A new commission model proposed by Richmond Federal Reserve Bank senior economist Borys Grochulski and vice president of research Zhu Wang could slash roughly $30 billion of real estate agent's commissions in the United States.
In a new working paper titled Real Estate Commissions and Homebuying, the economists noted home sellers in the Netherlands, Singapore, Sweden, and Norway pay less than 2% in commission to their real estate agents. In comparison, the current compensation model in the U.S. has home sellers paying an average of 5.5% in commissions to their real estate agents, per a 2015 report from the Brookings Economic Studies program.
The model used by U.S. real estate agents contributes to "elevated home prices, overused agent services, and prolonged home searches," the pair noted.
To correct this, Grochulski and Wang proposed a new "à la carte" that could significantly reduce commissions paid to real estate agents by home sellers by $30 billion. Under that model, both homebuyers and sellers would pay their agents separately. The amount would also be independent of the final home price in each transaction and would force homebuyers to pay for each task their agents perform. This includes searching for an ideal home, negotiating with the seller, or showing properties.
"The results suggest that switching to a cost-based commission model...may increase U.S. homebuyers' welfare by more than $30 billion a year," they wrote in the paper. "Under such a system, competition among agents would likely align agent compensation with cost, and buyers would not overuse agent services."
Apart from reducing commissions, the pair said the model would also help prevent "steering," a tactic that real estate agents use to direct their clients to properties that have higher commissions.
Real Estate Commission Lawsuit
The new paper comes as the real estate industry is facing a major challenge. In the past months, the National Association of Realtors (NAR) and several major brokerages across the country have been named in multiple lawsuits alleging collusion to artificially inflate real estate agent commissions. In one lawsuit, specifically one filed in Kansas, a jury has sided against the NAR and fined the organization $1.8 billion in damages.