Changing the commission payment method would be harmful
Black, Hispanic/Latino, first-time, and low/middle-income buyers dominate
MINNEAPOLIS, July 11, 2022 /PRNewswire/ — A new study has found that forcing potential buyers to pay real estate agents directly would significantly reduce home buying opportunities for large segments of the population. “Be Careful What You Ask For: The Economic Impact of Changing the Structure of Real Estate Agent Fees,” illustrates how the changes would most affect Black, Hispanic/Latino, first-time, and low- to middle-income buyers. The independent study was commissioned by HomeServices of America as part of the company’s ongoing efforts to support equity in home buying.
Recognizing housing inequity and the homeownership gap, HomeServices of America began work in early 2019 to create a foundation whose mission is to increase homeownership among homebuyers blacks and other color potential buyers. In 2021, the HomeServices Foundation for Housing Equity was officially established. Although some favor changing the decades-old practice of listing brokers offering commissions to home-selling brokers, it became apparent that this proposed change could have serious implications for the capabilities purchase of a house by the people for whom the Foundation was created. Given the possible negative impact on homebuyers, HomeServices of America commissioned an independent study to assess its concerns with the proposed change.
Written by Freddie Mac alum Anne SchnareChief Economist of the National Association of Credit Management Amy Cutts and george washington university Business teacher vanessa perrythe study created an economic model that proves the adverse effects to consumers and the U.S. economy in general that would likely result from changes in how agent fees are currently paid.
“Changing the current compensation structure could affect the ability of potential buyers to qualify for a mortgage and buy a home,” said lead author Schnare. “Requiring buyers to pay their agent’s fees directly would result in reduced homeownership opportunities for cash-strapped families and lower net proceeds for many sellers. These outcomes would create negative ripple effects throughout the housing market.
Key findings of the study regarding decoupling commissions include:
- The greater evil would be for the first time, low income, middle income and racialvastly underrepresented buyers. A significant segment of the housing market would likely be negatively affected by the decoupling of fees. Overall, homeownership rates in the United States, especially among non-white buyers, would decline. The assets needed to purchase a $250,000 house would go from about $16,250 at $23,015.
- The decoupling of commissions would harm the whole economy. The reduction in demand that would likely occur at lower housing market price levels could easily spill over to other segments of the market. If a significant portion of potential buyers are already cash-constrained, changing the current compensation structure by requiring buyers to pay more upfront would inevitably lead to a reduction in market demand.
- Commissions could not be included in mortgages. Lenders, mortgage underwriters and appraisers would face significant challenges in determining the appropriate amount of buyer’s broker’s commission to include in home financing. Federal regulations limit how much of the total purchase price buyers can finance, which means some buyers might no longer qualify for a loan while others would have to pay an additional fee per month in mortgage insurance.
The study estimates that the median price potential first-time home buyers can afford to pay for a home is approximately $294,000. However, modifying the mode of payment of commissions would limit the purchasing power of these households. Although buyers could negotiate a 1.5% fee, for example, they could spend $33,450 – or 12% – less on a house if they had to pay these costs up front, out of pocket.
Such changes could prove disastrous in a housing market that already creates significant barriers for potential buyers. Since 2019, house prices have increased by almost 30% ($80,000 for a typical home), while inventory has fallen 57% over the same period. Homeownership opportunities for American families have also declined as mortgage rates rise and investors become more involved in the private real estate market, reducing the number of properties available.
As the study notes, such commission changes could have the most pronounced impact on black homebuyers. Homeownership rates for white buyers have remained above 70% since 2017, while rates for black buyers have struggled to exceed 40%. About half of all homes currently on sale are affordable for households with at least $100,000 income, but only 35% of white households and 20% of black households in America exceed this annual threshold.
The study’s findings refute unsubstantiated claims or suggestions that consumers are disadvantaged by the way commissions are currently paid.
“Nearly 9 in 10 homebuyers use a mortgage to finance the purchase of their primary residence, and many of these buyers face significant hurdles in acquiring the upfront cash needed to cover the down payment and fence,” said Dana Strandmo, administrative director at HomeServices of America. “These cash constraints are more prevalent among first-time home buyers and racial minority groups. This is a factor that needs to be considered in any conversation about changing the way buyers’ agents are typically remunerated.”
HomeServices of America funded this study. The authors conducted their research independently, and the opinions expressed and conclusions are their own. For the full study, visit: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4106600
ABOUT HOMESERVICES of AMERICA
HomeServices of America is the nation’s largest residential real estate brokerage firm, based on closed-end transactions, and is, through its operating companies, one of the nation’s leading homeownership service providers. country, including brokerage, mortgage, franchising, title, escrow, insurance and relocation. services. HomeServices of America owns the Berkshire Hathaway HomeServices and Real Living Real Estate franchise networks. HomeServices is owned by Berkshire Hathaway Energy, a consolidated subsidiary of Berkshire Hathaway Inc. HomeServices’ operating companies provide integrated real estate services, including brokerage services, mortgage originations, title and closing services, property and casualty insurance, home warranties and other home ownership services. . Visit www.homeservices.com.
SOURCE HomeServices of America