Ask HN: Are real estate agents the problem with out of control home prices? | Hacker News Reader

Ask HN: Are real estate agents the problem with out of control home prices?

10 pointsdavemel3712 comments

If real estate brokers charge 6% to sell a house, and home ownership over a long period of time averages about 6% growth a year, is it possible real estate agents are the real reason/problem with out of control real estate prices?

Here is how I see it. Seller A is willing to take X amount for his house. Agent B marks it up 6% to cover his fees. Buyer C pays x + 6% for the property. Broker D uses x + 6% to comp a new listing and lists the next home at x + 6% + 6%, etc....

Essentially, if brokers use comps to value properties, and they mark up the "net to seller" by 6% and prices average a 6% growth a year, wouldn't that mean that real estate agents are artificially inflating housing prices beyond what wages can justify and afford? Would cutting out real estate commissions bring housing prices back under control?

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I think the cause of with out of control home prices is low interest rates. Often, people buy the biggest house they can afford, the lower the interest rate, the more they are willing to pay.

As the interest rate fell from 14% in 1981, to roughly 0% today, and mortgage rates fell from ~20% to ~4%, people could afford to pay more and more, comfortably or otherwise, for their homes, and because often people buy the biggest house they can afford as a proportion of their monthly income, the maximum people can pay will continue to rise as interest rates fall. This drives house prices upwards.

As house prices rise upwards, all homeowners will have increased equity-debt ratios, giving them additional collateral to further pledge their houses to increase the amount they can borrow to spend on more properties. It is a pro-cyclical effect on house prices.

No.

You can only raise prices if you can find buyers who are willing to pay. If you used this pricing model as a real estate agent you would find yourself completely unable to sell houses pretty quick if, for example, people started moving out of the area. In that scenario there would be more houses for sale than buyers, and the real estate agent with the lowest price is the one who will actually get the sale (and if you’re still increasing prices that agent won’t be you.. you'll be going out of business).

This is why people can’t increase prices forever - you have to lower your prices if the buyer has a lot of good alternatives to buying your house.

To influence the price of housing you need to increase the number of good alternatives for buyers. You can do this by driving people out of the area (lame), or you can build tons of housing.

This is all based on one of the fundamental ideas of modern economics, the supply and demand model[1].

[1] https://en.wikipedia.org/wiki/Supply_and_demand

a counterpoint to this is if there is a combination of high demand (due to demand, jobs) low supply (zoning laws etc.) then this causes the fuel to higher house prices. The real estate agents and sellers are the spark by trying for higher prices, or skilfully marketed auctions (in the case of Australia).

another counterpoint is expectation adjustment. If $1m buys you a house today but $1m buys only an apartment in 10 years time, then it still buys a home where a family can live and the same wages at the same interest rate can support it, but land prices have clearly increased in that situation.

Taking Sydney as an example: you can move away to cheaper areas but enjoy your long commute and/or low paid job (or no job). I am sure the same is true of many capital cities. (Sydney is the capital of NSW before you correct me :-))

The 6% is not the main problem, but it does have an effect. Not in the way you suggest though.

The main problem is that the 6% reduces supply liquidity, which means there are less houses for sale than there would be otherwise. Owners know they cannot get back in easily at breakeven, due to the immediate 6% hit. That means when the market is hot, there is a tendency to hold on until it's not. This means the full extent of "affordability" is a more probable event.

It doesn't work on the flip side when times are bad, because buyers have no such penalty. Whereas sellers are going to sell either because they believe prices will get worse, or are forced to due to finances.

Your assumption about agents basing list prices on commissions isn't entirely accurate. First of all, agents tend to price properties to sell quickly so their chances of getting a commission are almost guaranteed. This doesn't always mean the home sells for the highest possible price [1]. In order to determine the list price, agents will runs comps to ensure their listing is competitive against the other listings in the area. Ultimately, the buyer wants the best bang for their buck.

If there's high demand and low inventory, agents will naturally up the price. Supply and demand.

[1]: https://www.youtube.com/watch?v=17jO_w6f8Ck

1. Housing laws (restricting housing supply to increase [SF])

2. Interest rates (when they are low) promotes more ownership

3. Federal/ State intervention : Promoting more people to own homes even if they can't afford to (or their job is high risk).

4. Low unemployment

5. Fannie Mae & Freddie Mac artificially propping housing prices by not releasing the million + mortgages they have on their books.

6. Terrible software that depends on humans being able to understand what prices should be for a home, while using antiquated ideas as to what a home price should be given "comps" and not supply of housing.

7. There are so many factors that if you're truly interested... Read a book called Housing Boom & Bust by Thomas Sowell. :)

Two problems with this thought.

1) On average in my jurisdiction, people sell their houses once every 10 years. So the 6% Fees would account for only (6%/10 = 0.6%) annual growth, not the whole 6%.

2) You could compare this to an area where agent fees are much lower. For example, most of my real estate industry experience is in Queensland, Australia where until last year Agent Commissions were capped at 2.5%. If your theory were correct, we would have seen growth rates closer to 2.5%, when in reality they average about 6-8% per annum here as well.

I like your thinking though!

To your first point. Comparable housing units are used to price new listings, so even if a specific home is only sold every 10 years, there are comparable homes sold every year that drive up the value by 6% yearly.

To your second point, I can't speak to specific markets, but assuming other market forces for the most part balance out over time and the only things that constantly change are inflation and increased brokerage fees, it could still show 6% growth.

I second what other commenters have said about low interest rates. They cause us to make economic decisions that we would not normally make such as buying a bigger house. Also, the requirement to have 20% down verse buying with a low down payment adjustable rate mortgage has effects on the price. People's time horizon to sell has changed over the last few decades. No longer due you see the majority living in their houses for 30 years. People have much shorter time horizons to sell.

One the interest rate point.

Think back to the 1980's if your mortgage had 10% interest, how much could you afford to buy? On the flip side, if your a seller how much could you sell your house for with 10% interest rates.

There was some figures out there that stated something along the lines that for every increase in interest rate by 100 basis points, there is a ~14% decrease in the price a buyer can afford.

Los angeles is a prime example of this problem. The demand has so far exceeded the supply the brokers are playing the flip game to a point now very few people who did not already start with a house in los angeles can afford one.

Even the current average tech worker wage at good companies will make buying a home on your own fairly impossible. Forget buying if you are someone who works a normal type job.

A house selling for 250k in a decent neighborhood in 2000 has jumped to 850k in 2016.

Given the dynamics of nominal GDP per capita, and mortgage rates falling from 8% in 2000 to 3.6% now, it means real price increase of only 37.5%. Is it such a big deal? Especially since, in both cases, such a house is affordable to the high middle class only, who's income growth is certainly faster than the average because the income distribution got more unequal since 2000.

A price is changed by fluctuations of supply and demand. If demand is rising or supply is shrinking, price goes up, and vice versa. Since real estate brokers don't hold onto any real estate, they don't buy it, they don't affect supply or demand, and blaming them is as crazy as blaming weather forecasters for bad weather.

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