Real estate agents face an overdue reckoning

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Finally some good news for people struggling to get on the property ladder.

For too long, Americans have suffered from a convoluted property system that condemned them to pay some of the world’s highest commissions, up to 6 per cent on residential sales. The real estate agents’ lock on online listings drove up costs and combined with a shortage of affordable homes to shut all but the most affluent buyers out of the housing market.

Class action lawyers get a bad rap, but last week they forced the National Association of Realtors to scrap a system that allegedly inflated the $100bn that Americans shell out on real estate commissions by between 20 and 50 per cent.

The settlement is expected to cut fees on the average home sale by $5,000 to $13,000. Existing homeowners will immediately benefit because they currently pay commissions for both their own agent and the buyers’ representative out of sale proceeds. But eventually, the much-needed changes should cut costs for everyone at a time when signs are turning more positive for entry level buyers.

Home sellers should feel comfortable accepting lower prices because they will keep more of the sales proceeds. Buyers also can save money by choosing a cut-rate representative — or none at all, as is common elsewhere. The settlement should also cut down on buyers’ agents who unscrupulously steer clients to homes that carry higher commissions.

These changes are particularly welcome after a brutal two-year period that has seen higher interest rates all but paralyse the residential real estate market. Sales of existing homes fell to levels not seen since the depths of the financial crisis as rates on the standard 30-year mortgage nearly tripled to around 8 per cent last autumn New listings tumbled, as potential sellers balked at trading in their low-rate mortgages for ones with higher rates, while prices moved out of reach for many first-time buyers.

Now mortgage rates have dropped back below 7 per cent and are expected to fall further later in the year. That, plus the realtor settlement, should draw more houses into the market by making it more affordable for existing homeowners to contemplate a move. Even before the agreement, the number of newly listed homes for sale had risen 17.5 per cent year on year in February.

Positive developments for first-time buyers are also emerging in the new construction market. After years of catering to the already wealthy with ever bigger and more expensive homes, builders are rethinking their approach and prioritising affordability.

That means more town houses, less expensive finishes and smaller floor plans. US houses are enormous and wasteful by international standards, so it is positive for the planet as well as new buyers that the median square footage of a single family home has dropped 11 per cent in a decade to 2,179 and is now at the lowest point since 2010.

Pulte, DR Horton and other big builders have all said on recent earnings calls that they are looking to boost their sales to first-time buyers. “With 75mn millennials out there, we were not going to wait for them to hit their 40s and buy their move-up home,” Toll Brothers chief executive Douglas Yearley said.

Financial analyst Meredith Whitney predicts that demographic change will also force more houses on to the market at reasonable prices, although she warns it will take time. Some 55 per cent of US homeowners are at least 55 years old, and half of them tell surveys that they expect to move a different house or a different community as they age.

“What this means is more housing on the market and more housing filling up the market,” Whitney says. “It starts this spring and it picks up momentum, and I don’t think it’s going to end inside of 15 years.”

Whitney worries that there will be a mismatch between the older communities where homes will come on to the market and the places where today’s first-time buyers want to live. But recent experience suggests that price differences eventually help even out supply and demand. Austin, Texas, which was red hot during the pandemic, is now in the throes of a property market crash, while prices in Albany, Providence and Hartford posted double-digit year-on-year gains.

The squeeze on commissions is bad news for the 1.6mn Americans currently registered to work as real estate agents, as well as the companies that employ them, Shares in listed realty companies such as Zillow, Redfin and Compass are down more than 12 per cent since Thursday. But it is hard to feel that much sympathy for an industry that has enjoyed such a profitable stranglehold for far too long.

brooke.masters@ft.com

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