A handful of class-action attorneys are seeking to upend a pro-consumer cornerstone of the American real estate market: the practice of homesellers, not the buyers, bearing the responsibility for the cost of real estate broker’s services. This standard has helped millions of Americans purchase their first home, which is often the first step toward building generational wealth. Rather than seeking to overturn this practice, the U.S. real estate market should be seeking ways to reduce not increase the costs for first-time buyers.
Proponents of this change argue it is necessary to promote competition. Exactly the opposite is true: Without the compensation approach as it is between the selling and buying broker, local broker marketplaces wouldn’t flourish and there wouldn’t be a level playing field for small businesses to have access to the same information as larger brokerages. Instead, the only thing changing how real estate compensation works would do is increase the cost burden for American homebuyers. Especially first-time homebuyers.
For most people, buying a home is the biggest financial decision they will make in their lifetime. Why would we want changes that would make it harder to be a first-time homebuyer in America?
Affording a down payment is often the biggest obstacle for most Americans when buying their first home. According to the most recent Federal Reserve Survey of Consumer Finances, the typical American household has an average of $5,300 in the bank. That’s not even half of the median down payment on a starter home, which is $16,100 or 7% for first-time homebuyers. If homebuyers had to pay broker fees, which most lenders don’t allow to be financed, every 1% of broker commissions would put their home another $2,300 out of reach.
When I was the president of the Federal Home Loan Bank of New York, I saw this reality firsthand. That is why I created a First Home Program, which today grants up to $10,000 in down payment assistance. Asking homebuyers to pay real estate agents’ fees would undercut programs like this and immediately put the housing market out of reach for ordinary Americans.
It’s also why I’m calling on Congress to pass the Neighborhood Homes Investment Act. This bipartisan legislation would create a new tax credit to encourage investors to provide distressed communities with affordable, entry-level homes. If passed it could lead to over 500,000 affordable homes for moderate- and middle-income homeowners over the next 10 years.
A change to how real estate agent compensation is paid could also cause some homebuyers to forgo using real estate agents altogether. This would be dangerous and unwise. Calling the homebuying process “complicated” is an understatement, and agents do much more than just “find you a house.” They help with price negotiations, make sure you are in compliance with local and state property taxes, help walk you through mountains of paperwork, and coordinate the appraisal and home inspection process. If the seller can afford the services of a real estate professional but the buyer cannot, one party is operating with the advantage of more knowledge and expertise than the other.
We know that access to safe, affordable housing is critical to strong communities and neighborhoods. So, we should all be helping first-time homebuyers purchase the homes of their dreams, not creating financial hurdles to homeownership.
Alfred Dellibovi was the president and CEO of the Federal Home Loan Bank of New York, and a nationally recognized authority on banking, the lending industry, housing, public finance, and HUD reform in the 1980s. He was United States Deputy Secretary of Housing and Urban Development from 1989 until 1992 under Jack Kemp, having been appointed by President George H. W. Bush. For more information about Dellibovi click here.
