Competition in the real estate brokerage industry: A critical review

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DECEMBER 2019

Competition in the real estate brokerage industry: A critical review

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Panle Jia Barwick

Department of Economics, Cornell University and NBER

Maisy Wong

University of Pennsylvania and NBER

This report is available online at: The Brookings Economic Studies program analyzes current

and emerging economic issues facing the United States and the world, focusing on ideas to achieve broad-based economic

growth, a strong labor market, sound fiscal and monetary policy, and economic opportunity and social mobility. The research aims to increase understanding of how the economy works and what can be done to make it work better.

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Contents

About the Author ......................................................................................................................3 Statement of Independence .....................................................................................................3 Abstract .....................................................................................................................................3 Acknowledgements ...................................................................................................................3 Introduction ..............................................................................................................................5 Lack of competition and elevated commission fees ...............................................................5 Uniform commission fees ........................................................................................................7 Commission fees high relative to other countries and industries......................................... 8 Commissions do not reflect costs ........................................................................................... 8 Industry concentration...........................................................................................................10 Contributing factors ...............................................................................................................10 Welfare consequences of high commissions .........................................................................18 Policy discussion.....................................................................................................................19 Digital platforms in the real estate industry ........................................................................ 23 Conclusions ............................................................................................................................ 26 Tables ......................................................................................................................................27 References .............................................................................................................................. 34

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ABOUT THE AUTHOR

Panle Jia Barwick is an Associate Professor of Industrial Organization, Applied Econometrics, and Applied Microeconomics in the Department of Economics at Cornell University. She serves as the co-director of Cornell Institute for china Economic Research (CICER). She is a faculty research associate at the National Bureau of Econmic Research (NBER), and editorial board member of VoxChina, and an associate editor of China Economic Review. Maisy Wong is the James T. Riady Associate Professor at the Wharton Department of Real Estate as well as the Assistant Director of the Grayken Program in International Real Estate. Her research interests include labor mobility, urbanization, housing, and real estate finance. Dr. Wong is a Research Associate at the NBER and is on the editorial board of the Journal of Urban Economics. Dr. Wong has a Bachelors from U.C. Berkeley (2003) and a Ph.D. in Economics from MIT (2008).

STATEMENT OF INDEPENDENCE

The authors did not receive financial support from any firm or person for this article or from any firm or person with a financial or political interest in this article. They are not currently an officer, director, or board member of any organization with a financial or political interest in this article.

ABSTRACT

The past decade has witnessed remarkable technological innovations and a proliferation of new business models in the real estate sector. However, much of the potential of these innovations has yet to be realized, and most real estate brokerage firms command a persistently high price (commission fee) for services rendered that seems to vary little with the associated cost. This paper identifies structural hurdles that have limited competition, including the current commission payment arrangement whereby the seller pays commissions to both the listing agent and the buying agent, high concentration in local markets, the threat of retaliation, and consumer biases. We then describe the negative welfare consequences of high commissions, discuss policy recommendations that could enhance competition in commissions, and conclude with a brief discussion of the implications of recent innovations in this industry.

ACKNOWLEDGEMENTS

The authors would like to thank Judy Chevalier, Steve Coate, Gillies Duranton, Sonia Gilbukh, Paul GoldsmothPinkham, Jerry Hausman, Benjamin Keys, and Mark Nadel for helpful comments. Adil Ahsan and Jiahua (Tiger) Wang provided exceptional research assistance. All errors are our own.

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Introduction

We live in a world with remarkable technological innovations. In the real estate brokerage industry, the past decade has witnessed a proliferation of new business models. These range from instant buying programs that make selling properties `as simple as clicking a button' to initiatives that streamline housing purchase with renovation and furniture upgrades, from virtual tours that enable housing purchase sight unseen to machine learning algorithms that accurately predict buyer preferences, and from digital closing to blockchain technology that greatly simplifies title and asset transfer. The options available seem endless. Despite these remarkable technological advances that can lower the cost of matching buyers with houses and facilitate housing transactions, the real estate brokerage industry in the United States still commands a persistently high price for services rendered. For example, to sell a house in New York State in 2018, the median household spends more than 40% of its annual income on commissions, transfer taxes, and other closing fees, with the lion's share going to commission payments to real estate agents (Bureau 2018, Cropley 2019, Prevu 2019). Across the country, national average commission fees over the past couple of decades have doubled and outpaced inflation in most years. Commission rates have remained uniformly high relative to other countries and industries and appear largely invariant to factors that affect the cost of housing transactions. All of these patterns are puzzling given the industry's significant technological changes in the meantime. In this paper, we identify structural hurdles embedded in this industry that have constrained change, including the current commission payment arrangement whereby the seller pays commissions to both the listing agent and the buying agent, high concentration in local markets, the threat of retaliation, and consumer biases. We then discuss the negative welfare consequences of high commissions and propose policy recommendations that could enhance competition in the brokerage industry. We conclude with a brief discussion of recent trends and innovations in this industry, including opportunities and challenges associated with digital platforms, and point to lessons learned from the existing literature and avenues for future research.

Lack of competition and elevated commission fees

At first glance, the residential brokerage industry, with its low entry barriers and many participants, appears competitive. Indeed, relative to the volume of home sales activity, the number of real estate agents has increased significantly over the past several decades. According to the National Association of REALTORS, the national trade association of real estate agents (hereafter NAR), its membership increased steadily from 760,000 in 2000 to 1,359,000 in 2018 (NAR 2019a). By comparison, the sales of new and existing homes

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