Speaker 1: Hello, and welcome to another episode of the Odd Lots podcast.
Speaker 1: I'm Jill Wisenthal and.
Speaker 2: I'm Tracy Alloway.
Speaker 1: Tracy, we've been doing a lot on competition stuff lately.
Speaker 2: Yeah, we really have. Let's see. So we spoke with
Speaker 2: Lena Kahn from the FTC recently before that, we spoke
Speaker 2: to the DOJ's Jonathan Canter. So it feels like we've
Speaker 2: been making the competition rounds right.
Speaker 1: We've talked a little bit about chicken too in a
Speaker 1: few episodes. But competition more broadly is a good lens
Speaker 1: to really learn about market structure across a range of industries,
Speaker 1: because every industry is different, and every industry is different
Speaker 1: centers of power and people who have information, people who
Speaker 1: extract rents from that information, and so just in terms
Speaker 1: of I don't know sheer curiosity about how different businesses work,
Speaker 1: the sort of competition lens I find to be very
Speaker 1: useful for getting to know it.
Speaker 2: Oh, absolutely, And it's one reason why we keep asking
Speaker 2: people from the FTC and the DOJ how they actually
Speaker 2: do their research learn about industries. But I would say,
Speaker 2: aside from that benefit, which is a major one, it
Speaker 2: does feel like there is this kind of ground swell
Speaker 2: of anti trust pressure or there's more of a examination
Speaker 2: of anti competitive practices nowadays. And it does feel like
Speaker 2: maybe the winds are shifting a little bit towards the consumer,
Speaker 2: perhaps given the macroeconomic background. You know, we've seen a
Speaker 2: lot of complaints about inflation, higher prices. Obviously, feels like
Speaker 2: companies are in some respects getting more savvy about what
Speaker 2: they're charging people. But then you also have companies or
Speaker 2: industries that have kind of been doing the same thing
Speaker 2: for a long time, but now people are looking at
Speaker 2: it more critically.
Speaker 1: Yeah, absolutely, that's very well put. It does feel like
Speaker 1: across the economy you see this a lot where something
Speaker 1: has been the norm for thirty forty two hundred years
Speaker 1: and then for whatever reason, maybe there's more data, maybe
Speaker 1: there maybe social media, maybe something, suddenly people wake up
Speaker 1: and say, wait, is this fair? Is this right? Is
Speaker 1: this optimal? Is this a good system? I think we
Speaker 1: see it a lot in medicine for sure, where people
Speaker 1: are like, wait, this is how it works. But and again,
Speaker 1: you know, I mentioned we've been doing a lot on competition.
Speaker 1: We've also been doing a lot on housing. Yes, and
Speaker 1: so this is going to be an episode that is
Speaker 1: sort of a merger.
Speaker 2: Let's put the two together.
Speaker 1: Let's put the two together and talk about competition in housing.
Speaker 2: Yes, so, I'm sure listeners have probably seen some headlines
Speaker 2: floating around about a recent federal civil case called the
Speaker 2: Sitzer Burnett case. It was basically a civil lawsuit, and
Speaker 2: it found that the National Association of Realtors plus two
Speaker 2: large brokerages I think they were called Keller Williams and
Speaker 2: Home Services of America conspired to keep commission costs artificially high,
Speaker 2: and the jury awarded Missouri home sellers something like one
Speaker 2: point eight billion dollars. But I've read that a judge
Speaker 2: could in theory increase that to damages of as much
Speaker 2: as five point three billion. And this has kicked off
Speaker 2: a huge discussion about the future of the real estate industry,
Speaker 2: which has historically made its money from these commissions, at
Speaker 2: least on the brokerage side.
Speaker 1: You summarize that very well, that was really good, and
Speaker 1: this gets to something There are many aspects of real
Speaker 1: estate brokerage that I just don't really understand, and I
Speaker 1: don't really get what multiple listing services are.
Speaker 2: Yeah, I'd never heard of that before I knew.
Speaker 1: I mean, I was familiar with these databases. I don't
Speaker 1: really get who owns them. I know that access is
Speaker 1: very restricted. I don't totally understand. So I know you
Speaker 1: have a buyer's broker, but then also you can go
Speaker 1: on Zillow and find your own house or something like that.
Speaker 1: At one point when I was trying to buy a
Speaker 1: house or earlier this year, found something on one of
Speaker 1: the sites, maybe with zillo. But then there's this broker
Speaker 1: who emerged. I don't really get how all these pieces
Speaker 1: fit together, but I do understand that if you have
Speaker 1: access on some level to this infrastructure that is very valuable.
Speaker 2: Well, here's the thing. It's one of those costs that
Speaker 2: is substantial. I think the average is something like five
Speaker 2: to six percent commission on a home sale price. But
Speaker 2: because it's so baked into what you know, both sellers
Speaker 2: and buyers are paying, it's never really broken out, and
Speaker 2: I think people don't think about it that much. It's
Speaker 2: just incorporated into the overall cost of either buying or
Speaker 2: selling a house. But now people are starting to examine
Speaker 2: it more closely and say, well, wait a second, how
Speaker 2: is this all working, What are the incentives here, and
Speaker 2: why has the average Commission been so remarkably stable across
Speaker 2: literally a century.
Speaker 1: I think so many questions that we need answers too,
Speaker 1: because setting aside this one civil case in Missouri, I
Speaker 1: don't think anyone knows how it's going to change the industry.
Speaker 1: If it'll change the industry, we don't know the damages.
Speaker 1: They're certainly going to be Appeals for these types of
Speaker 1: things last for years and years, I think, And so
Speaker 1: I don't think anyone really knows where it's going. But
Speaker 1: it is a good moment to maybe back up and
Speaker 1: get an understanding of the market structure here and what
Speaker 1: could potentially change. Yeah, let's do it, Okay, I am
Speaker 1: very excited. We have the perfect guest, Andrew Ghent. She's
Speaker 1: a professor of finance at the David Eccles School of
Speaker 1: Business at the University of Utah, specialist in this area. So,
Speaker 1: Professor Ghent, thank you so much for coming on a lot.
Speaker 3: Thank you so much for having me on the show.
Speaker 1: Absolutely, how do brokers get paid? I buy a house,
Speaker 1: I go on Zillow, I find something. I see a
Speaker 1: bid seems cool. Somehow I come to an agreement. It
Speaker 1: all seems baked in. How are individuals getting paid in
Speaker 1: that transaction. In just the sort of standard.
Speaker 3: Case, we have the basic intuition, right, you buy a
Speaker 3: house and the seller agent and the buyer's agent, they're
Speaker 3: going to split the commission, and before you even approached anybody,
Speaker 3: that was set in the listing contract. So it will
Speaker 3: say in the listening contract five or six percent typically,
Speaker 3: and that will be split evenly between the selling agent
Speaker 3: and the buying agent. So it's baked into the home
Speaker 3: price right now. You know, for a very long time
Speaker 3: National Association of Realtors effectively instructed its agents to tell
Speaker 3: buyers it was free, so you may as well work
Speaker 3: with an agent because it's free. And of course I
Speaker 3: think a couple of years ago they finally backed off that,
Speaker 3: so it's no longer claimed to be free. But you're
Speaker 3: absolutely right, Joe, it's baked into the price of the house.
Speaker 2: So just before we dig in further into commission structures,
Speaker 2: can you walk us through all the various lawsuits that
Speaker 2: seem to be floating around at the moment, because I
Speaker 2: mentioned the one that's gotten the most headlines, so the
Speaker 2: Sitzer Burnett one, but there are other things out there.
Speaker 2: There's a Gibson case in Missouri. I think I saw
Speaker 2: a headline about apartment brokers in New York also being sued,
Speaker 2: and I guess I'm curious, like why these are coming
Speaker 2: up as civil lawsuits versus something more federal or you know,
Speaker 2: like more targeted from the DOJ or something like that.
Speaker 2: I think the DOJ did have some sort of settlement
Speaker 2: with the National Association of Realtors a few years ago.
Speaker 2: But like, walk us through what this landscape of ever
Speaker 2: multiplying lawsuits it seems actually looks like right.
Speaker 3: Now, you know, this has been going on for some time,
Speaker 3: and sort of the puzzle you alluded to earlier in
Speaker 3: the show about why has this stayed sticky? We've had
Speaker 3: this technological advancement where you know, thirty years ago wasn't
Speaker 3: super feasible for you as an individual consumer to go
Speaker 3: and find a home online and effectively, you know all
Speaker 3: that the technology hasn't translated to lower prices for consumers.
Speaker 3: And I don't have a good answer for why now.
Speaker 3: Accept that we've had this long standing affordability crisis in
Speaker 3: the US that sort of came to a head with COVID.
Speaker 3: So COVID because it increased residential demand so fast, we
Speaker 3: saw this big increase in home prices and supply hasn't
Speaker 3: had a chance to catch up, and so I think
Speaker 3: that might be why there's a little bit more openness
Speaker 3: to sort of thinking about this. But you brought up
Speaker 3: rental agents. But the other lawsuit we're seeing is one
Speaker 3: about real Page and the software for rental housing, where
Speaker 3: again it's like our the landlord's colluding here by using
Speaker 3: the same software and providing data to basically extract the
Speaker 3: most they can from renters. So that's my best guess.
Speaker 3: I think the FCC does have a lawsuit against realtors
Speaker 3: as well, but that's my guess. It has been a
Speaker 3: long time coming. It's you know, I have to say
Speaker 3: I was very happy to see the bird at Sisser
Speaker 3: case because I think it's a bit outrageous to force
Speaker 3: consumers to pay this price. And I want to get
Speaker 3: into another sort of maybe more hit in cost of
Speaker 3: being forced to hire a realtor, which is what sort
Speaker 3: of incentives they have in terms of your portfolio by
Speaker 3: being forced to work with a full service broker.
Speaker 2: Right, So I assume that given the way these commissions
Speaker 2: are set, where like the selling agent will split the
Speaker 2: commission with the buying agent. I assume that means that
Speaker 2: buying agents are incentivized to push the listings that have
Speaker 2: a higher fee. Right, if someone is offering them like
Speaker 2: one percent instead of two point five percent, they're probably
Speaker 2: not that interested. They're probably not going to be pushing
Speaker 2: that property as much to buyers.
Speaker 3: For sure. There's very few in practice of commissions that
Speaker 3: are really, you know, in the two percent range for
Speaker 3: combining the buyer and the seller. I think the more
Speaker 3: concerning part to me is that a full service agent
Speaker 3: has an incentive, first of all to always get you
Speaker 3: to buy. That's kind of obvious because they get paid
Speaker 3: as a percentage of the house. But they also have
Speaker 3: an incentive to put you into the most expensive home
Speaker 3: you can qualify for a mortgage for. And this is
Speaker 3: actually the bigger concern to me, because having all of
Speaker 3: your assets in one asset that actually has a lot
Speaker 3: of kind of not diversified risk is actually not great
Speaker 3: from a financial portfolio perspective. Right, So for the average household,
Speaker 3: the vast majority of their wealth is in their house,
Speaker 3: and you might not want to be in a house
Speaker 3: that is taking up forty percent of your income to
Speaker 3: pay the mortgage. And you know, maybe a smaller house
Speaker 3: might be a better fit for your portfolio because then
Speaker 3: you had a little bit more money to put into
Speaker 3: stocks and bonds and maybe some private equity. So that's
Speaker 3: actually my bigger concern with the current structure is that
Speaker 3: it's very hard to get a flat rate service right
Speaker 3: now with a buying agent. I want to make clear,
Speaker 3: I think a lot of buyers may benefit from the
Speaker 3: expertise of somebody to help them buy a house or
Speaker 3: to help them sell a house. The structure, though, isn't
Speaker 3: giving me the option as a consumer right now to
Speaker 3: say I want to pay somebody a flat rate to
Speaker 3: show me around, or I want to pay somebody, you know,
Speaker 3: ten thousand dollars to show me around and do all
Speaker 3: the paperwork and also look at how it fits in
Speaker 3: with my overall portfolio. You know, that structure doesn't exist
Speaker 3: right now. That's what concerns me most because of the
Speaker 3: listing agent having it put in the contract. So how
Speaker 3: the buyer agent is going to get compensated is determined
Speaker 3: again before you even walk through the door.
Speaker 1: So wait, let's just say Tracy and I wanted to
Speaker 1: become buyers agents, buyer's brokers, and we said, you know what,
Speaker 1: we're just going to charge by the hour, and it
Speaker 1: doesn't matter whether you buy a two million dollar house,
Speaker 1: it doesn't matter whether you buy a half a million
Speaker 1: dollar house. This is our hourly fee. We'll take you around,
Speaker 1: et cetera. Is that possible under the current structure? Could
Speaker 1: we even enter the market with such an offering?
Speaker 3: It's technically possible, But then it's almost impossible to do though,
Speaker 3: because the way buyers are going to perceive it. In addition,
Speaker 3: they're going to get compensated this, you know, two and
Speaker 3: a half or three percent of the home value, and
Speaker 3: so very few buyers are going to be willing to
Speaker 3: pay that given right now, they're looking at a market
Speaker 3: where they don't have to come out of pocket. And again,
Speaker 3: that additional two and a half three percent is already
Speaker 3: baked into the value of the house, and so I
Speaker 3: think it'd be very hard to convince a buyer. We
Speaker 3: couldn't say, like value, what if?
Speaker 1: What if? What if we said we're going to remit
Speaker 1: that three percent to you get cash back.
Speaker 3: It's a good question because there is a company called
Speaker 3: Homie here in Utah that's been trying to do that
Speaker 3: and the Utah Association of Builders have made it very
Speaker 3: hard for them to actually run a competitive business model
Speaker 3: with that. There are some companies around the country that
Speaker 3: have tried that to try to remit I think REDFID
Speaker 3: might have that model where they're trying to remit some
Speaker 3: of that brokerage commission to the buyer exactly to try
Speaker 3: to so some buyers who are like I don't really
Speaker 3: want to pay the full three percent, And it sort
Speaker 3: of depends on how power hold of realtor's lobby is
Speaker 3: in various states, the success these companies have had with this.
Speaker 2: So you mentioned expertise of realtors earlier, and my understanding
Speaker 2: that this is without being mean to the thousands of
Speaker 2: realtors across the country, this is a point of contention,
Speaker 2: and one of the arguments is that, well, the fee
Speaker 2: the commission basically remains the same across all different types
Speaker 2: of realtors of varying skills, who you know, might put
Speaker 2: more or less time into either buying or selling your home.
Speaker 2: So I guess the question is how valid is that criticism,
Speaker 2: How difficult is it to buy or sell someone a house,
Speaker 2: particularly in this market.
Speaker 3: I think the answer is that there's huge variation in
Speaker 3: the quality of realtors and what services do you want
Speaker 3: as a home buyer. You can't unbundle them right now.
Speaker 3: I know in my own case, I basically have the
Speaker 3: house picked out by the time I go to it,
Speaker 3: like with the realtor, and I basically having to pay
Speaker 3: somebody a huge amount of money to fill it some
Speaker 3: paperwork I could have hired. I could have either done
Speaker 3: the paperwork myself or hired a real estate attorney for
Speaker 3: you know, a couple thousand dollars. You know, typically they're
Speaker 3: going to put a second year associate or something that
Speaker 3: it's not complicated paperwork for most you know, residential real
Speaker 3: estate transactions. And I do think it's very costly to
Speaker 3: get a bad realtor because again, these are ones that
Speaker 3: are especially unlikely to understand the risks of the home.
Speaker 3: The home ownership is really really risky, and I think
Speaker 3: people underestimate that, maybe especially with recency bias. You know,
Speaker 3: you if you bought a home in the last five years,
Speaker 3: you've done phenomenally well, and people somehow have forgotten what
Speaker 3: happened if you bought a home in two and five
Speaker 3: in Florida. So home prices do go down, and individual
Speaker 3: homes often have you know, every home has defects. But
Speaker 3: what does it take to be a realtor? In most
Speaker 3: states you have to have a college degree in some field,
Speaker 3: some sort of college degree, and either you know, somewhere
Speaker 3: between fifty seventy maybe even one hundred hours of online training.
Speaker 3: But half the online trading tends to be like propaganda
Speaker 3: for the National Association of Realtors on why it's terrible
Speaker 3: to work without a realtor. You know. So, I do
Speaker 3: think there are nuances of buying a home and it
Speaker 3: seems scary, I think, especially for first time home buyers.
Speaker 3: Right there's this huge sense of like what if it
Speaker 3: goes down? And what if I miss like a leak
Speaker 3: in the ceiling and there's you know, I think when
Speaker 3: you've done it a few times, you're like, oh, yeah,
Speaker 3: old houses have leaks.
Speaker 2: Old houses like you tell me about it.
Speaker 3: That is just part of the deal. That there's a
Speaker 3: lot of maidens costs that you won't foresee. But it
Speaker 3: is scary, and I do think there are some downside
Speaker 3: risks that working with a realtor. You know, a good
Speaker 3: realtor can help with, and good realtors also you know,
Speaker 3: they view their customers more as sort of a long
Speaker 3: term relationship, and they know they're going to get business
Speaker 3: from word of mouth, and they'll help you with a
Speaker 3: lot of little things. But what I would say, Tracy
Speaker 3: is it's not hard to get your realtor's license. That
Speaker 3: is a true statement. How hard it is? Does Ella
Speaker 3: house that or by a has that? That is a
Speaker 3: sort of It varies by agent, and it varies by
Speaker 3: individual consumer as well.
Speaker 1: So I want to talk more about why it is
Speaker 1: that the rise of sites like Zillow, redfin etc. Haven't
Speaker 1: actually had the effect of cutting out the brokers who
Speaker 1: make a lot of money. But before we do, can
Speaker 1: we just talk about for a minute the specifics of
Speaker 1: the Sitzer Burnett claim. What was actually alleged here in
Speaker 1: terms of what the plaintiffs deemed to be anti competitive
Speaker 1: or unfair about how the market is structured. And I
Speaker 1: think also a couple of the brokerages had already settled
Speaker 1: out of court and word of affected. But just walk
Speaker 1: those through. Well, really this was about yeah.
Speaker 3: So this is a group of individual home sellers, Okay, okay,
Speaker 3: and what they are alleging.
Speaker 2: Can I just tack on I don't understand why damages
Speaker 2: were awarded just to the sellers and not to the
Speaker 2: buyers as well. Who would be I mean, they're paying
Speaker 2: the sellers by paying for the house, and the cost
Speaker 2: is incorporated in the purchase price.
Speaker 3: Yeah, so it's a good question. The buyers were not
Speaker 3: part of the suit, right, So this is a class
Speaker 3: action suit and the buyers are not part of the
Speaker 3: party to suit, so I think they don't have standing,
Speaker 3: if Tracy, that would be my understanding. And technically, in
Speaker 3: terms of the actual bikiniary cost, it is sellers that
Speaker 3: are paying it. You're right, who actually paid for the
Speaker 3: higher house price to compensate the sellers? It's the buyers, right,
Speaker 3: They're not party to the suit.
Speaker 2: As far as I understand, I feel more class action
Speaker 2: lawsuits might be coming. I'm bad to.
Speaker 3: Buyers, yeah, I mean, I'm actually really happy these It's
Speaker 3: hard to imagine spending this much time on a case,
Speaker 3: right when it's twenty thirty thousand or something. It's not
Speaker 3: a huge amount of money, and it's a lot of
Speaker 3: time in the seller's lives. But what they're saying is
Speaker 3: they're claiming it's a restraint of trade. It's a collusion
Speaker 3: to set the price specifically for the buyer's commission, so
Speaker 3: the senses you can negotiate over the overall, you know,
Speaker 3: five or six percent, there's not a ton of negotiating
Speaker 3: room because oftentimes, because again this propaganda and the realtor's course,
Speaker 3: they'll say, no, I'm not going to even take it
Speaker 3: if it's a three percent commission overall, Like that's how
Speaker 3: they're sort of taught. But it's specifically. We haven't heard
Speaker 3: what the remedies are, and I'm excited to see what
Speaker 3: the court comes up with with the remedies, but my
Speaker 3: guess is they're no longer going to be able to
Speaker 3: mandate in the listing agreements. So basically the deal what
Speaker 3: these home sellers were faced with was if I want
Speaker 3: to work with a realtor, and the only way you
Speaker 3: get your house on the multiple listing service is you
Speaker 3: work with a realtor. That's sort of a requirement to
Speaker 3: get your house. So if you can't get your house
Speaker 3: on the multiple, so this is your key.
Speaker 1: You just as explain this the role of the multiple
Speaker 1: listing services within the market infrastructure.
Speaker 3: It's almost impossible to sell a house without I don't
Speaker 3: want to say impossible, but you'd be taking a huge
Speaker 3: discount because buyers won't even see your house even when
Speaker 3: you go to Zillow or redfin or some of these.
Speaker 3: So Zilo does have a for sale by buyer option,
Speaker 3: but it's actually shown differently if you look at the
Speaker 3: fine print, it's actually shown differently than any contract that
Speaker 3: is on the multiple listings. So this is basically information
Speaker 3: that realtors share with one another. In disclosure states, which
Speaker 3: is the majority of US states, you can see the
Speaker 3: transaction prices and you can see the listing prices, and
Speaker 3: that is a matter of public record. It's actually harder
Speaker 3: in states like the one I'm in in Utah or Texas,
Speaker 3: some of these other what we call it non disclosure states.
Speaker 3: In non disclosure states, sales prices of real estate are
Speaker 3: not a matter of public record. What that means is
Speaker 3: that the only people that have access to that information
Speaker 3: are realtors through the multiple listing service. So it's not
Speaker 3: a matter of public record. What's on the MLS is
Speaker 3: not public record. And so part of the reason that
Speaker 3: realtors in states like Utah and Texas have resisted going
Speaker 3: to a disclosure regime is that it takes away their
Speaker 3: informational advantage, if that makes sense. So right now, even
Speaker 3: if I could hire a realtor piecemeal to either sell
Speaker 3: or buy a house so I didn't have to pay
Speaker 3: it through this commission structure, it still make it pretty
Speaker 3: difficult for me, as an individual buyer seller to figure
Speaker 3: out the fair market value of my house either that
Speaker 3: I'm buying or selling, because I don't have the information,
Speaker 3: but the realtors do through the MLS.
Speaker 2: Got it. So there's obviously been a lot of reaction
Speaker 2: to this decision on the case, and I've seen so
Speaker 2: many commentary pieces about what this means for realtors for
Speaker 2: the housing market in general. And I suppose you could
Speaker 2: summit all up by nothing good for realtors, but a
Speaker 2: lot of it seems to be going in various directions.
Speaker 2: So why don't I just ask you the top line question?
Speaker 2: But what does this mean for the real estate broker industry?
Speaker 3: So it's a good question. My hope would be is
Speaker 3: that it forces out some of these very part time
Speaker 3: realtors that do a couple transactions a year that I
Speaker 3: think are really not helping home buyers or sellers, because
Speaker 3: I think those folks are just sort of waiting for
Speaker 3: good luck, a windfall. That's how they can stay in
Speaker 3: the industry even though they're not they don't have a
Speaker 3: ton of expertise. I do think you'll see commissions come down,
Speaker 3: and I hope you'll see more piecemeal services. The other
Speaker 3: thing I suspect we really need to know what the
Speaker 3: court decrees as remedies, because that's what we haven't seen yet.
Speaker 3: The hope is that the remedies will be you cannot
Speaker 3: it cannot be the seller that's compensating the buyer's agent,
Speaker 3: at least not as a commission. People do have worries
Speaker 3: about that, butarticularly for first time home buyers who are
Speaker 3: credit constrained, right, they have limited cash, and asking them
Speaker 3: to come up with another ten or fifteen or even
Speaker 3: twenty thousand dollars to compensate a broker, that's hard. But
Speaker 3: that I suspect is going to be the remedy because
Speaker 3: the particularly anti competitive part of the case that the
Speaker 3: allegations are that you're setting the price in advance with
Speaker 3: no opportunity for the buyer and negotiate. Right.
Speaker 2: So, just on this note, I mean, could the National
Speaker 2: Association of Realtors agree to some sort of settlement where
Speaker 2: they do decide to make some changes.
Speaker 3: Yeah, they've said they're going to fight it, right, so
Speaker 3: they're going to appeal. They're appealing. I'm interested to see
Speaker 3: what's in that appeal. They could settle, but I suspect
Speaker 3: what they're going to claim is that these laws are
Speaker 3: largely set at the state level, and they're going to
Speaker 3: say it has nothing to do with the National Association
Speaker 3: of Furnitures. I don't know this for a fact. I'm
Speaker 3: speculating the CORE has been asked to come up with
Speaker 3: remedies specifically, and so the settlement doesn't really deal with
Speaker 3: the remedies unless NAR would agree to its various member organizations,
Speaker 3: these state level realtor's boards. You know, that might be
Speaker 3: an option, but we have to see remedies. We have
Speaker 3: to see we are no longer going to engage in
Speaker 3: this practice that has been identified as restraint of trade.
Speaker 2: And then the other thing I was wondering, just from
Speaker 2: a legal strategy perspective, but you know, there are multiple
Speaker 2: brokers involved in multiple lawsuits at this point. Could you
Speaker 2: start to see some sort of like fracturing of the
Speaker 2: industry where individual companies try to argue that they're not
Speaker 2: like the other brokerages that are price fixing that you know,
Speaker 2: maybe they deserve a carve out from some of these
Speaker 2: lawsuits or something like that. Could you kind of see
Speaker 2: intra industry fighting.
Speaker 3: I doubt it, with the exception of some of these
Speaker 3: flat raid or you know, low commission services, and those
Speaker 3: do exist, and you have seen more of those pop
Speaker 3: up in the last ten years or so. Again, some
Speaker 3: states make it feasible in some states try to extinguish
Speaker 3: this business model. I think anybody who's operating on this
Speaker 3: structure where the buyer's agents compensated explicitly in the listic agreement,
Speaker 3: I can't see that surviving. And so I think if
Speaker 3: that's your business model, which is the business model of
Speaker 3: the vast majority of these large brokerages, I cannot see
Speaker 3: how they could claim they're doing something fundamentally different.
Speaker 1: One reason why there's a lot of anxiety and concern
Speaker 1: and interest in the space right now is because the
Speaker 1: housing affordability problem. We've been talking about it on the
Speaker 1: show a lot. By some measures, the least affordable housing market. Ever,
Speaker 1: I don't know, just to put on your sort of
Speaker 1: academic professor of fine nance hat for a second. You know,
Speaker 1: if you take out the broker, do houses actually get
Speaker 1: cheaper or does it just mean that the seller pockets
Speaker 1: more of the money. If I see a house that's
Speaker 1: listed for a million dollars and we take out six percent,
Speaker 1: I guess that's take out sixty thousand. Does that mean
Speaker 1: that if that goes away, maybe it goes down to
Speaker 1: twenty thousand. Does that mean that the house gets forty
Speaker 1: thousand dollars cheaper or does it just mean that the
Speaker 1: seller walks away with forty thousand dollars more.
Speaker 3: I think it's a little bit of both. It's forty
Speaker 3: thousand dollars that was previously going to the agents, and
Speaker 3: hopefully that will be shared between the buyer in the
Speaker 3: form of a lower home price and the seller. And
Speaker 3: you know what weights is it fifty to fifty? It
Speaker 3: kind of depends a little bit on the market right now,
Speaker 3: you know, it's it's not a great time to be
Speaker 3: a seller. So I suspect that the potential buyers that
Speaker 3: are willing to buy existing homes rather than new construction,
Speaker 3: I suspect that the buyer's wait a little bit more,
Speaker 3: so you will a little more softening at home prices.
Speaker 3: So it's a little bit of both. Right, it's surplus
Speaker 3: that is now available to be shared between the buyer
Speaker 3: and the seller.
Speaker 2: How does the US commission system and the rates, the
Speaker 2: average rates that we're paying five or six percent, how
Speaker 2: do those stack up against other countries? Because I feel
Speaker 2: like those sort of interracuntry comparisons are really useful in
Speaker 2: helping us understand how unusual or different the American system
Speaker 2: might be.
Speaker 3: Absolutely, the US system is very unique. You don't see
Speaker 3: this overseas.
Speaker 2: American exceptionalism strikes again.
Speaker 3: Yeah, you don't see this in Australia. You don't see
Speaker 3: this in the UK, and the UK is like one
Speaker 3: one and a half at most two percent, And so
Speaker 3: you do have to ask what is it about the
Speaker 3: US that is different? Because we largely have the same
Speaker 3: legal structure, right, these are both sort of common law countries.
Speaker 3: Property markets aren't that different, especially looking at Australia, and
Speaker 3: so I do think you have to sort of say,
Speaker 3: why are we special? Is there something that's especially difficult
Speaker 3: and time consuming about buying and selling residential real estate
Speaker 3: in US? And I think the answer is probably no.
Speaker 1: Can you explain further the impediments that states or realtors
Speaker 1: in those states put up to thwart alternative broker models,
Speaker 1: because you mentioned, yes, some of these do actually exist,
Speaker 1: and that there are companies that will remit part of
Speaker 1: their the broker fe back to the buyer, et cetera,
Speaker 1: but that the realtors put up roadblocks and make those
Speaker 1: business models hard. What makes them.
Speaker 3: Hard, I think that they sometimes almost will kind of
Speaker 3: blacklist you or take away your license if you're operating
Speaker 3: under certain business models. I don't know all the individual
Speaker 3: states exactly, but I do know having bought a home
Speaker 3: and let's see four states. Now, there's a lot of heterogeneity,
Speaker 3: and i'd say that the non disclosure states are especially
Speaker 3: challenging for these other business model. And part of the
Speaker 3: value of a good realtor is that they have an
Speaker 3: informational advantage. They're doing a lot of transactions, They're spending
Speaker 3: a lot of time thinking about the market and learning
Speaker 3: about what's on the market, and they may know off
Speaker 3: market deals that haven't come to market yet and those
Speaker 3: that's a huge value. So that's the sort of value
Speaker 3: I think a good realtor can provide. Where I sort
Speaker 3: of have more problems is when they're actually restricting who
Speaker 3: has access to the information. They're not just using the
Speaker 3: information they're gathering through having multiple deals. They're saying only
Speaker 3: a licensed realtor kind of access to this information, and
Speaker 3: they're putting up roadblocks, certainly to disclose this information. You know,
Speaker 3: Zillow has sued multiple times trying to get access to
Speaker 3: this information in non disclosure states. So I don't know exactly.
Speaker 3: It's more through I think, threatening to lose your license
Speaker 3: if you're not operating on a certain business model. You know.
Speaker 2: When I think about the potential macro impacts of all
Speaker 2: of this, obviously the effects on the residential real estate
Speaker 2: market are a huge one given its size and position
Speaker 2: in the US economy. But the other one I kind
Speaker 2: of think about is just from a pure labor perspective,
Speaker 2: because there are a lot of real estate brokers in
Speaker 2: the US, and I think there's some disagreement about what
Speaker 2: this might mean for those jobs. I've seen some people
Speaker 2: arguing that, like, maybe it means if commissions are coming down,
Speaker 2: you're not making as much money. Maybe it means more
Speaker 2: people are doing it part time. You know, On the side,
Speaker 2: it's a little bit of a bonus that you might
Speaker 2: make in addition to your normal day job. But then
Speaker 2: I've seen other people arguing that actually, this is going
Speaker 2: to mean fewer part timers. Expertise, as you were mentioning before,
Speaker 2: becomes more important and so you're going to see more
Speaker 2: full time agents. So I'm curious where you land in
Speaker 2: that discussion.
Speaker 3: Yeah, it's a good question, and I don't know definitively,
Speaker 3: but my I would lean towards fewer overall agents and
Speaker 3: more full time agents because I think you're going to
Speaker 3: want to do more volume of transactions, right, and you're
Speaker 3: going to treat a little bit more like a commodity
Speaker 3: because you can't be compensated, you know, these huge sums
Speaker 3: of money. I mean, I don't think we're going to
Speaker 3: get rid of the commission structure altogether. I do think
Speaker 3: you'll see fewer part times because basically, those part time
Speaker 3: agents that were selling one or two houses a year,
Speaker 3: they were just waiting to kind of get lucky, right
Speaker 3: that somebody would come to them. And now I suppose
Speaker 3: the commission comes down to four percent between the seller
Speaker 3: and the buyer. I'm just throwing out a number there
Speaker 3: that mass starts to look worse.
Speaker 1: You know, you mentioned I think you were a little
Speaker 1: bit skeptical of the effect of buyers brokers or buyers
Speaker 1: agents steering people to houses based on the percent that
Speaker 1: you do think that there was a lot of action
Speaker 1: towards steering people to the most expensive home that people
Speaker 1: could afford. But why don't sellers' agents just say knocking
Speaker 1: down to two percent or one percent? I mean, why
Speaker 1: isn't there more competition on that?
Speaker 3: And that is because I think it's that these agents
Speaker 3: are instructed through their education to not accept something below
Speaker 3: five percent of the overall listing agreement, Like that's the
Speaker 3: sort of collusion, is that they're so pushed on for
Speaker 3: that and it's so deeply ingrained in them. Yeah, whether
Speaker 3: that will change going forward, I don't know, but I
Speaker 3: think the education of realtors has to change. But that
Speaker 3: is I don't think going to be part of the
Speaker 3: remedies in this case. To be clear, I suspect the
Speaker 3: remedies are going to be that you can't explicitly put
Speaker 3: in the listing agreement.
Speaker 1: Because technically speaking it can be won the seller's agent
Speaker 1: could it could in the listing on the MLS that
Speaker 1: it's one percent is just basically never done.
Speaker 3: It's basically never done. That's right. There are companies that
Speaker 3: do this that agree. I think redfin is one of
Speaker 3: them that do do this. Why they can't operate in
Speaker 3: a state like Utah, I'm not sure, but there are
Speaker 3: companies operating in some states and it's a company wide position,
Speaker 3: if that makes sense. You know the strain. Which thing
Speaker 3: is you mentioned? Well, would you be worried as a
Speaker 3: seller that no buyers agents would visit you? I think
Speaker 3: that does go on, but I think increasingly with the
Speaker 3: information that prospective buyers have, I'm not as concerned about
Speaker 3: that as long as it's on the MLS, because I
Speaker 3: can just tell my agent, like, take me to this house.
Speaker 3: I saw it online. It has two bedrooms and one
Speaker 3: and a half pass. I want to see this house, right, Yeah,
Speaker 3: So I don't know. One concern I have is that
Speaker 3: consumers perceive some authority on the part of their realtors
Speaker 3: and they don't realize they're really the ones in control,
Speaker 3: and so they can just say I want to get
Speaker 3: into this place. I want you to you know. So, yeah,
Speaker 3: but it does sound like that goes on. Is that, oh, well,
Speaker 3: then the buyer's agent won't go there. I don't see
Speaker 3: why it should go on given the information that most
Speaker 3: home buyers have, except that they trust the expertise of
Speaker 3: their realtor.
Speaker 1: I just have one last question, which is, Okay, this
Speaker 1: was a civil suit in Missouri, As you mentioned, there
Speaker 1: are other suits. What would it take for this to
Speaker 1: be a national change to the industry, because does this
Speaker 1: just affect realtors in Missouri? What or how what is
Speaker 1: the scope of the ruling.
Speaker 3: I think it would affect as setting a precedent. So
Speaker 3: it may be that the scope of that case in
Speaker 3: particular is specifically Missouri. But then there's a precedent, ok right,
Speaker 3: And so then I know in other states, Hey, the
Speaker 3: legwork to get you know, maybe do we have to
Speaker 3: do the same lawsuit? Fine, we got to do it,
Speaker 3: but there's precedent got and if that precedent holds up,
Speaker 3: it's not a big you know, you know, the realtors
Speaker 3: might just say we're not going to do that because
Speaker 3: we don't want to deal with this suit because it's
Speaker 3: the precedent.
Speaker 2: And then there's the Gibson case which has been filed
Speaker 2: in Missouri, like the Sitzer Burnett case, but I think
Speaker 2: that one is for national damages and I think I've
Speaker 2: seen a number floating around there of up to two
Speaker 2: hundred billion dollars in damages, which is pretty sizable. But
Speaker 2: also to Andrew's point, if there's anything I know about
Speaker 2: class action lawyers, it's that once there's precedent, there will
Speaker 2: be more lawsuits.
Speaker 1: Yeah, Andrew Gan, thank you so much. That was a
Speaker 1: great explanation, and now I have some understanding of how
Speaker 1: this market actually works. Really appreciate you coming on oddlocks.
Speaker 3: Thank you so much for having me. Really appreciate the time.
Speaker 2: Thanks Sandra Joe. That was fun.
Speaker 1: You know what sort of blows in my mind tracing
Speaker 1: that so many real estate sales are public and you
Speaker 1: can just see the price people paid for their houses.
Speaker 2: Oh yeah, it is pretty weird.
Speaker 1: It's weird, right, I mean, you think it's sort of
Speaker 1: a personal thing and people don't really know, but it's
Speaker 1: all right there online. It takes about two seconds to
Speaker 1: figure out how much almost anyone paid for their huse.
Speaker 3: Yeah.
Speaker 2: I find housing a weirdly opaque and transparent market. At
Speaker 2: the same time, it's like there are all these things
Speaker 2: embedded in the house purchase process, like the commission, which
Speaker 2: you don't necessari see broken out, but then you can
Speaker 2: see really sensitive numbers like the overall sales price. It's weird.
Speaker 1: I remember as a kid when my parents bought a house.
Speaker 1: I forget when or where, you know, going from house
Speaker 1: to house to house to house in a drive and
Speaker 1: maybe driving behind the realtor's car, going in the realtor's
Speaker 1: car to all these different houses. It does seem crazy
Speaker 1: to me that the commission structure hasn't changed much at all,
Speaker 1: or if at all, despite the proliferation of these online marketplaces.
Speaker 2: Now absolutely, because nowadays you can see a house online
Speaker 2: on Zillow or something like that, and you just shoot
Speaker 2: a little inquiry form over and you say I want
Speaker 2: to see this house, and then someone lets you in
Speaker 2: the front door. But that seems to be pretty much
Speaker 2: the extent of realtor services sometimes, and I do think
Speaker 2: Andrew touched on this, but I do think the argument
Speaker 2: for unbundling more of those. So maybe you don't have
Speaker 2: a buying agent, maybe you start to substitute a real
Speaker 2: estate attorney for some of the things that a realtor
Speaker 2: historically was doing. That seems like a possibility totally.
Speaker 1: On one hand, it seems very intuitive to me that
Speaker 1: just over time. Shouldn't there be more of these, maybe
Speaker 1: discount brokerage models for real estate where you get remitted
Speaker 1: back part of the three percent, just a flat fee,
Speaker 1: pay by the hour, et cetera. But on the other hand,
Speaker 1: as long as the fee is basically hidden to the buyer,
Speaker 1: it's just part of the house price.
Speaker 2: And you have no opportunity to negotiate it.
Speaker 1: Yeah, and you have no opportunity, but also no real
Speaker 1: reason too. It's like, oh, there's a million dollar house
Speaker 1: for sale. I don't the buyer doesn't have to think
Speaker 1: about the brokerage fee because it comes out of the cellar.
Speaker 1: You could see a why alternative models don't just take
Speaker 1: off because they're obviously appealing to the buyer who doesn't
Speaker 1: even really think about the fee in the first place.
Speaker 1: And b maybe that helps explain why the first lawsuits
Speaker 1: came from the seller side.
Speaker 2: Ah, that makes sense. And also, I mean this is
Speaker 2: really a story of incentives, right, and the incentives that
Speaker 2: the listing and the buying agents actually have. And I
Speaker 2: think you can kind of also understand why, on the
Speaker 2: one hand, this industry can appear to be competitive, like
Speaker 2: the barriers to entry are probably not that high like, yes,
Speaker 2: you need a college degree, but then you can take
Speaker 2: a National Association of realchair's course and get your foot
Speaker 2: in the door reasonably quickly. But on the other hand,
Speaker 2: like the incentive to keep prices as high as possible,
Speaker 2: it's there in a commission based system for obvious reasons,
Speaker 2: and it does feel like in that sort of structure
Speaker 2: you kind of need an external entity to affect change, right,
Speaker 2: because otherwise no one is incentivized to do it, not
Speaker 2: even the like new discount if you had discount brokerages
Speaker 2: or something like that.
Speaker 1: The existence of them uses themselves are really fascinating.
Speaker 2: I know, I want to look at an MLS.
Speaker 1: Yeah, they won't let you. There's no way. You can
Speaker 1: get your real estate license then you can look at.
Speaker 2: But no, it's like, okay, the one I will Joe.
Speaker 1: On the one hand, it's market transparency. They're all there,
Speaker 1: so that's good. On the other hand, only some people
Speaker 1: can access it, and if you do access it, you
Speaker 1: have to sort of basically enter into these byzantine commission structures.
Speaker 1: Lots of stuff. They're related to market power.
Speaker 2: Yeah, shout out to my realtor who fed our koyfish
Speaker 2: until we could get to the house.
Speaker 1: That's value. That's it's a value.
Speaker 2: Add yeah, appreciate it all right? Shall we leave it there?
Speaker 1: Let's leave it there.
Speaker 2: This has been another episode of the All Thoughts podcast.
Speaker 2: I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 1: And I'm joll Wisenthal. You can follow me at the Stalwart.
Speaker 1: Follow our producers Carmen Rodriguez at Carmen armand dash Ol
Speaker 1: Bennett at Dashbot and kel Brooks at kel Brooks. For
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