There are tectonic plate shifts in our economy that have existed since the early ages of commerce, events so dramatic, they shake entire industries. An example would be how the advent of the Internet decimated the travel agency world.
A couple of decades ago, trying to book airline tickets and hotel rooms was a laborious, over-the-phone nightmare that travel agents made far easier with their own systems that efficiently booked everything, making them invaluable intermediaries for business and leisure travel. Then the Internet came along, and the simplicity of booking from our computers blew up the travel agency industry completely.
The same holds true for the by-gone era of long distance calling with the coming of cellular phones. So rapid and impactful was the descent of the long-distance world that it destroyed companies like MCI, which couldn’t pivot quickly enough, and resulted in a spectacular bankruptcy that sent senior managers to jail.
Laws and Regulations. But the shifts are not just driven by new technologies; laws and regulations have often had the same effect on entire industries that are forever altered by fiat, such as Teddy Roosevelt and the trust busters of his era. They brought the monopolies in oil, rail, banking and so many other industries to a halt, ending the fortune-making of the Gilded Age. Likewise, clean air legislation has forever changed the coal industry, which has only survived these regulations because of exports.
Another outcome of the trust-buster era that has long endured was the outlawing of price fixing, an anti-trust measure that is carefully watched and complied with by virtually everyone in our industry. And now a jury in Missouri has handed down a sweeping verdict on price-fixing in the world of real estate commissions, which stands to radically alter the way real estate agents are paid for their work. It will undoubtedly result in far lower pay for the 1.6 million men and women who sell homes as their main job or as a side hustle.
The verdict was directed at some of the major real estate brokerages around the nation, but most particularly against the National Association of Realtors (NAR). The federal jury in Missouri found that the NAR and large brokerages conspired to keep costs associated with home sales artificially high by effectively locking in commission rates, even as home prices have skyrocketed.
Post-Verdict Report. One prominent post-verdict report predicted that more than half of agents, and as many as 80%, could lose their jobs or leave the profession amid continued class-action litigation. Additionally, the report predicts that over time, the $100 billion annual commission pool on home sales in the United States could be cut by one-third. Realtors were already facing the effects of rising interest rates, which have put a chill on inventory and pushed down home sales to their lowest level in years, and now this.
Remember, U.S. real estate agents drive 90% of home sales, and earn an average of $65,850 a year, typically paid by commission when a home gets sold. Some now believe changing the commission model will weed out many part-time Realtors, leaving more business for full-time agents.
The report suggests that in a more competitive marketplace, the commission rates will come down to 3-4%, from 5-6%, with greater variation from agent to agent. Both the buyer’s and seller’s sides are going to negotiate commissions downward, and it still is unclear how changes to commissions, which have long been baked into home prices, would affect the housing market.
Some believe turning to a flat-fee model might be an answer. One option would be to charge house hunters between $2,000 and $5,000 for a clear list of services and expenses, including transportation, time and mileage, over a period of weeks while they looked for a home. If the potential buyer didn’t find one during that contract, they would have the option of continuing with the broker, and a new fee would kick in.
But in reality, the final outcome will take years to determine. And in the meantime, one more tectonic plate shift will affect this $100 billion industry forever.
AVP Pulse Index. I get asked what the line in this index means, so I thought I would explain it once again: it represents our proprietary algorithm, which tracks the direction of our industry on a rolling 36-month basis. Simply put, the line defines the direction of the industry, whether it is trending up or down. After a strong start in 2023, the Index is trending down in the last few months, but is still positive for the year. This is driven in part by the new home segment of our industry, as well as builder and construction sentiment. Overall, we are much higher than we were three years ago. I believe this trend will flatten over the next six months, as the strength of the Infrastructure Investment and Jobs Act money combines with anticipation for falling interest rates.
About the Author
Pierre G. Villere serves as president and senior managing partner of Allen-Villere Partners, an investment banking firm with a national practice in the construction materials industry that specializes in mergers & acquisitions. He has a career spanning almost five decades, and volunteers his time to educating the industry as a regular columnist in publications and through presentations at numerous industry events. Contact Pierre via email at pvillere@allenvillere.com. Follow him on Twitter – @allenvillere.