Homebuyers still prefer real Realtors

Steve Murray sometimes gets together with other old-timers in the real estate industry, shares some wine and inevitably gets around to remarking, 'I sure would've thought it would've changed more by now.”

Murray, president of consulting firm Real Trends, has been tracking for 40 years how real estate agents do their jobs. And over the past decade, the internet has disrupted almost every aspect of a transaction that sits at the core of the American dream.

Everyone now has free access to information that used to be impossible to find or required an agent's help.

But as a new homebuying season kicks off, one thing remains mostly unchanged - the traditional five-percent-to-six-percent commission paid to real estate agents when a home sells.

While the internet has pummeled the middlemen in many industries - decimating travel agents, stomping stock-trading fees, cracking open the heavily regulated taxi industry - the average commission paid to real estate agents has gone up slightly since 2005, according to Real Trends. In 2016, it stood at 5.12 percent.

'There's not a shred of evidence that the internet is having an impact,” Murray said, sounding like he almost can't believe it himself.

The stickiness of the real estate commission is a source of fascination for economists and curiosity for consumers who are doing an increasing share of the homebuying legwork themselves online. It also offers potential lessons for workers in other industries worried about the internet's destructive powers.

The Web has changed how agents hustle for a share of the estimated $60 billion paid each year in residential real estate commissions. But it hasn't taken their jobs. In fact, the number of agents has grown 60 percent in the past two decades.

It wasn't supposed to be like this.

Experts have been predicting the demise of real estate agents for years. Consider the title of a 1997 article in the Journal of Real Estate Portfolio Management, 'The Coming Downsizing of Real Estate: The Implications of Technology.”

In the mid-2000s, the arrival of real estate tech start-ups such as Zillow, Redfin and Trulia spurred a fresh dose of anticipation. 'Realtors' sacrosanct commission rates of six percent may be in danger,” warned '60 Minutes” in 2007. Jeff Jarvis, a City University of New York professor who examines the internet's effects, wrote a 2006 blog post predicting, 'Real estate agents are next.”

Agents thought so, too.

'The industry was fearful of the internet. They didn't think they'd have jobs,” said Leonard Zumpano, a retired finance professor who for years ran the University of Alabama's Real Estate Research Center.

The Web automated and simplified huge swathes of a process that once was complicated and time-consuming. With a few taps on a smartphone, homebuyers and sellers now can find information that once required digging through musky deed books at the county recorder's office.

And the new technology has made agents more efficient. In many ways, their job is easier now.

Yet agents stand to earn more in commissions today than in the pre-internet era, because of stable commission rates and surging home values.

In 1997, the typical commission on a median-priced home, adjusted for inflation, was $16,600.

Today, that commission is $20,131.

'It's a mystery to me,” Zumpano said. 'I would've expected commissions to go down.”

In 2005, the Justice Department and the Federal Trade Commission held a workshop to talk about why commissions had not fallen more. The American Bankers Association argued that the commission rate could be cut in half in a truly competitive market.

Attendees at the workshop appeared to place great faith in the power of the internet to lower commissions.

In a typical home sale, the commission is paid out of the seller's proceeds and split between the seller's and buyer's agent. The rate is negotiable. But the traditional rate has held firm, even as an agent's main advantage - information - has been eroded by the internet.

Experts don't have a good answer for why these commissions have survived the internet's onslaught. They point to several potential factors. A home sale is a massive financial transaction. It's complicated.

And it doesn't happen often, with homebuyers staying put for an average of 12 to 13 years. So intimidated consumers keep turning to agents for help.

Regulations may have slowed the pace of change. Twenty states and the District of Columbia set minimum levels of service for agents, dissuading brokers willing to do less for lower fees.

Ten states also ban agents from rebating a portion of the commission to their clients. But commission rates do not vary wildly among these states, analysts say.

The National Association of Realtors also has worked to reinforce the role of agents through lobbying and advertising, sometimes in unconventional ways.

Last year, the group struck a deal with the ABC sitcom 'Modern Family” to work into an episode that character Phil Dunphy is a true real estate expert - a licensed Realtor, with a capital R. And national broker Century 21 is running ads with the tagline, 'Good luck, robots,” adding 'there's no robot for insight or hustle or a handshake.”

The efforts appear to be working. The association reports 89 percent of home sellers used an agent in 2016 - on par with the previous five years. At the same time, for-sale-by-owner transactions fell to their lowest rate - 8 percent - since the association began tracking the data in 1981.

'Who is going to write a contract? Fill out a disclosure statement? Anticipate what's coming on the market?” association president Bill Brown asked. 'There's a human element to buying and selling a home that can't be replaced.”

But the internet is expert at discounting that human element.

That was the worry that greeted Zillow when it was launched in 2006 with executives from Expedia and Hotwire, travel sites that were on their way to pushing out human travel agents.

'There was fear in the beginning,” Zillow chief marketing officer Jeremy Wacksman said.

Agents fought to keep Zillow from accessing private databases known as the multiple listing service - where agents post homes for sale and which many considered an agent's ultimate advantage.

Zillow eventually tapped those listings. But it decided not to challenge the industry head-on, opting to focus on real estate ads.

The reception was harsher for Redfin, a tech-heavy broker in Seattle that tried to cut agent commissions. It started out selling homes for a flat $3,000 fee and rebated part of the homebuyer agent's commission.

'Competing agents have threatened us with violence, intimidated our customers and tried to block their offers,” Redfin CEO Glenn Kelman said in testimony before Congress in 2006.

Redfin changed course. Today, Redfin more closely resembles a traditional broker. It has its own local agents. It sells homes for a 1 to 1.5 percent commission.

Redfin agents are paid a salary and a bonus tied to customer satisfaction.

Redfin remains a small player, with one percent to two percent of the market. But in some big cities such as Chicago, Seattle and Washington, D.C., it holds a 5 percent share.

Kelman said he believes Redfin will continue to grow as a new generation of buyers and sellers enters the market.

'Kids who grew up buying textbooks on Amazon are now buying houses on Redfin,” Kelman said.