High Real Estate Commissions Raise Questions About the Need for Salesperson Licensing

  • November 21, 2023
  • 0
  • 48 Views

Marc Joffe

A jury recently found that the National Association of Realtors and its brokers conspired against home buyers and sellers to artificially raise commissions. While we should be skeptical of government attempts to break up alleged conspiracies in restraint of trade (which include labor unions), it is worth understanding that market conditions were probably not what allowed the real estate brokerage industry to exercise so much market power.

The real culprit, it seems, is licensing. In particular, state governments across the United States have empowered incumbents and restricted new market entrants by requiring real estate brokers and salespeople to obtain licenses.

All states license real estate brokers, while 44 license real estate salespeople. A salesperson must work for a broker, but a broker can work independently. In California, a real estate salesperson must complete three college‐​level courses, pass an exam, and pay $305 in fees to obtain a license. Brokers have to complete eight courses, pass a different exam, and pay $395.

However, individuals are free to sell their homes without an agent. In California, “for sale by owner” transactions accounted for seven percent of home sales in both 2021 and 2022. If unlicensed individuals are capable of selling their own homes, why can they not help sell other people’s homes?

The Wall Street Journal recently reported that US real estate commissions are far higher than those in several European countries. For example, the WSJ found that brokerage commissions averaged 5.5 percent in the US compared to just 1.3 percent in the UK.

International Brokerage Commission Comparison Originally Published in the Wall Street Journal, November 16, 2023

There are a lot of differences between the US and UK markets. One difference is that the UK does not have a licensing requirement for professionals known in Britain as “estate agents.” The regulatory regime for the real estate brokerage industry was put in place by the Estate Agents Act of 1979. The law created a regulatory agency that registers Estate Agents and enforces a requirement that they participate in an approved redress scheme, which adjudicates consumer complaints.

Although UK estate agents make a lot less on each transaction than their US counterparts, they participate in more transactions each year. According to the Wall Street Journal, UK Estate Agents participate in 40–50 sales each year compared to about a dozen for the average US agent.

In 2017, the UK government issued a “Call for Evidence” seeking public input on how to improve the homebuying process. Among the questions respondents were asked to address were whether new regulations were needed, and, if so, which types. Over three‐​quarters of those addressing this question called for more regulation, but only 10 percent favored government licensing of Estate Agents.

This proportion likely overstates public support for licensing since only motivated individuals and firms likely responded to the Call for Evidence. Indeed, as my colleagues Chris Edwards and Scott Lincicome have written with respect to the United States, new calls for occupational licensing restrictions usually come from members of the to‐​be‐​regulated industry at issue.

In the US real estate market, fixed percentage commissions have resulted in a transfer of wealth to the real estate industry over time. Since January 2001, median home prices have increased 153 percent from $169,800 to $431,000. Over the same period, the Consumer Price Index rose only 82 percent.

So, to the extent that commission rates have remained constant, real estate agents and brokers got a significant raise in real dollars. Had the market been more competitive, it is likely that commission rates would have been bid down thereby limiting this wealth transfer.

As policymakers rethink the real estate business in the aftermath of the recent jury decision, they may wish to revisit licensing to ensure that consumers actually benefit.

Leave a Reply

Your email address will not be published. Required fields are marked *