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The really fucked up thing is the origination fee. Banks charge like 1% to do the loan paperwork. Why does the paperwork for a $400k house cost more than a $250k house? Don't the banks make enough money on the interest?
Not to mention PMI, which should just be illegal. Oh you don't have 20% down? Great credit score? Doesn't matter. We're charging you another 2%.
Home sales are a greasy business.
That 20% down payment in today's market is just atrocious. We're getting ready to sell our home and we will profit maybe 80k, and that's still not enough for a detached 3-bedroom home in our area. We'll likely need to dip into our 401k to get up to 20% to avoid PMI
I think that the system for determining down payments and mortgage rates is probably okay. That market should be competitive -- if a lender is demanding an unreasonable amount, a buyer can go somewhere else, same as any other market.
https://www.forbes.com/advisor/mortgages/how-many-mortgage-lenders-should-i-apply/
But how many mortgage lenders should you apply to? The Consumer Finance Protection Bureau (CFPB) recommends that you contact “at least three lenders” on your shortlist.
In such an environment, I'd expect that it's hard for there to be collusion to artificially drive fees up. They'd have to have some way of preventing competing lenders from entering the market.
The down payment discourages a buyer from defaulting, so I suppose if lenders expect high down payments in a given situation, they expect a high risk of default. Maybe they assess the risk of the post-sale price falling as high, for example. Saying "I want 20% down" is the lender saying "I think the price might fall 20% and if so, I don't want to be the one left holding the bag. You, the buyer, can eat the first 20% of price drop, and only after that will I start to be exposed."
I think that if lenders are wary of lending to buy something without a large down payment, I might be wary of buying it too, as a potential buyer.
Might be interesting to see what the correlation is in historic spread in offered mortgage rates for various down payments with historic price movements of houses over some subsequent fixed period of time. If a lender can do a good job of predicting price movements, then one would expect them to have a higher down payment more-significantly reduce lending rates prior to situations where the price of the property falls.
Lenders these days lack nuance and are beholden to large corporate rules that are there to protect them. What you are saying is good but I don't think it exists.
But I have not been able to afford to buy a house so I have no idea.
My take is that having a percentage fee of the total sale price for the realtor makes little sense. The realtor might be able to get a more-favorable price, sure. But the effort and return there aren't linear in the price of a house. If one wants incentive to reflect what the realtor's involvement actually does, I'd expect to do something more like have a commission based on how far the price differs from an appraisal or something.
Sure, there are different issues with gameability there, but let me put it a different way. Say you are selling or buying a ~$500k piece of property. Say the price can go up or down $50k based on what your agent does. Do you want to have the realtor mostly incentivized to get that swing in your favor, or incentivized to get more throughout? As things stand on our hypothetical sale, there's a percentage of that that goes to both the buyer's agent and seller's agent.
As things stand in our hypothetical example, 80% of the seller agent's incentive is to just close the sale. If they have to put in double the amount of work to get the best possible price rather than the worst possible price, it makes no sense for them to do so -- they'd rather focus on doing another sale.
I remember thinking "it'd probably be a good idea to outright offer something like a 50% split on sale above some fixed level to the agent, if you're selling real estate, even in addition to the existing commission, because as a seller, you want them focused on driving that number up, and the current system doesn't much do that".
As the existing structure has it, the real sales job that the seller's agent is incentivized to do isn't getting a favorable price for the seller, but rather selling the seller on having them, rather than a different realtor, represent them.
On the side of the buyer's agent, the existing incentive is even more curious, because they get rewarded by having a higher price, not a lower price, which to the degree that they respond to incentives to have a different price, aligns their interests with the seller, not the buyer that they are hypothetically working for.
That being said, I understand that percentage commissions aren't uncommon in the sales world. Just that usually, a salesman isn't selling a fixed amount of product for the party that they are working for -- you're trying to incentivize them to sell a larger amount. And while I don't know how procurement agents are typically compensated, I doubt that it's normally tied to having a higher price. Any system is going to have its own degree of gameability, but the current set of incentives seems to me really removed from one that makes sense for the buyers and sellers involved.
This is why everyone seemingly has a real estate license. Low barrier to entry and no cap on income. I am guessing the barrier will increase now so the top producers get even more quantity to make up for the lower per transaction deal and push out the smaller fish.
Without PMI, if you don't put 20% down, they just won't give you the loan for that amount. Outlawing PMI would just screw the consumers who can afford the payments, but just don't have the 20% to put down. Which was the case for me when I bought my first house.
I’m not gonna shed any tears on that, but this is peripheral to the root issue and why that commission is out of control.
Solve why homes cost a ransom in this first place, and that 6% commission should drop proportionally.
Yeah it all comes down to a shortage of homes. The bubble popped around 2008 and construction of new homes stopped. Ever since then we haven't been building enough homes, so there is a shortage driving up prices. Until we make more places to live, home prices will be outrageous.
Many of the builders went under. The ones that survived were typically building more expensive (ergo higher margin) housing. Which is why they've continued doing so up to today.
I don't recall exactly now but read a while back around half the home building companies in the US were defunct by 2012.
Or, ya know, regulate rampant price fixing.
Who is fixing the prices of homes? I would expect it to basically be a bunch of individual sellers setting it at what the market would allow.
Yeah, no it’s an entire industry.
https://finance.yahoo.com/news/yardi-rent-setting-software-illegally-223000337.html
That's about someone alleging collusion among some massive rental owners in Seattle. . .and it's being offered up as proof that there is some collusion among individual home owners in selling homes across the country.
Well okay then.
I am always baffled by "the shortage of home". Population growth is pretty slow. And the news claims more young adults are living with thier parents. So where are all the homes going?
The homes didn't go anywhere. They don't exist. Developers basically stopped building enough homes in 2008. Since then the population growth has vastly outpaced the number of homes being built. Now we're years away from having enough housing because it takes time to catch up building them. Unfortunately prices are not going to significantly drop any time soon.
The percentage is one issue. While it takes more work to find the buyer for a $10 million home than for a $200k home, it doesn't take $488,000 more work. But that's an edge case, since not many of those are sold so it is more about the lack of volume requiring more money. The real issue is in places like SoCal where every house costs a million, so every commission is $60k. That's a big chunk of change for average buyers trying to get into a starter home.
I mean it also just continuously inflates the price every transaction cycle because that cost gets baked into the loan.
So you are adding substantial inflation to home prices with that 3-6% if the average home is bought and sold ~10 years.
There's a broader concern to the American economy in discouraging labor mobility. There is a benefit to the country's economy in having a mobile labor force and high transaction costs discourage labor mobility.
It's one argument to have more people renting, as there's a lower cost to move for renters than owners.
A country benefits if workers are relatively able and willing to move to wherever demand for labor is. If there's an artificial barrier to such a move, then it makes it harder to connect workers and demand for labor; a worker would be artificially-inclined to work in a less-productive job that didn't require a move and it's harder for an employer who has some more-productive job to manage to get workers.
https://en.wikipedia.org/wiki/Labor_mobility
Labor or worker mobility is the geographical and occupational movement of workers.[1] Impediments to mobility are easily divided into two distinct classes with one being personal and the other being systemic. Personal impediments include physical location, and physical and mental ability. The systemic impediments include educational opportunities as well as various laws and political contrivances and even barriers and hurdles arising from historical happenstance.
Increasing and maintaining a high level of labor mobility allows a more efficient allocation of resources and greater productivity.
That being said, I understand that the American labor force has historically been relatively-mobile, though I recall reading that that has fallen off in recent decades (maybe it's due to the process of urbanization starting to wrap up in the fairly-developed US, as I'm sure that urbanization drives some labor mobility -- gotta move if one is to move to a city).
Can you explain this? I can't make sense of it. If it's a fixed rate, I don't see how it adds to the inflation of the home value.
If you buy a house for 100k, it has a 6k commission baked in the price, so the seller gets 94k. But that 94k only matters to that seller, you still need 100k to break even, plus another 6% to get into the green after your sale's commission. So your break even price is now 106,360. And your buyer's break even price will be 6% on top of that and so on.
Because it's a % of the price, it's exponential growth. If it was a fixed number, it would just be linear growth.
The general idea of saving 15 to 20 percent for a down payment becomes a lot less worthwhile of a grind when that money all goes to realtor fees.
I wonder what will happen in the current spring market between now and when the settlement takes effect in mid-July?
I could imagine some sort of buyer frenzy before they'd have to pay for the buyer agent themselves.
Good — the real estate market is run by a cartel
Don't know if Canadian market is really different, but in Québec at least more and more people are selling their properties themselves to save on those commission. For instance https://duproprio.com/en#how-much-could-i-save You cannot do that in USA?
You can in many places. Realtors do offer benefits though but usually not 6%.
You can, but the problem is that realtors won’t show people your property because you are not using a realtor. It is a way to essentially punish people that try to avoid the fees.