There’s been a lot in the news about NAR, changes in the way real estate sales will be handled in the coming years and in particular, the fees and commissions paid to agents representing buyers. With several court decisions pending, it’s without doubt that changes are coming. The plaintiff’s argument goes that sellers have been paying too much by being forced to pay the buyer’s agent and that buyers are really paying for it in the form of a higher price but they aren’t afforded the opportunity to negotiate that fee with their agent since the seller and their broker set the fee. Meanwhile, there’s the question of, “How can an agent/fiduciary represent someone who isn’t responsible for your fee?”
While you can argue that by virtue of paying both sides of the commission fee, sellers are paying too much, the reality is that the sellers benefit by paying the agent who has the qualified buyer. This is because by incentivizing that agent to show the seller’s home, the seller increases the likelihood of competition which leads to the highest possible price. How can you fault a seller for wanting to ensure their home gets maximum exposure? Moreover, most sellers were at one time the buyer of the property and they got the benefit of having the seller pay their agent’s commission when they bought the home; so, it’s not like it’s all just seller cost because they didn’t pay going in.
As for the fiduciary argument, this admittedly could be murky if it weren’t so common that buyer’s representatives never really consider the issue as to who is actually paying them. They are loyal to their client.
As for the argument that buyers don’t have the choice of how much to pay their representative since it’s built into the seller’s cost structure, I’d suggest that the buyers don’t want to have to pay the fee at all. But wait, you say, they are paying by virtue of a higher price! Not necessarily and not necessarily in full. In other words, consider a for sale by owner. A FSBO seller almost always figures the money they save on commissions is theirs, not the buyer’s since they are the ones paying for it. So even in a situation where the buyer represents themselves, they don’t get the full amount because the seller sees the commission savings as their money, not the buyer’s.
If you are a watcher of real estate and you want to peek into the window of where this will all lead, look no further than Fannie, Freddie, FHA and VA. Once the government backed lenders authorize commissions to be added to the sales price and financed, then and only then will the system be set up to have the buyer pay their representative’s fee. Until that happens, a selling agent fee will be paid by the seller as has always been done because buyers won’t have the money to pay, while also coming up with the down payment and closing costs. If the buyer also has to pay the commission, the already monumental affordability problem gets exacerbated. Not to mention the seller is going to want to incentivize agents to sell their property, maybe get multiple offers and thus command the highest possible selling price. And to that point you could argue that the current structure benefits sellers by getting them the highest sales price, and also benefits buyers by reducing barriers to home ownership by reducing the upfront cost which in turn opens the door to the greatest wealth builder this country has to offer, owning real estate.
OK, we are in general short of housing units, but that’s not the only issue causing the low supply. By now you’re undoubtedly aware that in an effort by the Federal Reserve to slow inflation, interest rates have more than doubled since early 2022. This has had a number of unforeseen consequences. Most significant is the effect on would be sellers. With 70% of homeowners carrying mortgages with rates 4% or lower, many sellers are reluctant to part with those rates knowing that to sell means to pay a lot more for financing. This makes selling and buying almost cost prohibitive so many would be sellers are not selling. Not enough newly built homes plus fewer existing home sellers equals very low supply.
It’s been an interesting exercise watching the current real estate market. Where 6 months ago, having just dropped 8-10%, I would have predicted a continued drop in values of another 8-10%, instead the market has demonstrated surprising resiliency [
Since the Fed has literally caused interest rates to double in the shortest time on record, it’s no surprise that the market is struggling to find it’s footing. How slow is it? I have statistics I maintain for my local market dating back to 2008 and today’s pending information does not look good. For example, in August of 2008 there were 314 homes under contract. In January 2009 when the market was in an absolute freefall, there were 260. A year ago, there were 296 but today it’s just 123 [
Inflation is running too high at over 8%, so to combat this the Fed has embarked on the most aggressive rate raising path in history; driving us into a housing correction and a recession. The Fed is doing what many of us would do and look to past experience as a guide on the best way forward but is that the right approach? In this case they’re following 1970’s and 80’s Paul Volker and radically pushing up interest rates. Never before have rates doubled in less than a year, let alone half a year. Unfortunately, this approach has come at the immediate expense of the mortgage business where massive layoffs have commenced in earnest. Let’s not kid ourselves however, this is no accident. The Fed sees the exponential increase in housing costs since the pandemic, both purchase and rental, as a core driver of today’s excessive inflation. But is it? It may be a contributing factor, but it’s not the whole enchilada by any means. None the less, The Fed figures if they can slow housing, they slow the economy which reduces demand and takes pressure off prices, reversing inflation. Home prices are coming down, many in the 8.5-10% range so far (
Here’s the problem as I see it, The Fed was late to reduce the rates and stop their bond buying, holding rates down for too long and now they are trying to make up for lost time. Okay, so mistakes happen, but driving us into a recession in my opinion, is a bad idea anytime. But do they have another choice? As with Maggie and her kid’s braces or Bill with his tires, of course they have a choice. In The Fed’s case, the alternate choice is to let inflation run hot. “That’s a terrible idea,” some will scream. But is it really? To answer this, you need to ask yourself, does demand alone cause inflation? I mean, after all, that’s all the Fed is doing by raising rates, clamping down on demand. By definition, inflation is too many dollars chasing too few goods. Prices go up in response to scarcity. As demand wanes, supply in theory goes up, but the supply doesn’t go up any more than the relative level of decline in demand. Imagine taking a weight off one side of the scale, the other side goes up by the relative change. The Fed itself has no influence on the larger issues affecting supply like supply chain disruption coming from the pandemic or the rise in energy costs as a result of the war in Europe. Even if demand went to near zero, the supply issues would continue. It’s my opinion that pushing us into recession will not be enough to slow inflation to the 2% rate that the Fed states is their target.
If you accept my premise, the question we and The Fed must ask is, of the two evils we are left with: inflation or recession, which is the lesser evil? I’d argue that recession is never the right answer and that until the supply side issues get resolved, it’s better to live with some inflation.
If you’re an old movie buff like me, you love Abbott and Costello. These guys always had movie titles where they “Meet” someone, ie” Abbott and Costello meet The Wolfman or Abbott and Costello Meet The Mummy. So why have a title Abbott and Costello Meet The Killer (Jerome Powell)? To understand this inside joke, you have to listen to Abbott and Costello’s marvelous routine “Who’s on first?” The gag has the two comics naming ballplayers that all happen to have interrogative pronouns for names. Who’s on first, What’s on second, I Don’t Know’s on third etc. So when Lou Costello asks “who’s on third?” Bud Powell answers, Who’s on first, I Don’t Know is on third. Lou: “I don’t know is on third?” Bud: “Yes.” Lou: What’s the guy’s name on third?” Bud: “I don’t know’s on third. What’s on second.” And so it goes until Lou eventually says “ I don’t know,” they simultaneously point and say “Third base.” Still makes me smile just writing it. The reason I chose this story to frame the current Fed dilemma, is because no matter what the Fed does, it’s inflationary
Hindsight is 20/20, so of course we can see that The Fed should have stopped their QE bond buying long before February 2022 and they should have started raising rates mid to late 2021. Heaven knows it was patently obvious to anyone in the housing trade that inflation was running amuck. That said, raising rates sooner would have helped for sure, but it would not have substantively changed our situation. Why? Two words: War and Pandemic. (
For example, The Fed is raising interest rates at an unprecedented pace without waiting for the effects to manifest. But this is designed to slow the economy, right? Yes but… higher US rates make the US Dollar stronger. A stronger dollar means Europe, England and Asia have to pay more of their weakened currency to buy American goods and services. This is globally inflationary. Those nation states in turn raise the price of their goods and you got it, inflationary. The Fed bought mortgage-backed securities, US and corporate debt known as Quantitative Easing or QE, as a means to get us out of The Great Recession and again when the Pandemic forced us to shut down the economy. So how does the Fed buy debt and where do those dollars come from? They have the Treasury print more money which is… inflationary. Now they have increased their balance sheet to a whopping $9 Trillion. They need to reduce that balance sheet and sell off that debt. 
This is known as Quantitative Tightening, or QT, and they began selling debt in early September. This is a good thing though, right? It puts pressure on rates as they are not only not a buyer (decreasing demand) but they are actually a net seller (increasing supply). This means more bonds in the market, which must be discounted to sell to a reduced number of buyers and this raises rates which slows the economy. This is another way to attack the demand side of inflation by effectively taking those excess pandemic dollars out of the economy. By removing dollars from the economy, the Fed is shrinking the Money Supply. Remember, inflation is too many dollars chasing too few goods. So, the Fed sells bonds in exchange for dollars and those dollars come out of circulation and are given back to the Treasury. Great news, right? Yes except… when you reduce the supply of something, in this case dollars, you make the value of the existing dollars go up, making the dollar even stronger against foreign currency which is, you guessed it, inflationary. Damned if you do, damned if you don’t. Anything the Fed tries will be inflationary so long as there’s a war in Europe and a supply chain issue. Crushing US demand will slow the economy and almost certainly drive us into a recession, but will it stop inflation? The answer is it will slow inflation and maybe reduce it some but no it won’t stop inflation. What will stop inflation is an increase in supply. You can’t stop inflation by only addressing the domestic demand side. That just punishes working Americans and American business. 
Back to rents; according to Zumper, rent on a 2 bedroom apartment in New York City, the most expensive market in the country, jumped year over year by an unconscionable 46.7%! But they aren’t alone. Nashville is up 26.7%; Boise 11%; Glendale, AZ 24.1%; Greensboro, NC 31.8%; Tulsa 23.3% – I could go on… it’s mind bending. I just listed a 500 SF 2 bed/1 bath flat in the heart of the San Fernando Valley for $2,050/mo and have had no fewer than 60 inquiries. This is not good.
The Real Estate Conversation 