NAR president Leslie Rouda Smith on the negative impact of requiring homebuyers to pay their brokers’ commission at closing
August 8, 2022, 3:59 pm By Leslie Rouda Smith
Critics argue that prospective homebuyers should pay real estate agents directly out of pocket — as opposed to the more common practice of the listing broker paying the buyer broker’s compensation. What those critics fail to account for are negative effects this would have on fair housing in America.
This push toward “decoupling commissions” is a movement built on assumptions that have been dispelled — once again — by a recent, nationwide study that demonstrates the harmful effects this proposed change would have on the residential real estate market, particularly first-time homebuyers and those from minority groups. “Be Careful What You Ask For: The Economic Impact of Changing the Structure of Real Estate Agent Fees,” was conducted by two former Freddie Mac executives and a former senior advisor at the Department of Housing and Urban Development.
Using straightforward economic modeling, the researchers concluded that requiring buyers to come up with the additional funds needed to compensate their broker at closing would make it significantly less likely that first-time and other aspiring buyers could afford a home. A family purchasing a $250,000 home, for example, would see its closing costs increase by 42% if also covering, say, a 3% broker commission. Black and Hispanic/Latino buyers would be 20% and 23% less likely, respectively, to qualify for a mortgage, compared to a 16% drop for non-Hispanic/White households.
Critics of how commissions typically work now also contend that commissions would decrease if buyers were forced to pay their brokers directly. However, commissions always have been negotiable, recently falling to an historic low of 4.94% (to be divided between listing and buyer brokers). But even a significant reduction in commissions would result in the same disparity.
In the above example, a buy side commission rate of just 1.5% would still increase a buyer’s closing costs by 19%, with the number of qualifying Black and Hispanic/Latino renters who could qualify for mortgages dropping by 14% and 11%, respectively, compared to 8% for non-Hispanic/White renters, the study’s authors found.
Perhaps the biggest myth that critics promote is that buyer brokers aren’t truly valuable in the internet age. A home purchase is often the most significant and consequential financial decision a person makes in their lifetime. The role of the buyer broker is to help American consumers navigate all aspects of the transaction. From pricing and financing to offers, negotiations and closings, the buyer broker is a trusted advisor through it all.
Research has shown that buyers very much want and need that advice, even as a great majority of them use the Internet to facilitate and drive their housing search. More than half of respondents in a recent survey said they still wanted to use a broker to “help them find the right home to purchase,” let alone all the decisions that must be made once the “right” property has been identified.
This study presents some deeply troubling concerns about the impact there would be of changing how commissions are paid within the real estate market. Because of its effects on first-time homebuyers, a change would surely reduce demand. And this shift would most significantly harm Black and Hispanic/Latino families, many of whom already face barriers and have substantially lower homeownership rates than White families.
And at a time when home prices and interest rates are particularly high, our nation should be working to develop policies and proposals that increase access to the American Dream — not deter it.
The Biden administration has placed an emphasis on increasing equity in the housing market, and we applaud those efforts. We hope that, as this study suggests, policymakers will recognize that requiring homebuyers to pay their brokers directly would be a major setback for all interested in housing equity.
Leslie Rouda Smith is the president of the National Association of Realtors.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.