DOJ v. NAR and the ethics of real estate commissions

Matthew Blake: Hey, everyone. We are back here at “Houses in Motion,” part of the “HousingWire Daily” podcast. This is Matthew Blake, senior real estate reporter with “HousingWire.” And I am here with Max Besbris. Max is a professor at the University of Wisconsin-Madison in Sociology, and he studies why people make the choices they do when they’re buying things in the market. Max, why don’t you tell us a little bit about, sort of, how your academic work intersects with real estate.

Max Besbris: Thanks, Matthew. I’m really happy to be here. Thank you for having me. I studied real estate agents specifically, actually, for almost a decade in New York and recently published a book called “Upsold,” which is about how real estate agents affect people’s housing decisions. And I was really interested in this question because, as your listeners probably know, housing is this really important commodity. And I mean important in the sense that it’s financially the biggest purchase that most Americans ever make. It’s also culturally and symbolically this really definitive ideal about what it means to be middle calls or upper class or “have made it,” right, the ability to buy a house. More than that, though, it’s also an intense form of stratification in housing.

So we have lots of differences by lots of different demographic categories in assets and wealth, and that’s mostly around home value. We also have pretty intense residential segregation in the United States, in most American cities, and what that means is that the housing market is sorting people in ways that end up creating more inequality. And so, for all of these reasons, I was really interested in this question of how people decide where to live, and this is a question that a lot of sociologists are interested in.

Matthew Blake: Right.

Max Besbris: But one thing that not a lot of people had studied before is the role of real estate agents. So what I ended up doing was following around a group of real estate agents for over two years while they met with clients, while they went to open houses, while they did showings, while they were at their offices. And I really wanted to observe how they talked about houses, how they talked about different neighborhoods, how they talked about value. And then I also collected a lot of what we call quantitative data, so statistical data where I was able to run regression models to show that what real estate agents do actually does have an impact on housing prices.

And, basically, the upshot of the book, I would say, and the reason it’s called “Upsold,” is I found that, in a market like New York City’s, particularly post great recession where housing prices are really booming, real estate agents are doing some really intense work to reorient people’s ideas of what is valuable. And by that, I mean they are pretty good at getting people to spend more than what they expect to. Now, obviously, there’s a ton of market pressures that are also driving prices up, but what I show in my quantitative models is that real estate agents are also having an effect on housing prices, that neighborhoods that have more real estate agents, over time, see higher increases in housing prices. And I link that to the observational data I have from my ethnographic work where I elaborate the processes by which real estate agents are upselling home buyers.

Matthew Blake: Yeah, that’s very interesting. I mean, I guess, a couple of things I think about that, like, well, one is sort of, you know, wow, these real estate agents sound very manipulative. They’re kind of forcing the consumer to, like, desire a home, like, at a price range that they didn’t initially anticipate. Another might be that, you know, while the agent is really good at their job, sort of, you know, real estate agents make money based on a percentage of the sale of the home. So, I mean, whichever the angle you take, why were they effective in terms of boosting the value of not just individual homes but, you know, entire neighborhoods? And I think Brooklyn and Manhattan was where you were looking at.

Max Besbris: Yeah, so most of my research was in Brooklyn and Manhattan, obviously two very highly priced real estate markets, markets that were also increasing in price at a pretty rapid clip when I was doing my research. And I think that’s a great question, because, in my book, I try very hard not to blame real estate agents. I don’t think these individual real estate agents are acting nefariously or consciously in a way that is trying to rip off their clients. In fact, I think they’re generally doing very well by their clients. But their market position, the structure of the market, and the structure of the deals that they make, puts them in a position where their interests lie at increasing both the volume and the worth of housing transactions, because, obviously, they make money off of commissions. They want prices to be higher. But I think they also genuinely believed that rising prices was a good thing overall. It was good for neighbors. It was good for their clients, right? If their buyers bought a house and that house continued to increase in value, that’s a good thing, right?

I certainly don’t want to say that these individual agents are doing anything bad by trying to, sort of, actively get people to spend more money. I think there’s a lot of reasons why they’re doing that, a lot of rational and obvious reasons. But I think what’s happening, certainly in big cities like New York or, you know, L.A., San Francisco, Denver, Boston, these are all places…Miami, right, that are having really increasing housing prices at a very fast pace during the same time that I’m doing my field work. And I think what real estate agents are thinking is that, “By getting people to spend more money, I’m actually doing them a little bit of a favor. I’m actually matching them to the house that they actually want.” And that’s what their job is, really. That’s why we hire a real estate agent. We want them to help us find the place that matches our needs, our desires, right, that fits the best.

And I think real estate agents, like I said, actually believe that when they showed someone who said they wanted to spend $1 million on a fancy apartment in Manhattan, started showing them apartments listed at $2 million, I think they’re doing that because they genuinely believed that these buyers actually were better fits for these $2 million apartments. So, again, it’s not about real estate agents, I think, trying to rip off buyers. It’s really more about the structure of the market that pushes prices up and reorients people’s price points.

And so I remember one in particular, which is, there’s this single guy who’s recently divorced, who’s a very well-off doctor looking for an apartment in Manhattan. And, you know, he says he wants to spend around $2 million on an apartment. And this real estate agent starts taking him around to apartments listed around $2 million, but they really just talk about the things that they don’t like about these apartments. They talk about small windows or that apartment buildings are too distant from subway stations or that there’s no doorman or things like that. They’re just really sort of negative on all these apartments that they’re seeing.

And after they’ve seen a bunch, you know, the buyer is pretty disappointed. He says to his real estate, “I don’t think we’ve seen anything really unique.” And the real estate agent, you know, is very apologetic and says, “You’re right. It’s my fault. This is my job just to show you something that you like.” And so the real estate agent starts to take this buyer to different apartments, but all these new apartments are listed at more than $3 million, so a good chunk of change bigger than what this buyer said he had wanted to spend. But this buyer starts reacting very positively to these more expensive places. And I think some of that is facilitated by the real estate agent who talks these places up, right, who compliments them, who…you know, beautiful moldings or building materials or great architectural styles. And I think the buyer agrees, right?

And, you know, I think it’s debatable whether or not the buyer would agree on his own or whether or not the real estate agent is shaping his desires. But I think the point is that this person, this buyer, does end up spending over $3 million on an apartment, you know, a very large amount of money, more than he said he wanted to. But in the end, he’s very satisfied. I interviewed him after, and I said, “Look, you know, you said you wanted to spend $2 million. You end up spending more than $3 million. How did this happen?” He says, “You know, I didn’t think I wanted to spend that much, but, you know, eventually, I did.”

And so the argument, again, is that these real estate agents, as they take people through the market, I do think they reorient or shape people’s perceptions about what is desirable. And so it’s not necessarily a super-refined art and conscious effort that these real estate agents are making. I do think that everyone thinks, “Well, you spend more, you get more.” And so it’s really easy for us to be pushed in that direction.

Matthew Blake: That’s interesting. Yeah, just one more thing on that. I think, you know, I mean, our listeners to this podcast certainly know this. A lot of the folks that I write for are real estate agents here at HousingWire. But, you know, just to state the obvious, real estate agents, or at least most of them, work entirely on commission and, you know, do not draw a salary, draw a percentage of the sale of the home. How do you feel that that, sort of, economic incentive for the agent…it sounds like, in the example you just gave, that the agent, you know, really went to extraordinary lengths in terms of, like, providing, you know, service to the customer and even sort of nobly sort of upholding their fiduciary duty to the customer. Do you feel that commission-based pay for agents sort of dictates that, or do you feel that, sort of, agents would have behaved that way if it was more of traditional American economy salary model?

Max Besbris: That’s a really interesting question, and I think the answer is complicated. There certainly is a lot of research that shows that real estate agents actually don’t necessarily have a motivation to increase prices, because most people are pretty limited in the amount that they can spend. And so, you know, this guy that I just described, who says he wants to spend $2 million but ends up spending $3 million, I think, is not the typical home buyer in America, who has $1 million lying around that he can spend more on a house.

Matthew Blake: Right.

Max Besbris: Most people have a pretty tight budget. It’s dictated a lot by their mortgage, right? Their bank says, “This is the amount that we’re willing to loan you.” And so that’s a pretty hard cap for a lot of people. And so, by and large, what past research has shown is that real estate agents, what they do instead of trying to drive up prices on individual transactions, is that they just try to do as many transactions as possible, right? So they’re really interested in volume and speed, in particular. They want houses to sell very quickly. They want transactions to happen fast. And so, in some sense, we might think that’s not really a problem. The market is the market, and people are buying and selling as they want. On the other hand, there might be some drawbacks to the quickness with which these things happen.

Housing, again, is this really important commodity, and it grounds us in our daily life, and it might make a lot more sense to be as deliberative as possible in this decision. And so I think one thing the commission structure does do is facilitate a speedier market at a time when people might want to take more time to consider their options. Now, obviously, that’s up to individual buyers and sellers and real estate agents, but I think that is one aspect of how our commission structure works right now. I think, you know, more directly to your question about, would things be different if real estate agents got paid in a different way, I actually think the answer is yes. And you see this with the growth of flat-rate commissions or buyers-only brokerages, right, which are doing the work of, you’re a buyer, you pay a real estate agent $10,000 regardless of whatever the home price is going to be. I mean, they do this for sellers as well.

But these flat-rate commission brokerages I actually think are an interesting new model, and we’ll see if they really take off. There’s some research showing that they’re actually not growing particularly quickly. The supposition is that the other real estate agents who work on commissions actually don’t want to do deals with flat-rate brokerages because, you know, it reduces the cost, overall, of the transaction and commissions, more generally. But I do think it’s an interesting model. I do hope that more consumers are aware of it, because I think one thing that certainly consumers are not aware of is that commissions are, in every state, legally negotiable. I think people show up to a housing transaction, and because it’s a transaction that so few consumers take part in over their lives…you know, most Americans buy a house once or twice in their lives, if they ever buy one. And so we don’t have a lot of familiarity with this transaction. And so a real estate agent tells us, “Well, you know, it’s 5% or 6%. I split it with the other broker. And that’s that.”

You know, I don’t think people realize, in a lot of ways, that’s just [inaudible 00:14:12], right? There’s no rules that say that that’s what it has to be. And I do think that if we’re going to have a commission-based market for real estate agents, we do need to educate consumers a little bit better about their options.

Matthew Blake: Yeah, that discussion on commissions kind of gets into something I wanted to ask you about. The flat-rate commission brokerages is really interesting, just paying the $10,000 flat fee, because the Justice Department…we’re recording this the second week of July. At the first day of July, the Justice Department antitrust division, which has not…the Joe Biden administration has yet to name, I believe, or nominate, even, a head of the Justice Department antitrust division. But they made an announcement that they are withdrawing from a settlement that they made with the National Association of Realtors last November, and at about four or fives times in this press release from the Justice Department saying that they’re withdrawing from the settlement with the National Association of Realtors is the word “commission.” And the Justice Department is repeatedly saying in this, consumers are paying a lot of commissions, and they say, I believe, $85 billion in commissions consumers are paying in the U.S. each year to real estate agents.

And so, basically, by way of background, the settlement that the Justice Department reached with the NAR back in November was saying, “Hey, you need to disclose the commissions that you’re making to consumers.” There was a question as to whether consumers even knew that agents representing the home buyers knew of the commission that they were set to make. And a couple of other rules, mostly relating around transparency, and they wanna look into the rules and policies that the NAR has set regarding commissions. So, with all that background in mind, what do you, kind of, make out of this announcement from the Justice Department, and how do you think this might, sort of, reshape the, you know, thoughts that you just had on commissions and how that may change, going forward?

Max Besbris: I’ll just say that when the initial DOJ complaint and agreement was filed back last year, you know, it really rang true for me based on my own research. Which is to say that there are plenty of examples that I have in my field work of real estate agents who are representing buyers, meeting with buyers, going to open houses with them, and buyers asking real estate agents about how commissions work, and real estate agents not necessarily being untruthful, but I think being relatively opaque about the process. Saying things like, “Well, don’t worry. It’s the seller that pays me.” You know, “Don’t worry. It’s the final price. You don’t have to worry about what a commission is like, because you’re not actually paying it.” But, of course, that’s not really the case, right?

Matthew Blake: Right.

Max Besbris: The commission is built…considered, right, and built into the price that the buyer is ultimately paying for the house. So I think that, when I saw the initial complaint last year, I thought, “Yeah, you know, this makes sense. I think there probably need to be more stringent, more accurate, more careful language and rules around how commissions are communicated to, particularly, buyers. And so, in some ways, I was very excited, because, like I said, I think I saw examples of this constantly during my own field work. And there’s a few passages in my book about this, in particular, where agents, I think, again, are not doing something bad, but I think want to build relationships with clients. And we know that talking about money, you know, is not always the best way to build a trust. And so, you know, I think real estate agents, in their efforts to, you know, build a relationship with a client so the client believes that they’re doing the best work for them, you know, don’t want to dwell on payment, right? It’s not a very friendly topic.

And so, again, right, it’s not that I think agents are doing this in a, sort of, consciously bad way, but I think they do have some interest, right, in not necessarily always explaining the full laws and rules about how commissions work. And so, when I read this new…the DOJ revoking the agreement that they had made, you know, I think, in some ways, you know, I’m excited to see what happens next, right? Because I think the language in the press release from last week is that the idea was that the Department of Justice, like you said, wants to actually look a little bit harder and not prevent themselves from further litigation or investigation of NAR and commission practices. And, ultimately, I think that’s probably a good thing. I do believe that there needs to be a little bit more oversight into commission practices and, like I said before, a lot more education for consumers about how commissions work.

And so, you know, I obviously don’t know what the DOJ is actually, sort of, up to and what they’re gonna be looking for a little bit more deeply, but if it’s in the same vein as the agreement that they made last year and the investigation that they did last year, I think, ultimately, it’s probably beneficial for consumers, because it seems like they’re taking very seriously the idea that commissions are not benefiting clients in the way that we hope that they would, right? If we’re paying real estate agents for a particular service, you know, we want them to be not only, you know, doing right by us, but I think also explaining the service and the payment structure to us, you know, as accurately as possible.

Matthew Blake: What would you, kind of, like to see the DOJ investigate? I know that you’ve done some work with the New York State Legislature in terms of issues there around, you know, steering, basically, the idea of practices that can perpetuate a racial segregation. What kind of reforms would you like to see, maybe, on a national level regarding real estate?

Max Besbris: One thing that we suggested that New York State do is pour even just a little bit more money into the Secretary of State and the Attorney General’s offices to just conduct more audits of real estate markets and see where steering is more or less likely to occur. Because I think if we had a better sense of where it happens, we would know those are the places where we need to do more active targeting, more active investigation, more active involvement in education and making sure that it happens less. And I should say, right, that so the Department of Housing and Urban Development does, every 10 years, do a major audit study across lots of different cities. And it’s usually a very, very good portrait of how steering is working in America, but I think we need more than that. I think individual states actually should be taking, you know, a more forceful, sort of, bigger steps in terms of testing.

Matthew Blake: And how does that work, exactly? Like, I sort of, maybe erroneously, pictured in my mind, like, you know, New York State official, like, posing as a potential home buyer or something and being undercover. But how does an audit actually work with real estate agents?

Max Besbris: So, what happens, usually, when housing audits are done by non-profits or by Newsday or by the government is they hire people. They hire people who need jobs, not necessarily ones who already work for the government. But they hire people of lots of different races, and all different races, and they say, “Give them the same financial credentials,” right? And give them [inaudible 00:22:11] financial profiles and say, “Here are some things…” and they train them, and they say, “Here are the things that we want you to say when you go meet with your real estate agent, when you go meet with a real estate agent.” And then they send them out to real estate agents, and they say, “Say these things. Tell them you make this amount of money. Tell them, you know, you’re interested in these kinds of neighborhoods,” or these kinds of schools, or whatever it might be, and see how they react.

And what people record, then, they record the real estate agent’s responses. More specifically, they record where they get shown houses, how much those houses are worth, and what those houses are like. And so they’re paying a lot of attention to what real estate agents not only say about neighborhoods and neighborhood quality and whether there’s any sort of racial tinge to that language, but also the demographics of the neighborhoods that the real estate agents say, “Here’s where we should look for you.” And they look to see if there are any differences across people by race. And, like I said, you know, it’s a relatively common and consistent finding that real estate agents steer white home buyers away from neighborhoods of color. They steer home buyers of color generally away from white neighborhoods, and they do this without the testers having said that they want to live in a same-race neighborhood.

Even if a buyer does say that they wanna live in a neighborhood that’s predominantly the same race as them, the real estate agent is not supposed to respond. The real estate agent is supposed to tell them, “I can’t facilitate that kind of sale,” right? “I cannot facilitate that kind of search. That is not my job. In fact, it’s illegal if I did.” And like I was saying before, I think real estate agents don’t necessarily have great ways of responding to these kinds of questions, which I think is part of the problem. But that’s generally what a test, an audit of a housing market looks like. And so I think we definitely want more of that. We want more testing, because I think it will illuminate a little bit better where the problems are.

The last thing that we suggested, that I think is actually the most transformational, in some ways, is we have laws on the books right now that mortgage brokers have to report everything that happens with their applications, right? So if you’re a mortgage bank, you have to make a report to the federal government every time someone applies for a mortgage and the outcome of that mortgage, and you collect data on the demographics of that person, their race, their gender, how much money they make. And this actually has done a really good job of allowing the government to see where discrimination is happening, because they have all of this aggregate data to be able to say, “Well, it looks like black home buyers are getting denied at a higher rate, despite having equal, you know, finances as white home buyers.” Or, “Women buyers are getting discriminated or not getting mortgages at the same rate as individual male buyers.” You know, questions like that.

And it’s done, I think, a very good job. It’s been a boon, certainly, for researchers, and I think a proactive Department of Justice also can do a good job of regulating, you know, these mortgage banks a little bit better. I think what we want is something similar for real estate agents, where real estate agents don’t have to report on any of their interactions with their clients right now. I mean, they do internally to their own brokerages, but there’s no federal or states that…you know, federal mandate or a state mandate that requires real estate agents to tell you, tell us, tell the public, right, or tell the government, you know, “This is the race of the person that came to me. These are the houses that I showed them. This is the cost. These were their financial profiles.” And I think if we simply, even, just had that data, it would be fantastic in terms of being able to tell where discrimination is more or less happening, if it is happening at all, and what real estate agents need in terms of making their work less discriminatory and easier for them.

And so what we proposed for New York State, and there is a law working its way through the State Legislature right now, is that real estate agents would have to report on the demographics of their clients. We’ll see if it actually makes it into law. My hope certainly is that it does. And if it does, I hope it can serve for a model for the federal government to more generally collect this kind of data and do this kind of regulation, I think, in a more straightforward and clear way.

Matthew Blake: This has been a really great conversation, at least I thought. Hopefully, our audience agrees. Yeah, I guess, before we go, just curious, you know, you wrote “Upsold,” you know, like you said, sort of the post-great recession recovery in the housing market when there were a ton of big cities, including New York City, where home prices just boomed. Home prices are continuing to boom. Real estate agents are continuing to get at least a piece of that, you know, economic transaction. Just, again, before we go, any sort of parting thoughts about, kind of, the future of the real estate agent? Like, if you were to write, you know, “Upsold: The Sequel” five years from now or, you know, a year from now, like, any changes that you might anticipate?

Max Besbris: Well, one thing that I would very much want to answer a little bit better than I did, I think, in the first book, in “Upsold,” is this really interesting statistic that, you know, more and more people continue to use real estate agents. And, you know, 10 years ago, 20 years ago, with the rise of websites like Craigslist or Zillow, you know, where you can post real estate advertisements outside of a multiple listing service, you know, and you don’t necessarily need a real estate agent who has access to a multiple listing service to tell you about available houses, you would think that maybe the percentage of people using real estate agents would go down, because people are thinking…consumers are thinking, “Well, I can do this on my own.” But we’ve seen the percentage of housing transactions using a real estate agent actually continue to climb over the past 20 years.

And so, you know, I don’t think I did a great job in the book of figuring out why that’s the case. I think there are a lot of reasons, certainly. Some of them have to do, again, with, I think, the increasing price of housing. I think as housing continues to cost more and more for individual families, it seems to us as a bigger transaction, a more weighty transaction, or [crosstalk 00:28:43] one.

Matthew Blake: Yeah, [crosstalk 00:28:44].

Max Besbris: And, you know, we want the help of a real estate agent to, sort of, sort all of this out, and, obviously, real estate agents also often provide us with connections to brokers or real estate attorneys and all the other, you know, actors that are necessary for completing a housing transaction. And so that’s one part of it, is I think that housing prices, as they ballooned, make us, you know, understandably, as consumers, anxious. And we want help with the process. So, you know, that’s maybe one reason.

I think there’s some evidence…I’d have to look again, but I think that there’s some evidence that inter-family housing sales have actually gone down. And those are sales that, you know, would presumably not necessarily require a real estate agent, and as that percentage of housing transactions has gone down, probably the use of real estate agents has gone up at the same time. And so I think, again, there’s a lot of reasons why this percentage continues to go up, the overall percentage of transactions that use real estate agents. But I think it’s a really, really interesting question, and, you know, I don’t think I’m gonna answer it, but if there are, you know, some enterprising researchers listening to the podcast, I would say I think that’s a really fascinating place that I would wanna see, sort of, the next step go.

Matthew Blake: Well, Max, thank you so much for coming on. I really appreciate all your insights. People, go out and read “Upsold.” And, yeah, I really appreciated this talk.

Max Besbris: It was my pleasure.