Commissions down $12B in 2008 – NAR takes issue with ForSaleByOwner.com findings

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Full-service real estate agents and brokers collected an estimated $46.6 billion in commissions in 2008, down 8.6 percent from the year before and 34.6 percent from a peak of $71 billion at the height of the housing boom, according to an analysis by ForSaleByOwner.com.

The analysis relied in part on sales and home price data from the National Association of Realtors, which questioned ForSaleByOwner.com’s findings and
its claims that the numbers show declining home values have made real estate commissions “a luxury” that sellers cannot afford.

While few would dispute that total commissions paid to real estate agents have sagged during the downturn in concert with sales and prices, there’s
some disagreement over exactly how much commission revenue has fallen, and why.

ForSaleByOwner.com provides services including advertising and property pricing reports to sellers who choose to represent themselves rather than
list a home with an agent.

The company also contracts with licensed real estate brokers to place clients’ homes in multiple listing services (MLSs). ForSaleByOwner.com’s claim to have “direct access” to Realtor.com last year was called “misleading to both consumers and the Realtor community” by parent company Move Inc. (see story)

In its analysis of 2008 commissions, ForSaleByOwner.com relied in part on data from NAR showing that home sales fell 30.6 percent last year from their
2005 peak, to 4.9 million units, and that average sales price dropped 9.4 percent from a 2006 peak of $268,200.

Since commissions are typically based on a home’s sale price, it follows that a drastic reduction in the number of sales and sales price would put a dent in total agent and broker revenue.

But the average commission rate on home sales has been making a comeback in recent years. After falling from 5.42 percent in 2000 to 5.02 percent in
2005 as home prices shot up, the commission rate has since rebounded to 5.2 percent in 2008, according to data from market intelligence company Real
Trends that ForSaleByOwner.com used in its analysis.

“With home prices falling across the country, losing another 5 percent or more in the form of a real estate commission is simply a luxury that today’s
sellers cannot afford,” ForSaleByOwner.com’s Greg Healy said in a statement.

NAR spokesman Walter Molony said ForSaleByOwner.com’s analysis contains too many assumptions to produce a reliable estimate of commissions paid to
agents and brokers, and doesn’t justify the company’s claims.

Commission rates tend to be negotiable, and fall into a range that’s tied to home prices and the cost of doing business in a given market, Molony said.
In general, commission rates are lower in high-cost markets — where the costs of marketing a home represent a smaller fraction of its sales price –
and higher in low-cost markets, Molony said.

While the Real Trends data used by ForSaleByOwner.com does show some downward pressure on commission rates over the last decade, Molony said, “If
anything, there is probably upward pressure on commissions right now.”

Meanwhile, the percentage of “open market” for-sale-by-owner (FSBO) transactions — those in which the seller did not know the buyer — remained
at about 7 percent last year, down from 10 percent in 2004, Molony said, citing NAR’s ongoing surveys of home buyers and sellers.

“If you ask consumers how you choose the agent you work with, it has nothing to do with commissions,” Molony said. “It’s reputation, knowledge of market,
expertise and trustworthiness that are far more important than commission rate or business model.”

ForSaleByOwner.com has also cited the November 2008 NAR research report, “Profile of Home Buyers and Sellers,” as evidence that sellers who represent
themselves are able to close deals more quickly and at closer to their asking price than those represented by agents.

NAR’s surveys of homebuyers and sellers found the median price of FSBO properties in which the seller did not know the buyer was 97 percent of
asking price, compared to 96 percent for agent-assisted sales. NAR’s survey also found that the median number of weeks on market for those FSBO
properties was six weeks, compared to 10 weeks for agent-assisted sales.

That data is “taken a bit out of context,” NAR’s Molony said, noting that the $211,000 median selling price for agent-assisted sales was much greater
than the $153,000 for all FSBO properties.

“When the bottom line of (being represented by an agent) is $58,000, the question is how much does it cost a FSBO to save on that commission?” Molony
said.

Which is another way of saying what other critics have suggested: FSBOs may sell for closer to their asking price if sellers, lacking knowledge of their
market, are underpricing them.

ForSaleByOwner.com spokesman Eric Mangan said that, armed with an inexpensive professional appraisal or widely available Web-based valuation
tools, sellers representing themselves should have no trouble determining an asking price that reflects market conditions.

Mangan said a recent survey by Consumer Reports and studies by academics at Northwestern and Stanford universities demonstrate that “by owner” sellers
retain more equity than sellers represented by agents.

The Consumer Reports survey of more than 9,000 buyers and sellers found 82 percent of sellers employed the help of an agent, and received an average of
$5,000 below asking price. About 17 percent of respondents sold their homes without an agent, and received roughly the asking price (see story).

In a study published in 2007, economists from Northwestern University and the University of Wisconsin compared FSBO and agent-represented home sales
in Madison, Wis. The study found that sellers who used a listing agent and the local MLS did not get a higher price than those who used a new FSBO Web
site, FSBOMadison.com (see story).

According to an abstract of a February 2008 paper by Stanford researchers, faculty and staff who employed a broker to sell homes on the university
campus did not obtain more for them or significantly alter their initial asking price, but did manage to sell their homes more quickly.

The U.S. Department of Justice’s Antitrust Division has noted the sharp rise in commissions paid by consumers from 1999 to 2007 as home prices escalated,
even as commission rates remained steady in the 5 to 5.5 percent range.

“Unless broker costs were also rising sharply during this period of time, competition among brokers should have held commissions in check even as home
prices were rising,” the department noted in an online analysis.

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