Why Lower Real-Estate Commissions Mean Higher Home Prices

These changes are intended to bring more transparency to the real-estate industry, ultimately allowing competitive forces to drive down commissions, which remain almost double that of other developed economies.

The Biden administration, along with journalists and some consumer advocates, have argued that reduced commissions will have the additional effect of lowering housing prices.

This, says Kellogg’s Gregor Matvos, a professor of finance, is highly unlikely. Indeed, he and his colleagues, Greg Buchak and Amit Seru of Stanford and Tomasz Piskorski of Columbia, developed a model that predicts precisely the opposite: that lowering commissions will actually increase housing prices.

We recently sat down with Matvos to learn more.

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Kellogg Insight: The general argument for why the changes to the agent commissions are supposed to lower home prices is because these high commissions are baked into the prices we all pay. If it costs us a lot of money to buy and sell a house, that in turn is going to drive up the price of the house. Thus, if you lower those costs, it’s going to push prices down. So why is the above reasoning not correct?

Gregor Matvos: I think we should first talk about why it could be correct. Imagine if we were talking about selling shampoo. Anytime a store wants to sell you shampoo, somebody takes six percent of the price as a sales tax. If the sales tax goes down, what would happen to the price of shampoo? Well, a part of the discount is going to go to the seller, who will pocket some of the money, and a part of the discount is going to go to the buyer, who will pocket some of the money, and shampoo prices will go down. I think that’s the intuition we have for most goods. If we tax them less, prices should go down, and if we tax them more, prices should go up.

But unlike shampoo, houses can be resold. And this makes them a little more like stocks. When you go to your broker and you buy a stock, you know for sure that you will resell it. And anytime somebody takes a chunk out of that—say, the government, as a transaction tax—the stock loses value. So if the transaction tax goes down, the stock price goes up.

Now, houses are somewhere in between. They have some consumption value, but then most of us resell the house, so they have some resale value too. So when that resale value goes up, a buyer should be willing to pay more for it. In essence, buyers are getting a “better” house. The problem is, now we’re all willing to pay more for these better houses, and house prices go up.

Kellogg Insight: Right, so the same high transaction costs that have been blamed for driving up home costs are also, in effect, reducing the value of the home, just as a tax would. And so if you lower those transaction costs, the home should go up in value.

Matvos: Exactly. And that’s a good thing, right? It’s a good thing for consumers.

Kellogg Insight: Well, that was actually my next question. Your model finds that reducing real-estate commissions is still, on the whole, a good thing for both sellers and buyers, even if housing prices go up. Can you say more about this?

Matvos: What we compute is that everybody is a winner. The buyers are winners because they are buying a better house, but sellers are way bigger winners than buyers because they are benefiting from the lower fees to buy and sell the house, as well as the lower fees that will be paid to buy and sell the house forever. So they get a big chunk of the extra value.

I would say if there’s any losers, it is probably young, constrained households that are now priced out. We can all agree that the houses are now better houses, and buyers should be willing to pay for that. But if this prices you out because you don’t have the savings (which you will get back in the future when you’re a future seller), you are worse off.

Kellogg Insight: I have heard another argument for why housing prices will go down with lower agent-commission fees, and that is that the lower fees could encourage more sellers to put their homes on the market and increase supply. Does this logic track for you?

Matvos: So I think you could in principle have more transactions because the frictions are smaller, right? But that might in turn make houses worth more because, with more houses selling, maybe consumers just get better matches. So it’s a little unclear exactly which way that would go.

Kellogg Insight: Now, I did want to talk a little bit more about the role agents play. Because, of course, they do not only charge commissions; they also help facilitate transactions! Can you talk about how your model accounts for this?

Matvos: Yeah, so if agents weren’t doing anything, it would be hard for them to exist, right? The way we think about it very explicitly in our model is we think that brokers help buyers and sellers find each other. You are looking for a specific house; I’m selling a specific house. Not all houses are the same, so we need somebody to help out with this matching process.

In our model we estimate how much worse this matching process would have to be to justify the money you’re giving back to the brokers. And we found that, for consumers to justify paying six percent in brokerage fees on a transaction, real-estate brokers would have to help increase showings by a factor of five. For example, a seller would be indifferent between paying a brokerage fee of zero and generating ten showings, or paying the broker six percent and with the broker’s help, generating 50 showings. So not impossible, right? But a lot.

Kellogg Insight: Okay, so we’ve talked about what this ruling means for buyers and sellers. What about real-estate agents?

Matvos: I think this is not bad news necessarily for the seller’s agent. If indeed you are still providing a service worth three percent by staging, by showing the house, by giving advice on pricing, and so on, then you can probably still get a close-to-that-three-percent commission. And if house prices go up, that’s kind of great.

I think the really big difference comes to buyer’s agents. Right now, a caricature is that they were a gatekeeper to the buyer, and the buyer had no incentive to worry about the fact that they were taking three percent. So I think now buyer’s agents are going to have to make it much more clear to the customers where the value is added.

We may see agents offer fixed fees for a bundle of services, as well as more specialization (“I’m a really good negotiating buyer’s agent, so for the privilege of me negotiating for you, I’m going to charge you a lot.”)

I do think real-estate agents provide a service. The question is just, which service? Which agents? And is it worthwhile? Do consumers know what they’re paying for?

Editor’s note: This conversation has been edited for length and clarity.