618. Are Realtors Having an Existential Crisis?

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See Mint Mobile for details. Today's episode is about an industry that, like many industries, often talks about how competitive it is and how that competition is good for customers.

The free market is working, and I think the consumer is benefiting while still receiving professional representation. But if you ask most economists, they have a different view of this industry.
It's just hard not to say, man, these prices seem way higher than they need to be. This is an industry that most of us interact with rarely.
But when you do, the stakes are high. It's a really important decision financially, emotionally.
You need a little bit more handholding. But is your hand being held or is it being forced? I take great offense at that characterization.
Offense noted. But also worth noting, the National Association of Realtors, the NAR, just settled an antitrust lawsuit that requires it to pay hundreds of millions of dollars in damages and change the way realtors charge their customers.
Today on Freakonomics Radio, we speak with the president of the NAR as well as its chief economist. The real estate profession is one of the most competitive out there.
It's almost like economic textbook definition of perfect competition. And we hear from two other economists who don't see much competition, but instead what looks more like collusion.
Okay, we all know how this thing works, wink, wink.

And if we just don't rock the boat too hard, we can keep it together.

Consider the boat rocked, starting now. This is Freakonomics Radio, the podcast that explores the hidden side of everything, with your host, Stephen Dubner.
the national association of realt, which is headquartered in Chicago, is the largest trade organization in America with more than 1.5 million members. There are real estate agents who are not realtors with a capital R, but the NAR is where the action is.
The organization has endured a variety of scandals, especially among their leadership.

Allegations of sexual misbehavior, financial misbehavior, monopolistic behavior. There's quite a list.
In the past few years, presidents of the organization have come and gone as quickly as the cookies at an open house. Another big problem? there just isn't as much business as there used to be.
In 2023, only 4 million existing homes were sold, the fewest in 30 years. There are a variety of reasons for this slump.
The COVID pandemic had produced a spike in sales that has since receded. Mortgage rates are still relatively high.
And there's been a lot of political and economic uncertainty. There's also the simple fact that buying or selling a home can be stressful and complicated and confusing to the point of intimidation.
But that's where the real estate agent comes in. Real estate agents are there to help you.
They do know the market better than most buyers or sellers. They deal with transactions all the time.
That's exactly why you would hire them. That is Chad Severson.
He's an economist at the University of Chicago. I'm mostly a microeconomist.
And within that, my field is industrial organization, which is really just the economics of companies. Severson started out as a mechanical engineer, so he understands how something like a house is built.
As an economist, his job is to understand how houses are bought and sold. And part of that is understanding the incentives of the players involved.
Some years back, Severson co-authored a research paper, along with my Freakonomics friend and co-author Steve Levitt, which found that real estate agents do not necessarily act in the best interests of their clients. They argued that when you are selling a home, an agent may push you to accept the first decent offer rather than hold out for a better price.
Most agents work on commission, which means they are only paid when there is a sale. Historically, the commission has been roughly 6%, which is split between the seller's agent and the buyer's agent.
And then each of those agents often kick back half of their fee to their brokerage, which means that the seller's agent earns roughly one and a half percent of the sale. Not enough, Severson and Levitt argued, to help the seller max out.
I asked Severson if he got any hate mail when the original paper was published. Yeah, including some of my relatives, but it wasn't true hate in that case.
I have a bone to pick with you as a quote. What was the nature of these complaints then? What did they say that you got wrong? It was usually more diffuse than that.
It was just like, you're painting us in a bad light. I do care about my clients.
I would never do something that's not in their best interest. Well, both things can be true though, correct? Yes.
I mean, you can have very good intentions, but if you're in a system that's exploitive of the consumer, then it's exploitive of the consumer, even if you are a good, hardworking, honest person. I think that's totally right.
And I am happy to think of this as a problem with the system rather than a problem with the people. In fact, I think that's the right way to think about it.
Would you just describe how the residential real estate sector is an unusual sector, maybe atypical. What's unusual about residential real estate is both sides have an agent at the same time.
That's not totally unique, but it's atypical for agency-based purchase industries. I mean, it happens with lawyers, for instance.
If I need to hire a lawyer to work on something, then the party that I'm in a conflict with, they've got a lawyer too.

That's right. You've got two sides and each side has their own representative.
It is different from other agent-based middleman quote type purchases like buying insurance through an insurance agent or using a financial advisor to buy stocks or securities. There's only one party you're dealing with.
Whereas residential real estate, you've got your agent and the other side has their agent. Let's say I'm buying and I've got an agent and there's a property I'm interested in, they've got their agent.
It's quite possible that my agent and that agent know each other and have perhaps collaborated before and indeed maybe even work for the same firm? Is that possible? That's totally true. And in fact, quite likely in most markets, they might be familiar with each other and have worked together before and importantly, expect to work together again.
Quite often, they actually work for the same company. They're actually sharing their compensation and the back office bits and their colleagues, which is not so typical in, say, law.
If I wanted to sue you, Chad, I probably wouldn't hire a lawyer who works at the same firm that your lawyer works at. Yeah.
In fact, I think there are rules against that for lawyers, where it's just a matter of course in residential real estate. In fact, every once in a while, you get two sides represented by the same agent.
They're working both sides of the deal.

And what are the ramifications of the fact that a buy-side agent in one moment may be a sell-side agent the next moment? If I wanted to think about it positively, I could think, well, that makes sense because if I'm buying, my agent has also sold a lot of properties and therefore knows what to look for. On the other hand, I could think, well, it feels like maybe they are part of a fraternity that I'm not a part of.
And even though I feel like they're representing me and me alone, in fact, they work both sides of the aisle. Yeah, I think you nailed it with that description.
There could be good things in terms of understanding the market from both sides. But on the other hand, these frequent, repeated interactions between agents can lead to this behavior of, hey, this is how it works in this industry and it works well.
And if you want to do something different, I'm not sure we can keep working together. I've been in a case a few times as a buyer where I would say to the selling agent, I don't have a buyer's agent.
I'm just going to operate on my own. So can we agree from the outset that we're going to subtract 3% off the price? And I get the meanest looks and I'm told that that's not the way it works.
I mean, is that not the way it works? Well, there you go. You have the legal right to propose that.
They have the legal right to take you up on it, but they choose not to. Now, why do they choose not to? Because they know if they start deviating from how things work and everyone starts doing that, then the system might fall apart.
The NAR will tell you, oh, of course, you always have the right to negotiate over commissions. But your experience and the experience that I know other folks have had is when you try, you're often met with what you describe, which is, I'm sorry, that's just not how I do business.

I was also told that my client would never accept that.

And I'm like, why the heck would your client not accept that?

Because the money is going to get deducted from the sale price that they get.

Was that client in the room with you when that was said?

The client was not in the room.

Yeah, interesting.

So how do you when that was said?

The client was not in the room.

Yeah, interesting.

So how do sales commissions affect housing prices?

Can you quantify that?

That's the $64 billion question.

There's some estimates out there.

I'm not sure if anyone's agreed on how big it actually is.

I can say that there are a lot of countries who

have agent-mediated real estate transactions that end up with much lower effective transaction

prices than the U.S. So the U.S.
historically has been up in this 5.5% to 6% commission rate,

and there are other places down in the 1%, the 1.5% effective rate.

If you look at those other countries and say,

Thank you. 5.5% to 6% commission rate, and there are other places down in the 1%, the 1.5% effective rate.

If you look at those other countries and say, are there reasons why selling houses should be fundamentally cheaper in those places? You would say no, and certainly not by a multiple factor

that we've seen. So it's just hard not to say that, man, these prices seem way higher than

they need to be to get the job done. You may be wondering, why do real estate agents get paid on a percentage basis in the first place? Why not an hourly rate like lawyers and accountants and electricians and consultants and, well, like a lot of people.

To answer that question, you have to go back to 1908 and the founding of the National Association of Real Estate Boards. Back then, local boards in places like Chicago, Omaha, and Los Angeles had set fixed commission fees,

and this eventually became the standard.

In 1950, the Supreme Court declared that this amounted to price fixing in violation of the Sherman Act. The workaround was fee suggestions, which some observers thought looked an awful lot like the fixed schedules that they supposedly replaced.
In 1972, the National Association of Real Estate Boards became the National Association of Realtors. It didn't take long for the federal government to once again declare their practice anti-competitive.
This government scrutiny and the legal back and forthing has continued ever since. And yet, commissions have remained relatively steady at 5 to 6 percent%.
Home prices, meanwhile, have continued to rise. The current median price in the U.S.
is around $400,000, double what it was 20 years ago. The same percent commission on a higher price means a higher commission.
There's nothing really you can look at in the costs of selling a house that would scale up one for one with the price of the house. It shouldn't be twice as expensive to sell a house that costs twice as much.
Imagine that instead of buying a house 20 years ago, you were buying 1,000 shares of stock in Apple Inc. The share price back then, adjusting for splits, was around $1.
So the stock would cost you $1,000. And if you went through a brokerage, you might pay a $20 fee, which works out to a 2% commission.
Now imagine you buy 1,000 shares of Apple stock today. The share price is well above $200 now, so it would cost you over $200,000.
Would you still expect to pay a 2% brokerage fee, a $4,000 commission? No, you would not. In fact, you would probably pay close to zero.
In most industries, transaction prices fall over time, thanks to technology, economies of scale, and competition.

But again, residential real estate is not like most industries. So does this commission inflation mean that every real estate agent is getting filthy rich? It very much does not.
Let's bring in another economist to help explain. I'm Sonia Gilbuk, and I'm an assistant professor at Baruch College.
Most of my research is about the housing market and how buyers and sellers find each other and how real estate agents help them in that process. And are you putting help them in quotes? I mean, they're supposed to help.
And because in the U.S., most of the transactions go through a real estate agent, I'm putting help in a way that there's no alternative for the consumers.

To be fair, there are alternatives.

It is legal in every state to buy or sell a home without representation.

But it is rare.

Only around 7% of sellers go the route known as FISBO or for sale by owner. What Gilbuk wanted to understand was what happens in the other 93%.
And she was particularly interested in how much the individual real estate agent matters. The main takeaway is that not all agents are the same.
Gilbuk recently published a study, along with her husband and fellow economist Paul Goldsmith-Pinkham, that looked at data from the MLSs or multiple listing services in 60 markets across the U.S. Around 95 percent of MLSs are owned by the National Association of Realtors.
An MLS is a database where agents post their sales listings and communicate with one another about prices and commissions, including how much a buyer's agent should expect to receive. This is called a cooperating compensation agreement, and it is at the root of the alleged fixing of rates.
Gilbook and Goldsmith-Pinkham used this MLS data to analyze the comings and goings of individual agents as well as their performance. What did they find? There's some really experienced agents that offer different quality service from really new agents.
There's a lot of inexperienced agents out there, and they provide a much lower quality service in terms of probability of sale, which is especially important in a down market. This may not surprise you that experienced agents tend to be better, but when you consider how many agents are out there, you may be concerned with your odds of getting a good one.
Roughly 3 million people in the U.S. currently hold a real estate license.
Remember what I said earlier about the total number of home sales in a year? 4 million.

Even if there are two agents per sale, one on the buy side and one on the sell side,

that gets us to 8 million transactions. Do we really need three agents for every eight

transactions? So why does the market attract this many agents? Here's Chad Severson again. One way to think about it is just the gross pot of money involved is enormous.
Total number of houses sold per year times average price times five and a half or six percent. That is billions and billions of dollars.
If that's the pie and it is extremely low cost to get in and try to start slicing off a piece of that pie, you're going to have a lot of bakers trying to cut the pie. Now, it ends up there's so many, the slice that any average person gets is really tiny.
But I think that's one way to think about it is just a ton of money, super easy to get into. How easy is it? Here's Sonia Gilbuk.
It depends on the state, but in most states, you have to take a course, which could be a 50-hour course. So you put your foot down and you can be done with it in a week.
And then you take a state test and you pay a license fee. It's just so different from any other profession where you have to get a degree or you have to get an apprenticeship before you can actually practice.
And it's really easy to get a job because the agents essentially work for themselves. When an office hires an agent, they hire them as a contractor.
So they're not on the hook for any salary at all. They're just getting part of their commission.
So they don't lose anything by hiring as many people as they want. As Gilbuk said earlier, experienced agents perform better than newbies.
But newbies continue to flood the market. Why? We find that the reason why there's so many inexperienced people is because of the quote-unquote fixed commission rates.
In other words, that 5% or 6% commission is so attractive, almost like a lottery payout, that it draws many new players, even though they have a slim chance of getting that payout. So what would happen if commissions were smaller? We find that if the commissions were more competitive, there would be many fewer agents.
There would be a lot more experienced and more houses would be able to sell. So essentially, addressing the commissions is one of the most important ways that we can make this industry more efficient.
The National Association of Realtors insists that commissions are not fixed, that fees are negotiable. That may be true in theory, but in practice, the NAR has maintained its leverage.
How do they do that? We live in an economy where new technologies and new entrants are constantly pushing aside the old guard. Why hasn't that happened in residential real estate? Here's Chad Severson again.
Additional information has radically changed a lot of industries. Going back a few decades, travel agency lost 60% of its revenue when people figured out they could buy airline tickets themselves online.
And airlines figured out flyers were happy to do that. Basically, one of two things happened.
Either the industry does totally restructure itself. That's kind of what happened with travel agency.
Or it's a little bit of a squeezing the balloon thing like car sales, where they've moved some of the obfuscation, for lack of a better word, to other parts of the transaction. Or they just try to make profit on other dimensions now through repair deals or whatever.
So that tends to be how a lot of industries have responded. Residential real estate has changed less, and I think it's because you have this two-sidedness of the deal.
So it's not just one agent decides to do things differently and things start falling apart. If one starts doing things differently, the other one can say, oh, no, you don't.
And here's what's going to happen if you do. What you're describing sounds like a word that we don't like to throw around casually, but it's a word that you certainly used to describe this ecosystem, which is collusion.
In what ways does collusion exist in this system?

There's explicit collusion. The smoke-filled rooms where parties in an industry get together and say, hey, let's make a plan so we can monopolize this thing and make more money.
I don't think there's ever been evidence of this happening widespread in real estate. The kind of collusion that Steve and I talked about in the paper is what an economist might call tacit collusion, which is there's never an explicit agreement and no one's signed contracts of this form, which would be completely illegal.
But there is a sense of, okay, we kind of all know how this thing works, wink, wink, and this thing works well for us. And if we just don't rock the boat too hard, we can keep it together.
But in 2023, the NAR was the main defendant in a class action lawsuit in Missouri. The lead plaintiff, Rhonda Burnett, argued that in 2016, she and her husband wanted to sell a home and her real estate agent gave her a form with four commission rate boxes to choose from.
6%, 7%, 8% or 9%. When Burnett asked if the commission was negotiable, which the NAR says it always is, she was told that a lower commission might diminish the likelihood of her home being shown.
The Burnetts and other plaintiffs argued that the NAR and several brokerages conspired to impose a, quote, blanket, unilateral and effectively non-negotiable offer of buyer broker compensation. The trial evidence included a training script from one of the brokerages.
It instructed agents to say, if an agent has 10 different houses, nine of which come with a 3% commission, one of which comes with a 2.5% commission, which houses do you think they're going to show? It took a jury barely two hours to rule against the NAR. The court awarded damages of $1.8 billion, which in a settlement, the NAR negotiated down to $418 million.
But the trouble is not over. The NAR is facing lawsuits in several other states, charging monopolistic behavior.
Coming up after the break, what does the NAR have to say for itself? The settlement was part of our agreement where we didn't admit

to any wrongdoing. I'm Stephen Dubner.
This is Freakonomics Radio. We'll be right back.
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Okay, in the first chunk of this episode, we heard from economists who were beating up on the National Association of Realtors. Let's hear now from the NAR.
My name is Kevin Sears. I am a broker associate with La Macchia Realty in Springfield, Massachusetts.
Okay, also. And I'm the 2024 president of the National Association of Realtors.
Yeah. You almost left that one out.
That's a big deal, no? Yeah. You know, typically when I do the interviews, I'm used to just talking with local media and they want to know the brokerage I'm with.
Yeah. I understand.
Give me a little bit on the NAR. What is the NAR exactly? The National Association of Realtors is a trade organization that has about 1.5 million realtor members across the country.
We are a trade association that advocates for our members and for property owners' rights across the country. What share of all real estate agents belong to the National Association of Realtors? I think that there's probably close to about 3 million licensees across the country.
And so we've got about half of them that are members of the National Association of Realtors, which, you know, part of the requirement to be a member is you have to subscribe to the Code of Ethics, which is very important for us. And it's been around for over 100 years.
I've read that the organization holds more than a billion dollars in assets. Why would a trade organization have that many assets? Yeah, I'm not sure where you read that.
That was the New York Times. Yeah, the New York Times has been known to get some things wrong.
What I'll tell you is that the National Association of Realtors, we absolutely do have some assets. And part of the assets that we have are properties that we own, that we use.
We also have reserves built up from dues from our members.

We also have different wholly owned subsidiaries that invest in property technology and that sort

of thing. The NAR charges annual dues of $156 and with 1.5 million members, well, it pays to be the country's biggest trade association.
But when you're thinking about real estate agents, the important number to keep in mind, the top line number, is the total amount that Americans pay them every year, around $85 billion. That is not the value of the real estate they sell.
That is $85 billion in sales commissions. You might take this to mean that those 5% and 6% commissions, whether set by tacit collusion or otherwise, are simply too high.
Here's what Kevin Sears says. Commissions are entirely negotiable, and they have been for the entirety of the 30 years that I've been a real estate licensee and a realtor.
Economists that I know, when they look at the NAR, National Association of Realtors, they describe it as somewhere between a monopoly and a mafia, that it's got all the power on the selling and buying side of the housing market in the U.S. I assume you disagree with that characterization.
Tell me why they're wrong. Yeah, I take great offense at that characterization.
There's over 3 million across the country, and we have only half of those licensees as members. Consumers have tremendous choice right now.
They can choose who to hire, what to pay, or to go it on their own. The fact that we are the only national organization that has reached to all 50 states, and we have the ability to lobby in our nation's capital, that's a good thing, not only for our members, but for our industry and for the American consumers who rely on us to promote private property rights and the protections thereof.
Let's talk about the recent settlement. Tell me what it means for your organization and what kind of changes you're making because of that.
Unfortunately, a jury of eight in Missouri found us liable in federal court. And as a result, there was a jury verdict of $1.8 billion.
Since it was an antitrust case, that meant it was tripled up just shy of $5.4 billion. We did not have the resources when it came to being able to satisfy that jury verdict.
And so we negotiated with the plaintiffs on a settlement. The settlement does have a financial component.
Over the next three years, the National Association of Realtors will pay $418 million as part of the settlement. There are a couple of other things that come along with that.
The first is that the settlement was part of our agreement where we didn't admit to any wrongdoing. We do believe that the practices were legal, meaning that they were allowed by the law.

But with that said, we did agree to make some practice changes. There's two major components to the practice changes.
The first has to do with the multiple listing service. There will no longer be allowed an offer of cooperating compensation displayed on the multiple listing service.
With that said, offers of compensation can still be made off the MLS.

The second big change has to do with buyers. If buyers want to tour a home, they can expect to have a written agreement presented to them where it will spell out the services that will be provided by the realtor and the fee that that realtor will

be looking to get paid. The seller may still offer compensation to their agent, but what the buyer will need to understand is that if the seller does not offer compensation, does not offer the amount that is in their agreement, the buyer will have to come to the closing table with extra money to pay for their representative.
So that is the take on the NAR settlement from the president of the NAR. We spoke with another high-level executive there.
Lawrence Yun, chief economist for the National Association of Realtors. And how would you describe the state of the housing market at the moment? Well, for homeowners, it is great news.
I mean, people have seen the home price rise roughly 50 percent from pre-COVID days. But for the real estate professionals, the past two years has been quite difficult.
High mortgage rate along with record high home prices and limited inventory has restricted business opportunity. Home sales essentially trending at 30-year low levels, even though their past clients are all happy, super excited about having been a homeowner.
So your organization, the NAR, recently got a pretty big spanking from a federal jury trial in Missouri in a class action suit brought by homeowners. What's your response to that verdict and then the settlement that the NAR entered into? The real estate profession is one of the most competitive out there.
It's almost like economic textbook definition of perfect competition. You have so many new entrants every year, roughly 200,000 new people, entrepreneurs trying to test out their skill set.
And then you have roughly 200,000 realtors who gave their best, but they said, no, it's not for me. And then, of course, you had all different business models, full service, limited service, discount brokerages.
And great thing about America is that Americans can do it by themselves if they want to.

So I thought the market was competitive, but I guess the lawyers can always convince few people to get the verdict they want. Here's something you said about the lawsuit in the settlement.
You said a couple of lawyers were able to find two, three unhappy owners and make a lawsuit. And you have nine, 11 jury members.
So you can count the number of people involved in the lawsuit. Now, to me, Lawrence, it sounds like you're saying the NAR was screwed over by the legal and jury system.
Is that a fair assessment? Again, as an economist, I look at the competitive nature, the free entry and exit of the people in the profession. The only other industry that is more competitive, more dynamic than the real estate brokerage industry is in the restaurant, constantly coming in, constantly going out.
So let's say there was a couple of unhappy consumers of a restaurant. They may bring a lawyer to sue the restaurant to say, look, what they promised did not match the expectation of it.
But to make it into a class action lawsuit to have all the restaurants across the country be impacted, is that a fair judgment? When we take survey of consumers, recent home buyers, recent home sellers, every year, we have been doing it for 40 years, the numbers barely budge. Essentially, 70% say they really enjoy working with a realtor.
Who conducted the survey that you're citing about the customer satisfaction with realtors? The survey was commissioned by NAR. So when the consumers essentially say that they are happy, what was the key reason? And they say it's the trust factor.
I don't have to get down to all this paperwork. I trust what my realtor is relaying that information.
I could imagine that if an industry or a trade association like yours is commissioning a survey to understand how happy people are with their services, it might be tempting to find within that large data set of all people who have completed transactions, the home buyers or sellers who you know were particularly satisfied with their transaction. Persuade me that the data here are more representative than that and not cherry-picked like that.
You know, one can talk to any homeowner, just knock on the door, say, did you buy a home with a realtor? Who was the name of the realtor? Were you satisfied with the service? I'm pretty confident the result will be very, very similar. How is the recent NAR settlement changing things for not only the organization, but the brokerages down the line and then the real estate agents down the line? The realtors are quite optimistic about the new rules.
They don't agree with the verdict, but given that the verdict is in place, sometimes life is never fair on every angle, but entrepreneurs always adapt to new rules. They're explaining to their clients.
Buyers are understanding they have to sign the form. And for the home sellers, it is irrational to ignore offers that say you have to pay buyer agent because those offer may be high price or all cash that doesn't involve some complication later.

So the process moves on. But at the moment, the market is primarily determined by economic factors, inventory availability, mortgage rate, job market situation.
How do you see real estate transactions being conducted differently in five or 10 years based on the new rules put in place by this settlement? We are in the very first innings. There will be a lot of trial and errors and there will be a lot of new companies trying to see what type of new model will best fit under the new rules.
We don't know what the numbers are. NAR never collects data on the commission rate.
and the reasoning for that is that we don't want to set a focus point. So somehow NAR said this is the average rate, and everybody focused on that figure and leads to some tacit collusion.
We don't want that. We want the market to be competitive.
We don't study the commission. But anecdotally, some people are saying, well, now they are able to submit an offer with a little higher commission than what they had done before.
Others are saying a little lower. Only concerning factor that I have is the first-time buyers, especially minority first-time homebuyers.
Because we look at the wealth distribution in America, we understand the American history about generational wealth transfer. and if somehow it becomes the norm that the buyer have to pay out of their pocket to their agent, essentially you are denying the people in more moderate wealth circumstances, which in the U.S.
is essentially minority homebuyers. So you said, Lawrence, that the NAR does not gather data on commissions because you don't want it to seem like there is a collusive element there.
But people do gather those data. Economists do that.
We talked to Chad Severson. He and others have pretty decent data.
It shows that the traditional rate of 6% has maybe slipped a little bit over the past couple decades, gets into the five-something range. But that it's pretty consistent across the country.
And in fact, it's pretty consistent even in high value markets like New York City versus lower priced markets, which to me seems strange because 6% of a $5 million apartment is an awful lot bigger commission for not necessarily five times the work of a million dollar house somewhere or 10 times the work of a $500,000 house somewhere. So why do you think that commissions are so routinely in that range in so many different markets? I am aware of what outsiders are studying.
And again, as long as you have competition, let the market settle what it would be. I don't know the particulars of selling a home in New York City, maybe doing a co-op sell.
It gets a little more extra complication compared to home selling out in, say, middle America in Kansas. And maybe part of this settlement, maybe there's broader knowledge that people can negotiate.
As we know, there are many consumer habits. It is based out of inertia.
But with more publicity, maybe people will ask more questions. And those are all good.
More competition, more consumer awareness, all positive. So that's how Lawrence Yoon, the chief economist of the NAR, sees the after effects of the lawsuit and settlement.
And how about NAR president Kevin Sears? I do think there may be a little time of a learning curve for agents that are not used to having to present a written agreement to a buyer. What I can tell you is that on the sell side, the seller is going to have a professional representative and the conversation is going to be very, very similar to how it's always been.
They're just going to make sure that they clearly explain about the compensation for the buyer's agent and the fact that commissions are negotiable. This is just giving our members a great opportunity to have those extra conversations with the consumer up front about what they can expect in the buying process, what services and expertise and value the realtor will bring to the transaction, and how much they are looking to get paid and how they will get paid.

Do these explanations leave you a bit confused? Yeah, me too. Coming up after the break, the financial incentives may change in home buying, but how about the behavioral incentives? If I go out to dinner and the restaurant accidentally puts an extra $1,000 on my bill, I'm incensed.
But when it comes to selling a million dollar, it's $1,000 here, $1,000 there. I just want to finish this.
What does it matter? I'm Stephen Dubner. This is Freakonomics Radio.
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Love your work with Canva presentations at canva.com. Okay, I feel we need a quick recap.
The NAR, or National Association of Realtors, recently agreed to pay damages of more than $400 million and change some policies after they were beaten in a class action lawsuit in Missouri. One change is that home buyers will need to sign a compensation agreement with their agents up front,

and realtors can no longer post what are called cooperative compensation offers on multiple listing services. Theoretically, this might lead to lower commissions for home buyers and sellers, and economists who analyze this market think this might lead to lower housing prices.
I was surprised to hear Lawrence Yoon, the NAR's chief economist, say earlier that they don't compile data on realtor commissions. The reasoning for that is that we don't want to set a focus point.
I did ask him for some other NAR numbers. You talk about the new entrance into the NAR every year.
about 200,000 new entrepreneurs. So that sounds to me like a very high rate of churn, especially if that many people are leaving each time, which suggests that the median realtor is making very, very, very little money because it's really hard to get listings, especially when you're starting out.
What can you tell us about the annual earnings of a median realtor? When people look at the realtor profession, sometimes people think, well, maybe it's like teachers and all the realtors get similar pay, but it's not. It's an entrepreneurial business.
It's like a restaurant business. Some restaurants are driving year after year.
Some realtors are driving year after year. And then other restaurants are fairly new.
Maybe they will eventually thrive or maybe they will struggle. The median income is around $45,000, but there's a huge distribution.
About one-third make less than $20,000. And then you have about 20% make six figures.
The entrepreneurs who are coming into the industry say, well, I believe that I have this entrepreneurial skill set, and they give it a try. I mean, one has to admire that.
Of course, not everyone will succeed because of the competitive nature of the marketplace. Tell me a bit about the demographic makeup of your membership.
About two-thirds women, one-third men, and the median age is around 55. Their income level is not comparable to what other profession would possibly offer and stability.
Yet, I think the joy of seeing that first-time buyer get that home, and then for most homeowners, they become friends, being part of the community, I think there's some certain intangible satisfaction that comes from working in real estate. One of the interesting conversations among economists and others over the past 10 years has been how much free labor was provided by women in the home that was never valued, never counted, no price put on it.
And people are now trying to factor that into the economy. with so many women as realtors, with so many of them earning not very much money.

It strikes me that this is yet another area in which a lot of women are doing a lot of work and getting paid very little. Is that uncharitable or do you think that's accurate? This is a voluntary choice as people are trying it out.
Sometimes it could be for supplemental income for the household. We don't know.
One interesting part is that we have seen two years of very difficult business opportunity, yet the membership number has barely budged, which is implying that even with the income level being what it is, some people may be saying, look, I saw another realtor get that six-figure income. Maybe I can be that.
And here's something the economist Sonia Gilbuk told us that she had come across in her research. In our data set, we find that if you take a random agent, so someone who has some history, there's a 30% chance that they have never had a transaction before.

It's hard to think of another profession where 30% of the workers are unpaid.

If you don't sell a listing that you control,

or if you don't connect with a buyer who finds a home and actually buys it,

there is zero compensation, actually less than zero.

You may pay fees to the NAR, and then there are all the costs associated with trying to get a sales commission. So you can see why there is so much churn at the bottom of the pyramid.
At the top of the pyramid, meanwhile, there is a relatively small fraction of agents who earn a good living since they are routinely tapping into that five or 6% commission pool. This is what economists call a tournament model.
A lot of players are hoping to climb that pyramid, competing against the field, while knowing that success is unlikely. In this regard, selling real estate is less like a profession and more like the path followed by artists and performers and athletes.
I went back to Chad Severson, the University of Chicago economist, to ask why this is the case. It's just the nature of the industry.
All that happens when house prices go up is you get more agents. The structure now doesn't help the average agent.
Maybe it helps the ones who do super duper well. It helps the brokerages because the more volume they get under their umbrella, the better they are.
It helps the NAR because the more agents there are, the more dues and fees they collect. But at the individual agent level, this structure isn't what's making what they think would be nice about the industry nice.
You know, the flexibility, I can do this part-time, etc. You could do that in a world where you get paid by the hour too, right? Knowing what you know about real estate sales and knowing what you know about incentives generally as an economist, how do you think this change in incentives is going to change behavior, whether among buyers, sellers, or agents on the buy side or on the sell side? One possibility is nothing changes.
The current structure is completely allowable under the new settlement. It's just the way that that structure is agreed to has to be a little more explicit and there are more rules about how the communication of the commission rates are done.
But if you follow those rules, you can still have, say, a 6% total commission split evenly between the buyer's agent and the seller's agent. What might happen is the new rules give more leeway to agents who want to do things differently.
So let's say that, I mean, this is a very unlikely scenario, but let's say the NAR looks at what's coming and says, oh, we're losing our grip here. Our lovely model from the old days that made a lot of money for a handful of agents is going away.
And they come to you and say, Professor Severson, I know you've been a critic of this industry to some degree, but you also appreciate the value that some real estate agents can bring. We want to design a new system from scratch for home sales.
What would that look like in your mind? I think it makes a lot of sense just to start with an hourly fee. You know, we hire a lot of professional services at an hourly rate and the hourly rates are settable agent by agent.
You want competition in this market too. Certainly you don't want any coordinated hourly rate.
It doesn't solve all the problems. You're still going to have information gaps and it'll create its own.
When you pay someone by the hour, you get a lot of hours that maybe you don't really need. So it's not a panacea.
Let's assume that the NAR settlement really does change how the commission structure works. And let's pretend that five or 10 years from now, it is a very disintermediated market, the way that travel agents were disintermediated, which means a lot of people are booking travel on their own.
I don't know really how large this movement is, but I have read about a return to travel agents. Consumers want them because even though, yeah, I can book the flight and the hotel and rental car and other things I want to do all by myself online.

It's a lot of work and it's a hassle and it can be confusing and so on.

Could you see a future in which a similar thing happens with real estate sales that

agents really do get disintermediated and that buyers and sellers end up doing a lot

on their own and they don't like it and they want to return to the current ecosystem as inefficient as it may be for buyers and sellers? I can see people trying it out on their own and not liking it, certainly. There's probably going to be a set of really sophisticated sellers and buyers who will just keep doing it by themselves.
But I think what you described could happen, which is the typical house seller is like, geez, I might have the mechanism to do it, but I really don't know what I'm doing enough. I don't have the time, et cetera, et cetera.
And so they want to hire an agent. Again, there are reasons why agents are valuable, but if the structure of compensation falls apart and people do want to run back to agents.
I understand why that would happen. I would hope the compensation structure doesn't reverse itself back to what we've got now.
So, Chad, I know you've got four kids. I believe half of them have gone off to college.
Is that right? Yep. Okay.
Let's say the other half go off to college and you and your wife say, hey, time for a life change. We're going to upsize, downsize, move somewhere warm, whatever.
How do you think about selling the place you're in now and buying the place you end up wanting to buy? I would consider doing a for sale by owner. If I did, I would, quote, cooperate with buyer's agents.
In other words, if the buyer's agent was expecting to be compensated through a split with the sell-side agent, I'd effectively pay money. Because I would know that if they weren't being compensated by their own client, they've got no incentive to bring their client to my house.
There are reasons to have a sell-side agent that are valuable, particularly in the neighborhood I live in. It's sort of a small niche market, and it's good to have that pre-advertising component that having a sell-side agent can give you because they talk to other people in the market.
What about the buying side? Let's say you spend a couple hours looking at things online and you say, oh, these look like three properties I'd really like to go check out. Would you want to hire a buy side agent to do that or would you want to do it on your own? I think I could really handle the buy side myself.
The exception is if I thought the market were tight enough that having knowledge of sales to come was important. Just tootling around on the internet myself, I'm not going to know a house is for sale until it's for sale.
And in a hot market, it might be essentially gone by that point. So in that world, I might consider a buyer's agent.
But in a slower market, I think the agency component I would do myself.

That, again, was Chad Severson from the University of Chicago.

Thanks to him and to Sonia Gilbook

from Baruch College,

as well as to Lawrence Yoon

and Kevin Sears

from the National Association of Realtors.

I'd love to know what you think

about this topic

and about this episode.

Our email is radio at freakonomics.com. Coming up next time on the show, a lot of big things happened in 2024.
One of the biggest was a great leap forward in artificial intelligence. Or was it such a great leap? There is an exceptional level of hype.
That bubble is, in many ways, in the middle of bursting right now. But just in case the bubble is not bursting, what's the best way to think about the AI future? It really is about how you see the value of technology versus the value of people.
That's next week in our regular time slot, which is now Friday mornings, Eastern time.

But before then, you will get a bonus episode. You remember me telling you we were going to San Francisco for a live show? Well, we did that.
We spoke with a couple economists and the outgoing mayor. Pull out those phones because you guys are going to see a different mayor breed.
That's next time Until then, take care of yourself

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This episode was produced by Augusta Chapman. The Freakonomics Radio Network staff also includes Alina Cullman, Dalvin Abawaji, Eleanor Osborne, Ellen Frankman, Elsa Hernandez, Gabriel Roth, Greg Rippon, Jasmine Klinger, Jason Gambrell, Jeremy Johnston, John Schnarz, Lyric Bowditch, Morgan Levy, Neil Carruth, Sarah Lilly, Tao Jacobs, and Zach Lipinski.
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As always, thank you for listening. It's very welcoming that many other countries, especially developing countries, they come to NAR to say, how do you work? We want to have more orderly system.
We don't want the total chaos in the marketplace. We don't want people getting ripped off.
How does the multiple listing service work? What is your ethics rules? So we are happy to share all this with other countries who wants to know how the United States system works. The Freakonomics Radio Network, the hidden side of everything.
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