Budding Housing Recovery Fails to Bolster Broker Commissions

Dec. 29 (Bloomberg) -- A surge in home purchases by first- time U.S. buyers is doing little to help real estate agents and brokers who close the deals.

Commissions in 2009 fell to the lowest level in seven years, driven down by sales of low-priced homes to first-time buyers using the federal tax credit. Commissions through November dropped 6.2 percent from a year earlier to $40.6 billion, according to Bloomberg calculations based on the average commission rates from Real Trends Inc. and on home price and sales data from the National Association of Realtors.

The tax credit strengthened only the low end of the market and reduced agents’ pay, according to Steve Murray, president of Real Trends, a residential property research company. The tax benefit and foreclosure sales may lower the national median home price by a record 13 percent this year to $172,700, according to the Chicago-based Realtors’ group. Last month almost 75 percent of sales were for $250,000 or less, the Realtors said.

“The impact of the tax credit has been huge,” Murray said in an interview. “The average commission rate inched up this year and the number of real estate sales have gone up too, but the average price has dropped significantly because of the bulge of first-time buyers.”

The dollar value of commissions fell to the lowest amount since 2002 even as the average U.S. rate per transaction rose to about 5.29 percent this year, the fourth consecutive annual gain. The average commission rate was 5.26 percent in 2008, according to Real Trends, based in Castle Rock, Colorado.

‘No Trivial Number’

Commissions earned by real estate agents typically are computed as a percentage of a property’s sale price. Agents negotiate with sellers to set the rate and are required to pay a portion of it to the brokerage they work for.

Income from commissions at Realogy Corp., the largest U.S. residential brokerage and franchiser, fell to $2.1 billion during the first nine months of 2009 from $2.8 billion a year earlier, the Parsippany, New Jersey-based company said in a Nov. 10 regulatory filing.

“Income from real estate commissions is not a trivial number,” Patrick Newport, an economist at IHS Global Insight in Lexington, Massachusetts. “In a very weak economy, every little bit helps strengthen GDP.”

During the five-year real estate boom, commission rates dropped as agents competed for clients and surging prices boosted income from each transaction, according to Murray. By 2005’s record low of 5.02 percent, the average commission had tumbled more than a percentage point from 1992’s 6.04 percent.

Charging More

When home prices declined in 2006 and properties began sitting on the market for longer periods, agents started charging more, Murray said. Real Trends commission data is based on surveys of the largest 500 U.S. real estate brokerages.

“When the market was super-hot, getting a listing was like cash in the bank and there was a huge amount of competition,” Murray said. “Listings are not scarce anymore and, even if priced right, they’re not easy to sell.”

Sales of previously owned homes probably will total 5.15 million this year, a 4.8 percent gain from 2008, according to an estimate on NAR’s Web site. In November, sales rose 7.4 percent to a 6.54 million annual rate, the highest level in almost three years, as buyers rushed to meet the tax credit’s original Nov. 30 deadline, the trade group said in a Dec. 22 report.

Leaving the Business

“I had the busiest November I’ve had in five years, which made up for lower prices and lower commissions, but I know some people who left the business altogether or took second jobs because they were making so much less for each transaction,” said Karen McCormack, co-owner of McCormack & Scanlan Real Estate in Jamaica Plain, a Boston neighborhood.

The number of U.S. real estate brokers and salespeople as of Sept. 30 fell 9.2 percent from a year earlier to 850,000, according to the Bureau of Labor Statistics in Washington.

Housing demand probably will drop in December, even though Congress extended the home-buying tax credit to April and expanded it to include some move-up buyers, according to Lawrence Yun, chief economist at the National Association of Realtors.

“We expect a temporary sales drop while buying activity ramps up for another surge in the spring when buyers take advantage of the expanded tax credit,” Yun said in last week’s NAR report.

There are already signs that the real estate market is slowing again. The Mortgage Bankers Association’s index of loan applications decreased 11 percent to 595.8 the week ended Dec. 18, the lowest level since October, from 667.3 the prior week, the bankers’ trade group said last week.

“Starting this month, home sales are going to take a hit,” said Global Insight’s Newport. “The first credit used up the pool of first-time buyers by moving 2010 sales into 2009. We may not get much of a kick from the extension.”