The AEI Suggests Lowering Realtor Commissions to Spur Housing

04/21/2016
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NAR wants FHA to lower their MI to make homes more affordable, but the American Enterprise Institute thinks they should lower their commissions.  Hmmmm…. Thoughts?

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  • The AEI clearly don’t know what the hell they are talking about. Reducing Realtor commissions WILL NOT reduce Buyer/Borrower costs at all!!! Realtor commissions are paid by the Seller! And Realtors set it up this way, to reduce buyer costs AND make buying a home more affordable!!! AND a side note: the CFPB made it illegal ( RESPA violation) for a Loan Officer to pay for ANY buyer costs, because THAT would be an “inducement to borrow.” Where do these people come from!!! Idiots!

    Craig S. April 21, 2016 3:46 am Reply
    • The CFPB allows lenders to pay part of closing cost though market premiums on rates, this has been a long standing rule. What is not allowed is for a lender to state we will pay your closing cost as an inducement, the rule put in place an even playing field and a clear picture of how we the lender and loan officers are paid.
      So please don’t even call this or point fingers at lenders when we have the smallest pocket book on the transaction, in fact the idea of loans is to break even at the end of the day and expect the servicing value to be the small margin we make.

      As Realtors your commission went from the first 100,000 and then the difference (6/3%) to a flat 6% on total price, while the mortgage companies earnings went down and now capped by the CFPB along with the LO earnings capped in writing. While at the same time the cost to do business has gone up and may do so again based on the THRD requirements.

      So it is far to all that the commission earned by realtors now be on the table under the same fairness to consumers rules.

      Bob April 21, 2016 10:42 am Reply
  • What would have the most impact on housing affordability in our area would be the lowering of property and school taxes! In fact, there are towns and villages where sales are lagging because the tax hit is so awfully high that there is no way potential buyers can make mortgage payments work on a house they should be able to afford! Hhmmm, how to fix this? New York now offers towns incentives to abide by the tax increase cap – a great place to start, but in towns where the taxes were already exhorbitant, that does not really fix the problem for home owners or buyers.

    Yvonne Wilder April 21, 2016 3:53 am Reply
  • Exorbitant school/property/village taxes make more of an impact on affordability than anything else in my area. Although New York State has imposed a “tax increase cap” and offers towns and their residents incentives to stay within the established range, that does not fix a problem that was out of control to begin with. There are certain towns in my county where sales are lagging because the combination of monthly mortgage payment plus pro-rated annual tax payment knocks buyers out of the ballpark on homes they should be able to afford based on the price of the home. I also see the tax hit affecting the second home market (in our area, that is quite strong) – does not matter whether the buyer is high-end, moderate priced or low-end, the comments come in about the tax levels and folks back away.

    Yvonne Wilder April 21, 2016 4:02 am Reply
  • In order for either of those options to affect the market at all, all buyers and sellers in the market would have to be willing to just “lose” that extra money and leave it out there since a reduction in either cost would usually benefit one client or the other. The market sets the price of homes and the market is whatever price a willing buyer is willing to pay and a willing seller is l willing to sell at. People not using a realtor at all and selling to a cash buyer still most of the time look for market price.

    Sam April 21, 2016 4:13 am Reply
  • So they want us to collude to lower commissions ?
    Isn’t there someone out there watching for collusions?

    john burns April 21, 2016 4:31 am Reply
  • Commissions are negotiated between the Seller and listing agent at the time of listing. I personally give ‘commission breaks’ to my Sellers if they are also using my team to find their new home. Sellers pay the commissions, not the buyers. If I give my Sellers a half point or a whole point off commissions, who do you think its going to benefit?? Not the buyer! Market value is driven by the market and currently, we have low inventory. How bout we ask the people at the AEI to work for FREE, with NO Benefits, pay monthly marketing, business and brokerage fees out of their own pockets, pay taxes and insurance, and then, only then, when they have something that finally pays off, ask them to ‘cut’ their hard earned money. I get so tired of people thinking agents make soooooo much money from commissions when in reality that commission is going into a business, not all in the agents pockets.

    Donna Broadus April 21, 2016 5:25 am Reply
  • Since, the typical transaction involving FHA financing requires more time and effort than a conventional financing transaction. This is probably due to the lack of knowledge (hand holding on the Realtors part) by the typical FHA borrower. My firm has already made a push toward higher price point homes; simply due to the work required to complete a lower tier transaction. In a Realtor’s world, time is money. If, I can spend half the time selling a $500k home versus a $250k home which pays double the commission. I would certain focus on a higher price point (typically conventional type loans). While FHA buyers/sellers tend to be our bread and butter. A proposed reduction in commission would deter me and my firm from working with the buyers/sellers this idea is suppose to spur to buy homes. This would especially be the case with lower tier properties those below $125k. My firm has been flirting with raising our commission on FHA transactions before this proposal.

    Brian Saunders April 21, 2016 5:31 am Reply
  • I think the buyer should pay part of the realtors commission. The buyers run realtors around in circles knowing that they dont have to pay them anything. They use multiple realtors at the same time and almost never disclose this fact.

    Susan Batista April 21, 2016 6:33 am Reply
    • The solution to this is simple. If you don’t have a good enough relationship with your buyer that they would do this to you, you really need to have them sign a Buyer Broker agreement, and if they won’t, then you can use your time going after a stronger client. I learned this the hard way in my early years, and now, while I don’t require most of my clients to sign it, if I have any doubt whatsoever, it is mandatory.

      Tom Wolf April 21, 2016 5:47 pm Reply
  • Maybe the AEI should lead by example and take a pay cut!

    Steve Sisman April 21, 2016 6:38 am Reply
  • There are already several discount real estate brokers working on low commission. Some offering only 1% to a buyers agent. There are sellers who work with these discount brokers for a flat fee or very low percentage. So it’s not like there are no options out there for a seller who wants to list and wants to save on commission. If that was the answer these discount brokers would be wildly popular and corner the market. Instead they are nothing more than fringe players in the market.

    Mary Ann York April 21, 2016 6:47 am Reply
  • First, FHA is taxpayer backed entity, not private business. Second, Reducing commission to produce more inventory is not equivalent to reducing MI which makes homes more affordable. Even so, lets compare: $5,000 reduction in commission (purchase price) saves $21,73 per month ($245,000 loan amount vs $250,000. Reducing MIP 30bps on a $250,000 loan amount saves $62.41!

    Competition Benefits Consumers April 21, 2016 7:12 am Reply
  • The problem is that AE1 has not thought out commissions in a realistic way.

    for Example, an agent works 4 months selling a $200,000 home. The agents split is $6000.00. HERE IS THE OVERSIGHT! …….The agent worked for 4 months to earn the $6,000 which factors out to be $1500 per month. One must subtract about 30% from the $1500 to cover broker fees, taxes and selling expenses. Thus, the agent only netted about $1,000 per month on that sale. The agent better procure 3 or 4 of those sales running simultaneously or they will be on food stamps.

    Ken Guillen April 21, 2016 7:24 am Reply
  • Ok, you guys are FUNNY

    Lower the Agents Fees does not change the Value of the Home, but does in effect Lower the COST to the Buyer (and Seller) that have to pay those fees.

    In my area the standard Agent fee is 3% for each side of the deal. That means on a $300,000 sale the Agents each get $9,000. This is a total of $18,000 in fees on the deal to the Agents and the lucky Appraiser most likely got $450

    If you lower the Agent fees to a MAX of 2% that would save the Buyer (and Seller) just 1% or $3,000 each for a total of $6,000 that could be used for the down payment.
    BUT, most Agents would CRY that they just could not do this.
    I don’t know why, I live in California and can live and work on that same $6,000 a month without any issues. Most Agents live in cheaper places that California and if not, then the price of the sales is even higher

    I see Agents at every Sale that I do an inspection for one of my reports. As I still drive my 1999 Ford F-150 and am happy to do so what do they pull up in?
    You know it. Caddies, BMWs, Lexus, Jaguar, Mercs or a $60,000 4X4 with $20,000 of tricked out add-ons.
    It is the life style that the high fees they collect that they have wrapped themselves into that they will not give in on.

    I say make the Appraiser on the same type of system. Make the Appraiser’s Fee based on a % of the Sales Price too. I would start at 1/4 of 1%. How would this look today? Well let us take a look

    Today
    $300,000 sale
    $9,000 to the Listing Agent
    $9,000 to the Selling Agent
    $450 to the Appraiser
    These cost on the deal, $18,450

    If the Agents fee was 2% and the Appraiser fee 1/4 of 1%
    $300,000 sale
    $6,000 to the Listing Agent
    $6,000 to the Selling Agent
    $750 to the Appraiser
    These cost on the deal, $12,750

    This adds $5,700 to the pot for help with down payment or other fees that come into play like Section 1 and 2 repairs that no one expected
    But it would help the Buyer and Seller in so many ways

    No, forget that, Agents are there to help them

    James the Appraiser April 21, 2016 8:11 am Reply
    • James, that makes zero sense. The math is simple….NO seller will accept lower than market simply to help a less qualified buyer purchase their place. That being the case, any drop in commission will 100% go to the seller net and not help the buyer in any way whatsoever.

      Jason April 21, 2016 8:41 am Reply
    • Let’s assume the Appraiser fee is 1/4 of 1%. OK, I’ve got no problem with that. But to play by the same rules, we’ll also need to also assume that if the house does not close escrow, the appraiser does not get paid. Your may do 1,2 or 25 appraisals, using your gas, taking your time and still not make a dime. I’d love to make $450 guaranteed for every home I show.

      Ron Bouknight April 21, 2016 8:41 am Reply
    • Reduce commissions when everyone and everything already have their hands in our pockets? In my area, the average commission paid is 5% and split in half to 2.5%, so each side on the $300,000 sales price makes $7,500 gross. Now let’s break it down further because there are costs and fees associated with that. If you have a split with your office at 80%, now your down to $6,000 plus office administration costs let’s say $500 is now $5,500. Now you have to pay taxes on the $5,500 which is roughly 50% putting you at $2,750 and then minus any out of pocket expenses like gas, meals, marketing, time and maybe even that home inspections you said you’d pay for through escrow. The appraisers have already been screwed over by the system and now the system wants to screw us over. At least the appraiser always gets paid where we only get paid if the escrow closes.

      Michael April 21, 2016 9:11 am Reply
  • Bryan, please spit out your dip before the recording…..It’s distracting. I love your show and thing your show is awesome!

    Stephanie April 21, 2016 8:17 am Reply
  • Lawyers don’t lower their fees, and they don’t work any harder than we do. Doctors don’t lower their fees, and again, they don’t work any harder than we do. They are paid,because of what they know, and knowing how to make that knowledge work for you. I have an attorney that works for me as a licensed Sales agent. She has said on more than one occasion that Realtors work harder than lawyers. I want to be paid well for my time, and my knowledge. And in turn, I get the highest price available for my Sellers. I agree that the answer is an increase in Jobs.

    Earnest April 21, 2016 8:34 am Reply
  • I think its funny how all the comments here are focused on the idea of a commission decrease and not on the fact that the Treasury is STEALING MONEY and unnecessarily increasing the cost of borrowing money for new home owners.

    Rob Spring April 21, 2016 9:43 am Reply
  • Pretty passionate responses. The fact of the matter, Realtors receive an obscene amount of commissions in the high-end markets for the amount of work they actually do. The mortgage guy gets maybe 1%, the listing agent two and half times that amount and then wants the mortgage guy to give them a kickback (illegal or not), for referring them the business in the first place. By far, the mortgage guy is far more instrumental in making a deal happen than the listing Realtor who simply waits for some other Realtor to sell their listing. I speak from first hand practical experience on this one folks.

    Michael Blaser April 21, 2016 10:28 am Reply
    • Michael Blaser, you may only get 1%, but the total loan costs to the buyer are much higher than that, and that is money that the buyer must pay out of pocket, unless of course the seller pays it. Closing costs are by far a bigger hindrance to buyers being able to buy than commissions are, because commissions are in essence rolled into the loan. And not that I really want to nit pick anyone’s job because I respect what you do, but since you decided to call out Realtors, I’ll go ahead and mention that for your 1% you very likely never step foot out of your office, and if you are like 95% of the lenders out there, don’t work a minute beyond Monday through Friday, 8 to 6.

      Tom Wolf April 22, 2016 2:32 pm Reply
  • That’s a hysterical notion. My advertising costs are increasing, my association fees are increasing,as with everything else I am paying for and I am suppose to make less and still offer the same marketing and sales strategies as before? Wow!

    Shelly Farley April 21, 2016 11:49 am Reply
  • Quick question:
    Of all the parties in a real estate transaction who has the least long term liability and “skin in the game”?
    Your choices are-

    Title company
    Appraiser
    Lender
    Insurance agent
    Real Estate Agent

    2nd question:
    Who on the list has the highest compensation in a real estate transaction?

    Something seems to be out of balance doesn’t it?

    Jay Luke April 21, 2016 4:47 pm Reply
    • The answer is, the people who bring the transaction to the table so that everyone else on your list can get paid. Realtor commissions are well earned.

      HIPO T K April 22, 2016 6:46 am Reply
      • You might want to back track on your comment. Maybe you work with lazy loan originators but not all originators are the same. 78% of business I close comes from advertising I pay for and not realtor referrals. I actually hand realtors qualified buyers!!! My realtors make twice what I do per transaction while I do 90% of the work to get the loan to closing. I’m not complaining because this is the profession I chose but I don’t think it’s fair for you to say your astronomical commissions are well earned when in reality you do very little actual work. Most listings sent to buyers are on an automated service and most realtors or real estate companies have assistants that handle a lot of the back end paperwork. You do spend time, gas, and money on advertising but look at the percentage you receive for that. Try to understand that you get the biggest piece of the pie and do the least amount of actual work. You need to remember that without loan originators there is no transaction. We coordinating everything with the people who have the “GOLD”(lenders)so your buyer can get the “GOLD” to purchase the home.

        Tim April 22, 2016 7:53 am Reply
        • I always shake my head when I hear a lender compare workloads between themselves and agents. I don’t know you personally so I won’t make any assumptions, but 95% of LO’s never step foot outside their office, nor do they work a minute beyond M-F, 8-6. You also have a processor, an underwriter and others who help with your work as well. You can process FAR more transactions at once than any Realtor every could for those very reasons. You may only get 1% vs. 3% for an agent, but your companies total cost to the buyer is way beyond 1%, and is easily on par with agent commissions.

          Tom Wolf April 22, 2016 2:46 pm Reply
  • This is stupid! NAR has nothing to do with the average commission charged in the USA. It is an agreement between broker and seller and it is set by the MARKET, as are housing values. And to suggest that NAR has any ability to alter commissions displays complete ignorance of the entire industry. My market, like most, is plagued with limited inventory. Just yesterday a purchaser of mine called on a 190,000 house, 1 day on the market and it received 5 offers. Regardless if the commission charged is 10% or 8% or 2%, the property is worth 190,000.

    Catherine Barris April 22, 2016 6:36 am Reply
  • DID YOU PICK UP ON THIS:
    D.C. Circuit Panel Questions Constitutionality of the CFPB

    Greenberg Traurig LLP
    Greenberg Traurig LLP logo
    Jennifer L. GrayMurray B. Silverstein
    USA April 18 2016
    On April 12, 2016, the Court of Appeals for the D.C. Circuit heard oral arguments in PHH Corp. v. Consumer Financial Protection Bureau, which challenges the CFPB’s imposition of a $109 million penalty for RESPA violations.

    The case stems from a 2014 CFPB administrative proceeding alleging that PHH created a kickback scheme, in which it referred mortgage insurance business to mortgage insurers in exchange for entering into reinsurance contracts with PHH’s wholly-owned subsidiary, generating substantial revenue in the form of premiums. PHH argued that the premiums were lawful because it provided actual reinsurance services in exchange for the premiums and was exempt under RESPA Section 8(c)(2) (providing that payments received for actual services performed are not “kickbacks.”) PHH also claimed that its practices conformed to a 1997 HUD Interpretative Letter addressing captive reinsurance and Section 8(c)(2) of RESPA. An administrative law judge rejected PHH’s Section 8(c)(2) defense, concluding that the premiums PHH received exceeded the fair market value of the services performed, and imposed a $6.4 million penalty. PHH appealed to the Director of the CFPB, Richard Cordray. Cordray rejected both PHH’s and the ALJ’s interpretation of Section 8(c)(2), and held that to be lawful, payments for services must be “bona fide” — which he defined as not being tied in any way to a referral of business. Applying this standard, Cordray concluded that all of PHH’s reinsurance payments had been tied to business referrals and therefore violated RESPA. He also rejected the ALJ’s findings concerning the applicable statute of limitations. The ALJ had limited the CFPB’s jurisdiction to premiums associated with loans that closed within a three-year limitations period after the CFPB was created; Cordray asserted that PHH had violated RESPA every time it collected a premium since July 2008, even if the loan had closed years before that. Applying these parameters, Cordray ordered PHH to disgorge $109 million in past payments.

    PHH petitioned for review by the D.C. Circuit, challenging the CFPB’s interpretation of Section 8(c)(2) and the applicable statute of limitations. PHH also asserted that the CFPB itself was unconstitutional. Several days before the oral arguments, the D.C. Circuit Panel requested additional briefing on the constitutionality issue, signaling that this likely would be a focal point of the oral argument. Indeed, at the oral argument, two of three judges that participated aggressively questioned the CFPB’s counsel about the CFPB’s structure, particularly the extent of authority vested in a single Director, which one Judge described as “very problematic.” The Panel also indicated concern with the CFPB’s willingness to jettison HUD’s long standing interpretation of Section 8(c), noting that the entire industry had relied upon HUD’s interpretation. Judge Brett Kavanaugh observed that the CFPB’s decision to “pull the plug” was “very problematic.” The Panel was also troubled by Cordray’s seemingly-arbitrary approach to the statute of limitations. Judge Kavanaugh observed that under its theory, the CFPB could impose liability for decades-old conduct. Judge Randolph asked why the standard reasons for having a set limitations period – e.g. difficulty obtaining evidence, loss of memory, etc. – did not apply equally here, forcing the CFPB’s counsel to concede that those reasons were present in this case and that he knew of no legislative history justifying the omission of a statute of limitations for administrative adjudications.

    The Panel’s most heated questioning pertained to the structure of the CFPB, particularly that it is headed by a single director who is removable only by the President for cause. Judge Kavanaugh observed that it is “very problematic” that such a powerful official was able to make a decision that aimed to overturn a practice long seen by companies as acceptable. “You are concentrating huge power in a single person and the president has no power over it,” Judge Kavanaugh said. The CFPB has a “very unusual structure” that has “few precedents,” he added. The Panel’s aggressive and sharp questioning of the CFPB may indicate a willingness to declare that the CFPB, in its present form, is unconstitutional and to order significant structural changes, including potentially the elimination of a single Director at the helm.

    An audio recording of the oral argument is available here.

    Arthur Joy April 22, 2016 7:25 am Reply
  • As an appraiser, I don’t consider RE agents commissions as an adjustable consideration. So lowering the commissions would only help if it was market driven in the first place.

    David April 22, 2016 4:12 pm Reply
  • They should increase the Realtor’s commissions to 5%, as getting a real estate license is one of the toughest licenses to obtain, and involves so much blood, sweat and tears. How dare they try and lower their commissions!

    Mickey Deery April 22, 2016 4:45 pm Reply
  • What do I think? I think our Chief Economist has lost his mind! Perhaps if HE worked on commission his “solutions” would be caste through a more realistic lens.

    Rhonda NeSmith April 24, 2016 11:28 am Reply
  • Seems like any discussion of commissions would be in danger of anti-trust laws that we work so hard to avoid. Commissions are set and agreed upon between the parties of the transaction at the listing status and can be whatever is agreed by those parties and should not be set or directed as to how much or lower or such by outside parties.

    Chris Rosprim April 24, 2016 11:42 am Reply
  • I always knew we are important to the industry, but I didn’t think our commissions drove the real estate market. I don’t believe anyone should tell another how much he can earn and our fees are only a small part of the transaction anyway.

    Katie Muck April 24, 2016 12:41 pm Reply
  • It’s amazing that the ones doing the complaining are mostly lenders. Here’s an idea, go get your real estate license and start selling houses. To even think that the health of the market is based on commissions is absurd.

    Rick May 18, 2016 1:09 pm Reply
  • Has anyone ever worked opposite a low-cost broker on a transaction? Guess what happens? You get to do the work of both sides for no more compensation. The “bargain” broker will put the house in the MLS and have calls directed to the Seller. A limited representation brokerage is not your friend. In the crazy Austin TX market, houses go for 10k-20k above list. We have an inventory of 2.0 months, and even with lots of building, we are not keeping up with the inventory for new buyers. I think the NAR might do more good by trying to protect us from Zillow & Trulia than getting into a commission fight!

    Darlene Hello May 18, 2016 3:44 pm Reply

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