The Impact of Commissions on Home Sales in Greater Boston

Abstract

Buying or selling a residential property is one of the most important financial decisions for a large majority of households in the United States. In 2007, 68 percent of households owned their own home, more than a third of national wealth was held in residential real estate, and there were 6.4 million sales of existing homes according to estimates from the Department of Housing and Urban Development. Surveys indicate that an overwhelming majority of homes are sold with the aid of a licensed real estate agent or broker. According to a report issued in 1983 in the wake of the Federal Trade Commission’s investigation of the real estate brokerage industry, brokers accounted for the sale of 81 percent of single family homes. The National Association of Realtors (NAR), the largest professional organization of real estate agents in the United States that represents more than half of all licensed agents, estimates that nationally almost 80 percent of residential real estate transactions involve a Realtor. For owners selling their homes this way, real estate agents usually bear a large fraction of the costs of marketing a home: advertising the home, conducting open houses, taking potential buyers on visits to the home, and negotiating offers. Households interested in buying a home often solicit the help of an agent to make appointments to visit properties and arrange financing. In exchange for their efforts, agents are usually compensated with a fixed percentage commission of the sales price, split between the buyer’s agent and the seller’s agent (National Association of Realtors 2007, Chang-Tai Hsieh and Enrico Moretti 2003). If the agents are working for