Real estate industry

The real estate industry has something the internet can’t: the human element

Steve Murray sometimes gets together with other real estate alumni, shares wine, and inevitably starts to remark, “Of course I would have thought that would have changed more now. ”

Murray, president of consultancy firm Real Trends, has been following the way American real estate agents do their jobs for 40 years. And over the past decade, the internet has disrupted nearly every aspect of a transaction that is at the heart of the American Dream. Everyone now has free access to information that was previously impossible to find or that required the help of an agent.

But as a new home buying season kicks off, one thing remains largely unchanged: the traditional 5-6% commission paid to realtors when a home sells.

As the internet has hit middlemen in many industries – decimating travel agents, crushing stock market fees, opening up the heavily regulated taxi industry – the average commission paid to realtors has increased slightly since 2005, according to Real Trends . In 2016, it stood at 5.12%.

“There isn’t the slightest evidence that the internet has an impact,” Murray said, almost seeming not to believe it himself.

Real estate agent Samina Chowdhury, right, shows a property in Fulton, Md., To Mohammed Hossain, his wife Ummeh Sharmin and their daughter Zunaina Suwaibah on Saturday. (Doug Kapustin / for the Washington Post)

The rigidity of the real estate commission is a source of fascination for economists and of curiosity for consumers who themselves carry out an increasing part of the home buying process online. It also offers potential lessons for workers in other industries worried about the destructive powers of the Internet. The web has changed the way agents scramble for a share of the roughly $ 60 billion paid annually in residential real estate commissions. But that didn’t take their jobs. In fact, the number of agents has increased by 60% over the past two decades.

It wasn’t supposed to be like that.

Experts have predicted the demise of real estate agents for years. Consider the title of a 1997 article in the Journal of Real Estate Portfolio Management: “The Coming Downsizing of Real Estate: The Implications of Technology”.

In the mid-2000s, the arrival of real estate tech start-ups like Zillow, Redfin and Trulia sparked a new dose of anticipation. “Sacrosanct Real Estate Agent Commission Rates of 6% May Be at Risk” warned “60 minutes” in 2007. Jeff Jarvis, a professor at New York City University who examines the effects of the Internet, wrote a blog post in 2006 predicting, “Realtors are next.”

The agents thought so too.

“The industry was afraid of the Internet. They didn’t think they would have a job, ”said Leonard Zumpano, a retired finance professor who for years headed the Real Estate Research Center at the University of Alabama.

The web has automated and simplified huge swathes of a process that was once complicated and time consuming. With just a few clicks on a smartphone, home buyers and sellers can now find information that once required digging through musky deed books at the county registrar’s office. And new technology has made agents more efficient. In many ways, their job is now easier.

Yet agents are expected to earn more commissions today than they did in pre-Internet days, due to stable commission rates and soaring house values.

In 1997, the typical commission on a median price US home, adjusted for inflation, was $ 16,600.

Today that commission is $ 20,131.

“It’s a mystery to me,” Zumpano said. “I would have expected the commissions to go down. “

In 2005, the Department of Justice and the Federal Trade Commission held a workshop to explain why commissions had not declined further. The American Bankers Association argued that the commission rate could be cut in half in a truly competitive market. Workshop participants seemed to have great confidence in the power of the internet to reduce commissions.

In a typical home sale, the commission is paid on the seller’s product and divided between the seller’s agent and the buyer’s agent. The rate is negotiable. But the traditional rate has held up, even as an agent’s main advantage – information – has been eroded by the Internet.

Experts don’t have a good answer as to why these commissions have survived the Internet assault. They highlight several potential factors. A home sale is a massive financial transaction. It is complicated. And that doesn’t happen often, with homebuyers staying on site for an average of 12 to 13 years. Consumers who are intimidated therefore continue to turn to agents for help.

Regulations may have slowed the pace of change. Twenty states and the District have set minimum service levels for agents, deterring brokers willing to do less for lower fees. Ten states also prohibit agents from reimbursing part of the commission to their clients. But commission rates don’t vary dramatically between those states, analysts say.

The National Association of Realtors has also worked to strengthen the role of agents through lobbying and advertising, sometimes in unconventional ways. Last year, the group struck a deal with ABC sitcom “Modern Family” to work on an episode in which Phil Dunphy’s character is a true real estate expert – a licensed real estate agent. And the Century 21 national broker is broadcasting of announcements with the slogan “Good luck, robots”, adding “there is no robot for a glimpse, a shake or a handshake”.

The efforts seem to be working. The association reports that 89% of home sellers used an agent in 2016, which is comparable to the previous five years. At the same time, sales transactions by owner fell to their lowest rate – 8% – since the association started tracking data in 1981.

“Who is going to write a contract? Complete a disclosure statement? Anticipate what is happening on the market? asked association president Bill Brown. “There is a human element in buying and selling a home that cannot be replaced. “

But the Internet is an expert at removing this human element.

It was concern that greeted Zillow when it launched in 2006 with executives from Expedia and Hotwire, travel sites that were on the verge of ousting human travel agents.

“There was fear at the start,” said Jeremy Wacksman, Zillow’s marketing director.

Agents fought to prevent Zillow from accessing private databases known as the Multiple Listing Service – where agents post homes for sale and which many saw as an agent’s ultimate benefit. Zillow ultimately tapped into these lists. But he decided not to challenge the industry head-on, choosing to focus on real estate ads.

The reception has been harsher for Redfin, a Seattle-based tech broker who has tried to cut agent commissions. He started by selling houses for a fixed amount of $ 3,000 and reimbursed part of the buying agent’s commission.

“Competing agents threatened us with violence, intimidated our clients and tried to block their offers,” Redfin CEO Glenn Kelman said in testimony to Congress in 2006.

Redfin has changed course. Today Redfin is more like a traditional broker. It has its own local agents. He sells houses for a commission of 1 to 1.5%. Redfin agents receive a salary and bonus linked to customer satisfaction.

Redfin remains a small player, with 1 to 2% of the American market. But in some big cities like Chicago, Seattle and the District, it has a 5% share. Kelman said he believes Redfin will continue to grow as a new generation of buyers and sellers enter the market.

“Kids who grew up buying textbooks on Amazon are now buying homes on Redfin,” Kelman said.

The other agents do not stand still. They also embraced technology.

A glance at Samina Chowdhury’s smartphone shows how.

A seasoned agent in Ellicott City, MD, Chowdhury has an app that scans closing documents and drafts contracts. Another accepts digital signatures. She has an app that lets her keep tabs on prospects and another to unlock residential safes. She uses an online video editor to create home visit videos. And while Chowdhury speaks five languages, if she has any problems, she can call a translation program.

“None of these technologies existed 10 years ago,” she said.

Chowdhury has seen other Agents struggle with the pace of change. But she did well. She estimates that she made $ 300,000 last year.

The surge of technology in real estate is what prompted Chris Speicher to quit his job at Microsoft to join his wife, Peggy Lyn Speicher, as a real estate agent. He thought he could help.

“It’s not about going to the real estate agent anymore because they have ‘the truth’ – they have the data,” said Chris Speicher.

They work as a team, with staff divided between different tasks. They target potential home buyers with online ads. They get leads from Zillow. Last year, the Bethesda-based team helped close $ 100 million deals.

But Speicher, like many agents, is also feeling the pressures of change. He noticed more declines on the part of homebuyers, dropping that commission by almost 2.5%.

Murray, of Real Trends, found that commission rates tend to fluctuate with the health of the housing market, almost as if the Internet hadn’t existed.

In 2005, at the height of the real estate market, buying and selling was easy. The market was tight. And the national average commission stood at a low 5.02 percent. Four years later, in the real estate crash, with almost twice as many homes on the market, commissions hit 5.38%.

Now the commission rate is falling as the housing market heats up, Murray said.

He noted that the rate had dropped 16% in the past 25 years, but surprisingly, all of that drop happened before 2004.

Murray sees one way the Internet could attack commissions: It could consolidate the highly fragmented agent market. Today, two-thirds of consumers still find their agents by knowing them or referring them personally. But if the Internet weakens this link, popular agents could gain more market share.

“And they’re going to cut rates,” Murray said. “They can be more productive now, so they will bulk up instead. They will be more inclined to discount.

They will be agents who will do what the Internet has not done.


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