Commission "Triple Whammy"

Multiple-choice Economics Quiz

Given that it’s a Presidential year, a quick, multiple choice economics quiz seems in order:

Which embattled U.S. job category has suffered the biggest drop in income the last three years?

A. Airline pilots being squeezed by industry mergers and rising energy prices.
B. Textile workers losing their jobs to their counterparts in China and Vietnam.
C. “Rust Belt” factory workers also affected by outsourcing.
D. Realtors stung by the national drop in home sales and prices.

Correct answer? “D.” While the unprecedented national drop in home prices grabs headlines, the effect on realtors is going little-remarked. Thanks to a triple whammy of falling sales, lower prices, and contracting commissions, realtor income nationally is down a stunning 50%(!) since 2005.

Here is the math behind that number: sales of (existing) single family homes have fallen from almost 8 million in 2005 to a (projected) 5 million or less in 2008. According to the Standard & Poor’s /Case-Schiller price index, prices are down nationally at least 15% from the peak three years ago, reducing the price of the average U.S. home from $235k to $200k. During that time, average realtor commissions have shrunk from 5.5% nationally to 5.25% (this number is a blend of full and discount service rates).

Because commissions are a function of all three variables — sale volume, price level, and commission percentage — the interaction of the individual drops compounds the overall effect on net commissions. Bottom line: realtor commissions have dropped from almost $100 billion in 2005 to about half that this year.

That $50 billion pie is split amongst 1.2 million realtors. To put that in perspective, the top 25 hedge-fund managers earned $16 billion in 2007. The top-ranked manager, John Paulson, personally made $3.7 billion. How? . . . . drumroll, please . . . by betting against the subprime mortgage market.

Windfall Profit . . . Not

While realtors’ income has been crushed the last three years, two of their biggest expenses — gas and health care — have risen dramatically (as independent contractors, realtors have to pay for their own health care insurance). The slim thread of good news is that, due to a drop in the number of realtors, the much-smaller “commission pie” is now divided into slightly bigger slices. As a result, the average realtor’s income isn’t down quite as much as the 50% overall drop would suggest.

Against this backdrop, the (just-settled) Department of Justice’s antitrust suit against realtors seems curious, at the very least. The suit, which focused on how home listings are displayed on the Internet, in essence accused full-service realtors of charging too much. If that’s true, they’re certainly doing a very bad job of it (vs., say, OPEC and big oil companies).

About the author

Ross Kaplan has 19+ years experience selling real estate all over the Twin Cities. He is also a 12-time consecutive "Super Real Estate Agent," as determined by Mpls. - St. Paul Magazine and Twin Cities Business Magazine. Prior to becoming a Realtor, Ross was an attorney (corporate law), CPA, and entrepreneur. He holds an economics degree from Stanford.

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