Currently, every listing agent is required to offer some sort of buyer-agent compensation on the MLS. Zillow and Redfin publish those commission amounts on every listing now, so they are all out in the open.
Today, there are 79 homes for sale between La Jolla and Carlsbad in the $2,000,000-$3,000,000 price range. Thirty percent of those listing agents are offering less than 2.5% commissions to the buyer-agents.
Outsiders who see that will assume that commissions are finally starting to drop, after all these years.
But the vast majority of those listing agents are probably still taking 5% to 6% commissions, and offering 2% or less to the buyer-agent (and more for themselves).
If the listing agent is supremely talented and brings special skills to the transaction, then it would be understandable. But I’ve been a buyer-agent on listings that are offering less than 2.5%, and they’re not different. Virtually every listing agent still practices the Three-P marketing plan: Put a sign out front, Put it in the MLS, and Pray.
There are hundreds of multiple listing services in America. So far, only a few have removed the requirement of offering a buyer-agent commission. But the NAR lawsuits are going to change that, and soon every MLS will permit 0% commissions to be offered to the buyer-agents (hoping buyers will pay their own agent).
The listing agents who have little or no repsect for the buyer-agents will keep offering them lower and lower commissions. Eventually, their rate will get down to zero or close.
Will sellers figure it out?
Sellers focus on the total commission. They don’t do enough transactions to know that the amount the listing agent pays to the buyer-agent will impact the sale. It is a bounty offered to encourage the sale of the house, and when market conditions are soggy, it is better to pay buyer-agents more commission, not less.
In the lawsuits, they will discuss agents steering their buyers to homes that pay higher commissions. It’s why the search portals publish the commission rates now so buyers can track whether their agent shows any bias based on the commission rate being offered.
It’s why the industry will be racing towards 0% commissions offered to the buyer-agents.
Eventually, the DOJ will probably step in and insist that ALL sellers pay 0% commission to the buyer-agents to insure there is no chance of steering. Instead, listing agents will just offer them spiffs under the table in a softer market or when the house is ‘unique’.
Until then, the listing-agent teams are going to keep offering lower and lower commissions (if any) to the buyer-agents – who will then try to get their buyers to pay them something….anything!
At the same time, the listing agents will be encouraging buyers to avoid paying a buyer-agent commission altogether by coming direct to the listing agent instead. Their in-house assistant-agents will attempt a faux representation of the buyer but it will just be a novice clerk who processes their paperwork.
Boom! The seller didn’t have to pay a buyer-agent commission – making these lawsuits worth it – and instead the listing agent keeps the whole commission. If buyer-agents can somehow wedge themselves into the deal, then great, but will the buyer pay them too, when it doesn’t seem necessary?
Mark my words – this will be standard fare in the next year or two.
People are asking about the NAR lawsuits – hat tip to Susie, Gerry, and Carl!
The lawsuit that began this week contends that realtors force sellers to pay a commission to the buyer’s agent. Two defendants, ReMax and Anywhere (Coldwell Banker, Sotheby’s, etc.) have already come to settlement agreements, though they haven’t been approved by the judge yet. The other two brokerages, Keller Williams and Berkshire Hathaway, plus the National Association of Realtors are the remaining defendants. Their attorney started the proceedings by declaring that the plaintiffs have the burden of proof, and the defense may not call a witness. It is that type of arrogance that got them into this mess!
A summary:
In their trial brief, the plaintiffs in the suit allege that NAR’s Participation Rule, which they refer to as the Mandatory Offer of Compensation Rule, is “a market-shaping and distorting rule” that stifles innovation and competition.
“The Rule requires every home seller to offer payment to the broker representing their adversary, the buyer, even though the buyer’s broker is retained by and owes a fiduciary obligation to the buyer (who may be told, falsely, that the services of the buyer broker are “free”),” the brief said.
They argue that the current practice of the seller’s agent splitting their commission with the buyer’s agent, who typically negotiates for a lower selling price for their client, works against the seller’s interest and only exists due to the alleged anticompetitive rules. The plaintiffs also note that the NAR rule in question requires a blanket offer of compensation for the buyer’s broker regardless of their experience or the level of service they provide the buyers with, and that the compensation offer was only visible to the buyer’s agent and not their clients, until very recently.
“This artificial and severed market structure created by Defendants’ conduct deters price-cutting competition and innovation, resulting in inflated commissions,” the brief states. “The Mandatory NAR Rules impede the ability of a free market to function in the residential real estate industry, and the plain purpose and/or effect of the Rules is to raise, inflate, or stabilize commission rates.”
In the brief, the plaintiffs claim that the other defendants in the suit colluded with NAR to enforce this and other NAR and MLS policies.
“The Corporate Defendants compel compliance in multiple ways, including by requiring their franchisees, subsidiaries, brokers, and agents become members of NAR; writing the NAR Rules into their own corporate documents; and requiring that their franchisees, subsidiaries, brokers, and agents become members of and participants in the Subject MLSs — entities that compel NAR membership and adopt the mandatory NAR Rules,” the brief reads.
The brief notes that Craig Schulman, the director of Berkeley Research Group and professor of economic data analytics at Texas A&M University, will be an expert witness for the plaintiffs at trial. In studying transaction data from NAR and other parties, the brief states the Schulman has concluded that “(a) the NAR Rules have anticompetitive effects; (b) the NAR Rules caused a seller to pay his adversary (buyer broker) and that, but for the conspiracy, a seller would not pay the buyer broker; and (c) all class members were impacted.”
The brief also notes that Schulman will testify that NAR’s rules have stabilized commission rates at an “anticompetitive level,” noting that commissions have remained at 6% for several years.
Unfortunately, none of the reality of what happens on the street will get introduced during the trial. Instead, it will be ivory-tower guys hoping to persuade the judge and jury (one of which has to breast-feed her infant every 1.5 hours) that the whole commission thing is out of control and someone is to blame.
But the defendants have a good point:
NAR also argued that the plaintiffs do not have the ability to sue for damages —which some believe could reach as much as $4 billion in this case — because under federal and Missouri antitrust law, only “direct purchasers” can be allowed to sue and the plaintiffs have not bought anything directly from NAR or the other defendants.
“And, according to those same Model Rules and listing agreements, Plaintiffs did not directly pay cooperating agents, NAR, or the other Defendants; sellers only directly pay their listing agents and only directly receive services from their own agents,” the brief states. “Therefore, at best, Plaintiffs might claim that they paid their listing agents (who are not parties to this case) who, only then, paid Defendants. But such an indirect claim is prohibited by Supreme Court case law.”
Home sellers pay the full commission to the listing brokerage. It is the listing agent who declares in the original listing agreement of how much of the full commission they are willing to pay the buyer’s agent. None of this will be discussed during this trial, but it’s the most important part!
The plaintiffs should be suing the individual listing agents – good luck with that!
In the end, the defendants might be found guilty, and they will appeal for years – the American way! Or it’s more likely that they will settle in the next couple of weeks because the ReMax and Anywhere settlements were only $55 million and $85 million, which is pennies.
Part of the settlement package will be that the MLS will no longer be obligated to display ANY commission to be paid to the buyer’s agent. It will cause two things to happen:
MORE steering by the buyer-agents to the homes that are paying a healthy commission (bounty).
Buyer-agents trying to convince their buyers to pay them the buyer-side commission.
Kayla is faced with this dilemma in New York City. Did you know that 2/3’s of the population in Manhattan are renters? It’s a big business! But the listing agents don’t offer a tenant-agent commission, which means Kayla has to get paid by her tenants upon finding them new home to rent.
The results:
She has had the landlord’s listing agent pull aside her potential tenant and tell her to ditch Kayla and save the money, and go through him directly. Apparently they aren’t concerned with their reputations!
She has also had her potential tenants be reluctant to sign an tenant-agent agreement because they see apartments being advertised by the listing agents. They want to reserve the right to go direct to the listing agent, and usually they do. As a result, Kayla only works with those who appreciate her advice.
The idea that home buyers will hire and pay their own buyer-agents is a great idea…..in theory.
The reality is that buyers will go direct to the listing agents when they see an interesting new home for sale. Those listing agents will be advertising to those buyers directly, and flat-out encourage them to get a better deal by going through them.
An article published yesterday included some guesses about the future of the real estate market over the next five years. For those who thought it would be the usual expert opinions touting 3% appreciation per year, you won’t be disappointed, though Larry did throw in a possible 10% decline in California:
Yun foresees no major changes in purchase price tags on a nationwide level next year, with fluctuations of only about 5 percent one way or the other. The only exception is California, he says, where the market could see 10 percent declines: “Because it’s so expensive, California is always the most vulnerable to changes in interest rates.” This scenario is already playing out in the priciest areas in the state: For example, San Francisco median home prices are down 9.71 percent since last year, according to Redfin data. Overall, in five years, Yun expects prices to have appreciated a total of 15–25 percent.
McBride predicts home prices will average low- to mid-single-digit annual appreciation over the next five years. This rate of appreciation, he says, is consistent with the long-term average of home prices increasing by a rate that hovers a percentage point above the inflation rate.
I think the North San Diego County coastal region will perform much better for the following reasons:
Baby boomers aren’t dying fast enough. The capital-gains tax for long-time homeowners is so burdensome that heirs to the estate will insist on their elders aging-in-place, or renting out the home if their elder goes into a senior facility. This will prevent any concentrations of boomer liquidations, and sprinkle them over the next 20-25 years – keeping inventories low. (Half of boomers are still working!)
The dollar continues to devalue – money isn’t worth what it used to be.
San Diego is a premier destination spot for rich people. The affluent who tire of deteriorating conditions in their current town will be happy to join us – and pay whatever it takes.
The demand will stay strong and the inventory extremely tight. The realtor and lender populations will get cut in half (at least) and the fascinations about the real estate market will continue – but for almost everybody it will be from the sidelines.
The local Case-Shiller Index has risen 54% since March 2020.
I think we will see another +50% in the next five years, and in 2028 there won’t be a month when we have 100+ sales of detached homes between La Jolla and Carlsbad.
I spoke to a few agents on the broker preview yesterday about business this year, and the common theme was that agents are have big trouble finding people who want to sell their home. It suggests that the inventory of quality homes will be extremely low this year.
What happens, when that happens?
It means that when listing agents get a hot new property to sell, they will be tempted to find their own buyer first, and/or spoon it to a select few of their agent friends, and then maybe expose it to their office mates before putting it on the MLS/open market.
The extinction of buyer-agents is well underway.
As the market tightens further, more listing agents will be tempted to sandbag their listing and not put it on the open market. Look what happened to the agent this week who received 20+ offers (they told me the final count was 30 offers). After the listing was put on the open market, the flood of offers caused regrets about the workload, so they just grabbed one and shut it down.
Last night I popped off in the comment section about how the business gets shadier every year.
Here’s proof – not every listing with zero days on market was sandbagged, but let’s face it. If you mark your listing pending within a few hours of it going live on the MLS, you didn’t get full exposure.
NSDCC Annual Closed Sales With Zero Days On Market
Year
Annual Detached-Home Sales, Total
# With Zero Days on Market
Percentage
2016
3,107
84
2.6%
2017
3,084
99
3.2%
2018
2,799
84
3.0%
2019
2,834
100
3.5%
2020
3,190
116
3.6%
2021
3,184
173
5.4%
2022
1,939
124
6.4%
When agents see other agents touting their off-market business, they think it must be ok, so they do it too. It feeds on itself, especially when the allure of double-ending the commission is so strong in a tight-inventory environment.
This disease among agents is everywhere. You will notice it at every open house you attend – the agents conducting the open house can’t wait to tell you about their off-market opportunities to get you to sign up. You’ll see it mentioned on social media daily – agents don’t think there is anything wrong with promoting off-market deals. Heck, everyone is doing it!
I regularly ask the agents who have a quality home for sale how they will handle multiple offers, and the answer is always the same: “I don’t know”, before they stumble and mumble something about the seller will decide (oh, thanks for that!) so the agents don’t get blamed for the end result. It’s embarrassing that they don’t have any strategy, and want to leave the door open for shenanigans later. No wonder they want to do an off-market deal, with no scrutiny.
Because no one is doing anything to intervene, the off-market deals will continue to be an accepted practice, and exacerbate the trend towards single agency (and the extinction of buyer-agents). Within the next year or two, every buyer will just go to the listing agent and take their beating.
One sign isn’t going to change the world, but it’s an example of how home sales will be changing in the future. If/when homes are sold in-house (not exposed to outside brokers and buyers) like commercial properties, Compass should extend its dominance in San Diego County – especially north coastal.
I can’t control how this turns out; I can only roll with it!
Environmentalists and union laborers are working on a ballot initiative that could be some form of property or parcel tax to fund needed improvements and infrastructure in how we handle stormwater.
SANDAG and supporters of transit have been talking about the need for a new tax measure to expand the options people have to get around San Diego.
And we broke the news here that the largest labor union of city of San Diego workers has joined with the philanthropists behind the Library Foundation and Parks Foundation to support a measure that would implement a parcel tax to bring in more revenue to support libraries and parks in the city.
There’s a lot of tax talk going on.
And now there’s more.
The Building Industry Association, which is only a few weeks out from installing a new CEO, has outlined an ambitious plan to try to spur the creation of more affordable and middle-income housing. And one feature of it is to put a fee on real estate transactions.
It’s not something the group is determined to pursue but the idea has now advanced far enough to reportedly irk some of its allies. It’s part of a document the group is working on called a Three-Pronged Approach to Finance and Build Additional Restricted Affordable Housing in San Diego.
“This transfer tax (% to be determined) should be charged only at the point of a property sale, and should only be charged on the amount of property value increase a property owner received,” the document reads.
Lori Holt Pfeiler, the new CEO of BIA San Diego, cautioned the idea is just that – an idea. And she was a bit frustrated that the Politics Report got a hold of the document laying it out because she hadn’t had a chance to really discuss it and have partners, like real estate friends who have partnered with the BIA over the years, to influence it and get on board.
Tony Manolatos, who serves as a spokesman for the BIA, told the Politics Report that he wouldn’t be surprised if the measure was advanced for the November 2022 ballot.
“They haven’t settled on any tactics,” he said. “There is a real sense of urgency, though, to create more housing especially for the middle class.”
The author first explored this topic in 2015, and this follow-up article was published in February:
Welcome to the Brave New Housing Cycle: Factors indicate that an extended housing boom is underway.
A new long-term housing boom is upon us. And COVID-19 is the main reason why.
Both housing and economic cycles used to last five to seven years, but the economy has shifted to longer cycles, due to factors such as technology and monetary policy. The housing market has followed suit and the result is what I have defined as the Brave New Housing Cycle, which is poised to last seven to 10 years.
The current Brave New Housing Cycle actually started last year.
Those with good-paying jobs who’ve discovered the benefits of working from home are the ones who are most-likely fueling the ferocious demand – especially in what’s now the $1,000,000-$2,000,000 starter-home range between La Jolla and Carlsbad (can’t believe that I just said that).
Evaluating the economic impact of “social distancing” measures taken to arrest the spread of COVID-19 raises a fundamental question about the modern economy: how many jobs can be performed at home? We classify the feasibility of working at home for all occupations and merge this classification with occupational employment counts.
We find that 37 percent of jobs in the United States can be performed entirely at home, with significant variation across cities and industries. These jobs typically pay more than jobs that cannot be done at home and account for 46 percent of all US wages. Applying our occupational classification to 85 other countries reveals that lower-income economies have a lower share of jobs that can be done at home.
In 2021, how many garages have 2-3 cars parked inside? We should change the name from garage to ‘flex space’, or ‘California basement’. Hat tip to my friend Ken:
JBREC was pleased to be asked to be part of a team assembled by Pro Builder Magazine to collaborate on a concept home for their “Immersive Show Village” that was highlighted last week at IBSx and is available to tour all year long. The home was dubbed “The New New Home” and JBREC’s research, in collaboration with Pro Builder and Woodley Architecture Group helped form the vision.
Over the past year, the pandemic provided the opportunity for us to examine how people live now and how they will be living in the future. The team considered the functionality of the entire house from the front to the garage, outdoor spaces, and casitas. The following provides a glimpse into the research.
A 2,500-square-foot home that is right-sized for the family. The team chose to challenge itself by designing a home on a typical lot that is readily available throughout the country. The profile is a family with two children (around 9 and 12) with parents working from home and children attending school from home. Selfishly, this describes Ken’s family so we had a little bit of a head start.
A need for privacy. The New New Home was designed to look inward instead of toward the street with an interior courtyard rather than a larger front porch. This layout offers a private retreat while connecting almost every room on the lower floor to the outdoors. The courtyard also provides a safe place to drop off packages just inside the front gate.
Will we always need a two-car garage? Maybe not. While the home’s design highlighted a two-car garage, it included a single-car option to inspire and ask “what if?” In a future where we rely less on cars, the flexibility to offer a single car garage creates the opportunity for extra square footage, building in options to suit the preferences of different owners. The single-car option still allows for storage space in the garage and opens the possibility for more entertaining space in the courtyard.
A casita for multifunctional space. While the main house stays under 2,500 square feet, the guest house adds livable space. This multifunctional room could work as a guest quarters or multigenerational suite for extended family, whether a parent or a boomerang child who graduated college but is not ready to start their career. In the July 10, 2020 edition of The Light, we noted that more than 1.1 million 23-to-30-year-olds had moved “back home” since February. The casita could also function as a home office that is separate from the house.
A large, functional backyard. When asked to choose between a large backyard and a larger front yard, homeowners indicated the backyard was more important. The New New Home offers a private courtyard and a nicely sized backyard. The yard is large enough to include outdoor seating areas, a space to garden, an outdoor kitchen, and includes a covered outdoor room with transition space between the great room and the backyard.
A simple and open kitchen layout with all of the appliances along one wall is supported by a spacious island providing space for the kitchen sink and informal dining. Storage is important, and while this home doesn’t have a walk-in pantry, a run of cabinetry between a “clean room” (designed as a healthy transition space from the outside) and kitchen takes the place of the walk-in setup.
Multiple spots to accommodate working from home. JBREC’s consumer research found that 60% of households earning $50K+ who are working from home right now anticipate continuing to work from home at least part-time post COVID. The New New home includes two work spaces located on separate floors. Both offices were designed to incorporate lots of light, while considering the background behind the workspace. The offices have smaller dimensions to accommodate a built-in desk and storage but no space for clients “sitting across” from the worker.
Your kids live at home too! Our August 14 edition of The Light highlighted the need for spaces dedicated to remote learning as more than 4.0 million students were impacted by school closures. This home was designed to accommodate a growing family with the children’s “wing” featuring two secondary bedrooms that share a bath, and a layout that maximizes separation between the kids’ wing and the primary suite. The children’s bedroom provides space for separate study or remote learning areas.
Our New Home Trends Institute, our consumer research, and our constant “on-the-ground” consulting work continues to help inform our knowledge of how people live and how their homes are evolving. Let us show you how to implement these strategies into your next new home community.
If you have any questions, please contact Ken Perlman, Managing Principal, at (858) 281-7214 or kperlman@realestateconsulting.com.
