New Study: Proposed Change to Commission Structure Threatens Equitable Access to Housing

Changing how commissions are paid would hurt 
Black, Hispanic/Latino, first-time and low-/middle-income buyers most

MINNEAPOLIS, July 11, 2022 /PRNewswire/ -- A new study has found that requiring prospective homebuyers to pay real estate agents directly out of pocket would significantly suppress home buying opportunities for large segments of the population. "Be Careful What You Ask For: The Economic Impact of Changing the Structure of Real Estate Agent Fees," illustrates how the changes would most significantly affect Black, Hispanic/Latino, first-time, and low- and middle-income buyers. The independent study was requisitioned by HomeServices of America as part of the company's ongoing efforts to support equity in home buying.

In recognition of housing inequity and the homeownership gap, HomeServices of America began work in early 2019 to establish a foundation whose mission is to increase homeownership among Black homebuyers and other potential homebuyers of color. In 2021, the HomeServices Foundation for Housing Equity was officially established. While some favor changing the decades-old practice of listing brokers offering commissions to buying brokers in home sales, it appeared that this proposed change could severely impact the homebuying abilities of the people the Foundation was created to help. Given the possible negative impact to homebuyers, HomeServices of America requisitioned an independent study to evaluate its concerns about the proposed change.

Authored by Freddie Mac alum Ann Schnare, National Association of Credit Management Chief Economist Amy Cutts and George Washington University Business Professor Vanessa Perry, the study created an economic model that proves the detrimental outcomes for consumers and the broader U.S. economy that would likely result from changes to how agent fees are currently paid.

"Changing the current compensation structure could affect potential buyers' ability to qualify for a mortgage and purchase a home," said lead author Schnare. "Requiring buyers to pay their agent's fee directly would result in reduced homeownership opportunities for cash-constrained families and lower net proceeds for many sellers. These outcomes would create negative ripple effects across the entire housing market."

Key study findings regarding decoupling commissions include:

• The greatest harm would be to first-time, low-income, middle-income and racially underrepresented buyers. A significant segment of the housing market would likely be negatively affected by decoupling commissions. Overall U.S. homeownership rates, particularly among non-white buyers, would decline. Assets required to purchase a $250,000 home would increase from roughly $16,250 to $23,015.
• Decoupling commissions would harm the entire economy. The demand reduction that would likely occur at the lower price points of the housing market could easily spill into other segments of the market. If a significant portion of potential buyers are already cash constrained, changing the current compensation structure by requiring buyers to pay more up-front would inevitably lead to a reduction in market demand.
• Commissions would not be able to be included in mortgages. Lenders, mortgage underwriters and appraisers would face significant challenges in determining the appropriate amount of buyer broker commission allowed to be included within the financing of a home. Federal regulations limit how much of the total purchase price buyers can finance, meaning some buyers could no longer qualify for a loan while others would have to pay additional fees per month in mortgage insurance.

The study estimates that the median price that potential first-time homebuyers can afford to pay for a home is roughly $294,000. Altering how commissions are paid, however, would limit the purchasing power of these households. Even if buyers were able to negotiate a 1.5% fee, for example, they would be able to spend $33,450 – or 12% – less on a home if they had to pay these fees up front, out of pocket.

Such changes could prove disastrous in a housing market that is already creating significant barriers for potential homebuyers. Since 2019, home prices have risen nearly 30% ($80,000 for a typical home), while inventory is down 57% over the same period. Homeownership opportunities for American families also have diminished as mortgage rates rise and investors become more heavily involved in the private property market, leading to fewer available properties.

Any such changes to commissions, as the study notes, could have the most pronounced impact on Black homebuyers. Homeownership rates for white homebuyers have remained above 70% since 2017, while rates for Black homebuyers have struggled to exceed 40%. Approximately half of all homes currently listed for sale are affordable to households with at least $100,000 income, but just 35% of white households and 20% of Black households in America exceed this annual threshold.

The findings of the study refute unfounded allegations or suggestions that consumers are disadvantaged by how commissions are currently paid.

"Almost 9 out of every 10 homebuyers use a mortgage to finance the purchase of their primary residence, and many of these buyers face significant hurdles in acquiring the upfront cash to cover down payment and closing costs," said Dana Strandmo, Chief Administrative Officer at HomeServices of America. "These cash constraints are more prevalent among first-time homebuyers and racial minority groups. That is a factor that must be considered in any conversation about changing how buyers' agents are typically compensated."

HomeServices of America funded this study. The authors conducted their research independently, and the opinions expressed and findings are theirs. For the full study, go to: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4106600

HomeServices of America is the country's largest residential real estate brokerage company, based on closed transactions, and is through its operating companies, one of the country's premier providers of homeownership services, including brokerage, mortgage, franchising, title, escrow, insurance, and relocation services. HomeServices of America is the owner of the Berkshire Hathaway HomeServices and Real Living Real Estate franchise networks. HomeServices is owned by Berkshire Hathaway Energy, a consolidated subsidiary of Berkshire Hathaway Inc. HomeServices' operating companies offer integrated real estate services, including brokerage services, mortgage originations, title and closing services, property and casualty insurance, home warranties, and other homeownership services. Visit www.homeservices.com.

SOURCE HomeServices of America

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