Economists across the globe were all screaming…”NOOOOOOO, DON’T DO IT!”
This was in response to Kamala Harris’ promises to impose price and rent controls to stem inflation.
Economists know that price controls foster massive shortages and much higher prices every time they’re imposed.
Venezuela is the best example, as price controls caused both shortages and mass starvation.
CA is experiencing the impact right now with homeowner’s insurance, and America as a whole experimented with price controls in the 1940s and the 1970s with disastrous consequences.
And here’s my favorite quote from Swedish economist Assar Lindbeck: “Rent control appears to be the most efficient technique presently known to destroy a city — except for bombing.”
I share the above because price controls are perfect examples of policy choices that have the exact opposite of their intended impact.
Unintended Consequence of NAR Lawsuit and DOJ Policy
And that seems to be what is happening right now with the new commission rules that go into effect this weekend in response to the lawsuits against NAR and numerous brokerages.
When the new rules were announced, naïve observers all exclaimed … “YAY, SELLERS ARE GOING TO SAVE SO MUCH MONEY!”
But what those naïve observers failed to realize is this: If you vastly decrease the demand for a product, the price for that product will plummet.
So yes, sellers might save on commissions, but they also might see price drops (resulting from fewer buyers in the market) that will dwarf the potential savings from reduced commissions.
My wife just bought a new car with a price that was over 20% off sticker. A year ago, the dealer would have demanded full price and got it. But currently, there are so few buyers in the market that my wife held all the cards – and I am afraid we will see that happen in real estate.
The purchase market is already at record low levels, not seen for decades, as buyers are very apprehensive about high interest rates, affordability, the economy, and all of the housing crash predictions by the “crash bros.”
The last thing those buyers need right now is the added confusion about commissions and the possibility of having to come up with extra cash.
This is particularly the case for the large percentage of buyers who can barely scrape up enough cash for a down payment and closing costs – let alone a commission.
Hopefully, seller credits for commissions become the norm (more on that below) – but until that happens, I worry that commission concerns will keep tens of thousands of potential buyers on the sidelines.
Feedback from Agents Regarding Yesterday’s Blog: What If Sellers Want to Offer Commissions on MLS?
I wrote this blog yesterday: What If Sellers WANT To Offer Large Commissions on MLS?, and asked for feedback – which I got in spades.
Almost all of it came very from seasoned and successful agents, interestingly, who were not worried about themselves at all (which is probably why they’re so successful). Their concerns were for their sellers (see above), new agents, the market overall, and buyers with limited cash.
Here is some of the feedback I received: new agents won’t be able to get established; there will be fewer transactions; we’ll see a lot more dual agency transactions; real estate firms will have to re-think their commission structures; agents will leave the industry en masse; casual new buyers will not be nursed along nearly as often if it requires a contract upfront; and the only people who will benefit from all this is lawyers, as they will continue to look for any possible reason to sue the daylights out of brokerages.
Seller Credits for Commissions
I blogged about this a few weeks ago: Financing Options for Buyer’s Agent Commissions and Important: Contract Language for Commission Credits, and reminded readers that lenders have no qualms about sellers offering credits for buyer’s agent commissions.
Those credits are not subject to the “Interested Party Contribution” (IPC) limits (often 3% of purchase price) imposed by Fannie, Freddie and jumbo lenders as long as the credits go directly from the seller to the buyer’s agent or buyer’s agent’s brokerage.
If the credits pass through the buyer first (so the buyer can then pay the commission), lenders will take issue with the credits if they exceed IPC limits.
Hopefully, both buyers and sellers learn that sellers can still cover commissions (even if they can’t openly advertise them), as it will likely benefit sellers every bit as much as buyers.
This is certainly something we’re explaining to the many pre-approved buyers in our database.
