Real Estate Commissions = Lexus ES300

I just ran across an article from the NY Times on the current legal scuffle between the NAR (National Association of Realtors) and The Justice Department. The bottom line is that The Justice Department is trying to make the real estate industry more fair for consumers. Currently, the NAR (which includes almost all of the real estate agents we see on a daily basis), operates as a cartel. NAR and its members have such a large grasp on the real estate industry that they are able to resist competition. This means that consumers have and will continue to pay a 5-6% commission to sell their homes. These rules have been in place for years - back when spending $100,000 on house was alot of money.

Back then, a 5% commission on a $100,000 house was $5,000. With home prices going through the roof (especially here in the Bay Area), homes can easily sell for $1,000,000+. A 5% commission on $1,000,000 is $50,000 - which is quite a bit more than $5,000. The next question you have to ask yourself is this - have real estate agents increased the work that they do to sell your house by $45,000 worth? My guess is probably not. However, as home prices continue to rise, so do the commissions earned by real estate agents - yet the required amount of effort to sell a home has not increased. I would even argue that the amount of work an agent does is even less than before, given the advent of the internet and the hot real estate market (though I'll admit that things seem slower now). Still, my point is clear - real estate agents have gotten huge pay raises with home sellers left to foot the bill.

The one quote from the article that really struck me was this:

"Because the industry functions as a cartel, it is able to overcharge consumers tens of billions of dollars a year," said Stephen Brobeck, the federation's executive director. "Consumers are increasingly wondering why they are often charged more to sell a home than to purchase a new car."

Sure I know that real estate commissions are 5-6% of the home selling price. But when you look at it like, "I just paid my real estate agent a new Porsche Cayenne to sell my house", things look a little different. In reality, since 1/2 of the 5-6% commission goes to the buyer's agent, he/she probably wouldn't be able to get a Porsche Cayenne - maybe something more like a Lexus ES300 (without the navigation).

To address the article, yes - I will ask myself if my real estate agent really earned himself/herself a new car by selling my house.