NEW YORK, NY — Real estate agents might just be as important for homebuyers as they claim to be. In the wake of the recent National Association of Realtors (NAR) settlement, many have proposed that cutting agents out of the process would reduce prices for buyers. After all, agent commissions in the U.S. are the highest in the world and around 90% of home purchases are facilitated by an agent. A new study by Columbia Business School Professor Tomasz Piskorski, however, examines what happens when real estate agent commissions are reduced. Using a detailed model, Piskorski found cutting agent fees might actually result in higher prices for prospective buyers.
The study, NAR Settlement, House Prices, and Consumer Welfare, by Professor Piskorski and his co-authors, Professors Greg Buchak, Stanford Business School, Gregor Matvos, Northwestern University, and Amit Seru, Stanford University, found that lowering agent commissions can lead to higher home prices, as lower future transaction costs increase the long-term value of homes. Specifically, they discovered that reducing fees from 6% to 5% resulted in a 2.3% rise in home prices, while a 4% fee led to a 4.8% increase. Although lowering agent fees generally benefits consumers by reducing the cost of homeownership, the primary beneficiaries are current homeowners, rather than prospective buyers. On the other hand, new buyers face a market with increasingly valuable homes. Those on tighter budgets may see fewer advantages due to the expected rise in home prices. Therefore, even if the NAR settlement results in a significant reduction in agent fees, it is unlikely to substantially improve housing affordability for prospective buyers.
“The outcome of the NAR settlement and the potential reduction in agent commissions could have a significant impact on the housing market,” said Tomasz Piskorski, the Edward S. Gordon Professor of Real Estate. “While lower agent fees can benefit consumers by reducing the costs of buying and selling homes, our research shows that this can also lead to higher home prices. Both homebuyers and policymakers need to keep a close eye on these dynamics as the settlement is implemented to ensure that the intended benefits reach all participants in the market.”
Piskorski and his co-authors based their study on their housing market equilibrium model coupled with transaction-level data on home sales in major U.S. housing markets.
“For now, real estate technologies and NAR settlements will do little to reduce prices for homebuyers” said Professor Piskorski, “but further research is needed to investigate how agents plan to navigate the NAR settlement and to explore whether AI or next generation technological solutions might be capable of replacing the function of agents in the market over time.”
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