Do Brokers Deserve Their Fat Commissions?

My recent story offering home buyers tips on how to get a great deal on a house included a suggestion that buyers—who have the upper hand these days—should consider negotiating the real-estate commission with their agents. That brought a flood of mail from folks like real-estate broker Debi Handley, who argues that she and her colleagues "earn every penny" of the commission they charge.

"We should not be badgered about our wages by a customer," she writes. "That is rude and out of line."

Fellow agent Ron Carpenito agrees: "I could understand your logic if we all made a decent salary and the commission was a bonus, but it's not. What other service do you know of where you can work for months with someone at no cost, and ultimately not buy anything and not owe anything?

"The commissions are our paycheck," he notes. "Would you do as decent a job writing for 33 percent less money just because the newspaper market was slow?"

I shudder at the thought, Ron!

Yet consider this: My salary-much like that of most Americans—has barely budged over the past decade at a time when the cost of buying a home has skyrocketed. Despite the recent downturn in the housing market, the median home price in the nation's 20 largest metro areas has risen by 85 percent, to around $250,000, and by even more in places like New York City and Washington, D.C. (two journalism capitals).

Assuming that each homeowner paid the standard 6 percent real-estate commission, the agent pocketed roughly $15,000 per transaction, versus just $8,100 seven years ago.

Now, it's certainly the case that most agents earned that commission fair and square, putting in countless hours doing everything from analyzing the market to baking cookies for open houses and steering their clients through the morass of paperwork needed to close the deal.

That said, it's also true that the recent housing boom, which not only drove up home prices but also reduced the amount of time most houses sat on the market, helped decrease the time and energy needed to sell them. (To be sure, agents representing only buyers probably put in more time on their clients' behalf, although I would argue that touring open houses takes a lot less effort than putting them on.)

In any case, agents' collective take on the typical home nearly doubled at a time when wages for the average American household rose by only 15 percent. Given the contrast, is it any wonder that homeowners would increasingly look to negotiate—and even circumvent—the traditional 6 percent commission?

As for me, I'm in the Steven Levitt (of Freakonomics fame) camp on the issue of broker commissions. In a New York Times Magazine article entitled Endangered Species, the University of Chicago economist argued for an a la carte approach, in which various levels of service are offered for a fee, rather than the current system of commissions calculated simply as a percentage of the sale price.

Clearly, the arrival of the Internet and a vastly larger public database of pricing information has helped decentralize the sales process and put pressure on agents to lower their commissions. My guess, however, is that folks would have had less reason to complain if commissions hadn't grown at such a rapid rate compared with Americans' incomes.

Ironically, it very well may be the current bust in the housing market that will finally drive people back to the real-estate agents, as sellers are clearly getting more for their money these days by going with an agent.

Just to be clear, I'm not calling for the death of the real-estate brokers profession. I'm merely pointing out that despite what many agents would prefer, commissions are, in fact, open to negotiation and that it's in consumers' best interest to do exactly that.

Do you agree or disagree?