww.tops-products.comPaperwork involved in buying and selling a home
- The risk of the job: Real estate agents are paid on commission, which means that they only get paid if they close a deal. This can be a risky proposition, as there is no guarantee that they will make any money in a given month. To compensate for this risk, agents need to charge higher commissions when they do close a deal.
- The perception of value: Many people believe that real estate agents are worth their high commissions because they can help them get a good price on a home. In some cases, this may be true, but it is important to remember that there are also many factors that are out of an agent’s control, such as market conditions and the motivation of the buyer and seller.
Whether or not real estate commissions are too high is a matter of opinion. Some people believe that they are fair compensation for the services that agents provide, while others believe that they are an unnecessary expense. Ultimately, the decision of whether or not to pay a high commission is up to the buyer and seller.
Here are some things to consider when deciding whether or not to pay a high commission:
- The experience of the agent: More experienced agents may be able to command higher commissions, but they may also be able to get you a better price on your home.
- The complexity of the transaction: If your home is in a particularly competitive market or if there are a lot of contingencies involved in the sale, you may be willing to pay a higher commission to get an experienced agent to handle the transaction.
- Your budget: Ultimately, you need to decide how much you are willing to pay in commission. If you are on a tight budget, you may need to negotiate with the agent or consider selling your home yourself.
New Agents, Limited Success:
“A large majority of practicing real estate agents have recently received their license or work part-time,” says Stephen Brobeck, a senior fellow at CFA. “These agents often charge the same commission rates as experienced, full-time agents yet generally offer inferior service and take away clients from established agents.”
The study analyzed home sales in Jacksonville (FL), Minneapolis (MN), and Albuquerque (NM) and found that marginal agents (selling five or fewer homes annually) earn an estimated 25-30% of commission income. Industry data from 2021 paints a concerning picture:
- The median net income for all sales agents is $25,000.
- Sales agents with less than two years of experience have a median net income of just $7,800.
- The median net income for all brokers and associate brokers is $57,100.
Impact on Consumers and Experienced Agents:
The report highlights complaints from experienced, full-time agents regarding the incompetence and lack of dedication of some agents, ultimately harming consumers. Additionally, the “surfeit of agents” creates financial and peer pressure to maintain high commission rates.
“Without 5-6 percent rates, even fewer agents would survive financially in today’s marketplace,” explains Brobeck. “Ironically, relatively high rates attract new entrants into the industry, intensifying competition for clients and reducing individual income for everyone.”
The CFA report raises a crucial question: should the industry prioritize ensuring the competence and commitment of new agents? Potential solutions include stricter entry requirements and mandatory mentoring programs. A future CFA report will delve deeper into these proposed solutions.
A Call for Change:
The current state of the real estate agent landscape necessitates change. With an overabundance of agents chasing a limited number of sales, the industry faces economic inefficiencies, low incomes for many agents, frustrated consumers, and a potential tarnish to its reputation. Addressing these issues through stricter entry requirements, increased emphasis on agent training, and potentially rethinking commission structures could pave the way for a more sustainable and effective real estate market for all stakeholders.
- The report highlights the significant variance in state-level requirements for becoming a real estate agent, ranging from 40 to 180 hours of coursework.
- Despite acknowledging the challenges, many companies continue to actively recruit new agents due to high turnover rates, potential client acquisition through new hires, and fees generated by these agents.
- The outcomes of ongoing lawsuits regarding commission structures could also influence the future appeal of entering the residential real estate field.
It’s crucial to remember that this report sheds light on a complex issue with no easy solutions. However, by raising awareness and fostering open discussions, the CFA’s work can pave the way for a more balanced and efficient real estate industry that benefits both agents and consumers.
Potential solutions can be:
- Stricter Entry Requirements: Raising the bar for obtaining a real estate license could ensure a higher level of competence among new agents. This could involve longer training programs, stricter examinations, and mandatory experience thresholds.
- Continuing Education and Mentoring: Implementing ongoing education requirements and mandatory mentoring programs for new agents could help them hone their skills and navigate the complexities of the market.
- Commission Structure Reform: Exploring alternative commission structures, such as flat fees or tiered rates based on property value, could incentivize agents to focus on providing value and building long-term relationships with clients.
- Industry Regulation and Self-Governance: Strengthening regulatory oversight and promoting ethical practices within the industry could help address issues like misleading advertising and unfair competition.
- Consider the role of technology in potentially displacing some real estate agents in the future. Online platforms and tools may streamline certain aspects of the buying and selling process, reducing the need for human interaction in some cases.
- The impact of these inefficiencies may vary across different geographic regions and market segments. More research is needed to understand the nuances of the issue and tailor solutions to specific contexts.
It has to be said that if any measures are introduced, or change of culture is established, that reduces dramatically the number of real estate agents, we may then have to deal with numbers that are too limited for a healthy competition which is the only way to favor the consumer. Any solution which pushes away too many agents would leave much less choice for home sellers and home buyers, in times where they already have to deal with few homes for sale and few buyers who qualify for financing and therefore are able to purchase.