A landmark settlement in an antitrust challenge to the National Association of Realtors’ standards for real estate agent commissions has understandably been celebrated as a victory for homebuyers. At around 5.5%, average commissions in the United States are some of the highest in the world, and if the NAR settlement results in lower commissions (and if sellers, who typically pay the fees, incorporate the savings into their listing price), prospective homebuyers could save thousands of dollars.
Any such savings would be welcomed, and for good reason. But homebuyers shouldn’t expect fundamental changes to the brutal U.S. housing market.
First, it’s unclear just how much they’ll benefit from the settlement because it doesn’t address the other, and arguably bigger, anticompetitive facet of the U.S. real estate agent market: occupational licensing regulations.
All states require real estate brokers to obtain a license, and 44 states license real estate salespeople (who must work for a licensed broker). In many states, this system creates a high barrier to entry into the profession and severely limits competition.
Colorado, for example, demands 168 hours of education from a state-approved real estate school (or college equivalent), passage of the state licensing exam, fingerprinting and background check, a sponsoring broker, errors and omissions insurance and $485 broker licensing fee. All told, the process can take more than a year to complete and cost more than $1,000. Once licensed, brokers must annually complete another 24 hours of continuing education at a substantial additional expense.
Licensing leads to higher costs for consumers
Research has consistently found that by limiting competition, occupational licenses like these increase consumer costs while providing few, if any, benefits in terms of quality, health or safety. For home buyers and sellers, this probably means paying higher commissions for no good reason.
Consider, for example, the United Kingdom, which doesn’t license real estate agents and enjoys average commissions of just 1.3%. Even after this month’s settlement, U.S. homebuyers can only dream of such rates.
In a free market, providers should be able to offer any service at whatever price they want, and if consumers don’t like it, a competing provider can – and almost certainly will – offer it for less. But this is no free market. And until state laws that create local real estate cartels are reformed or eliminated, we should expect commissions to remain higher than they’d otherwise be.
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Even then, however, homebuyers wouldn’t be spared from the most important problem in the U.S. real estate market today: home prices and rents increasing at a pace that far exceeds overall inflation. That trend has nothing to do with cartels or commissions and almost everything to do with the limited supply of housing, particularly in high-growth metro areas.
Building more homes will slow price increases
Research has repeatedly shown that the most effective check on skyrocketing home prices is simply to build more homes. One survey of the literature found that new construction of market-rate units in several U.S. cities moderated the prices of all typesof nearby housing, both high- and low-priced.
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Recent experience shows much the same: places that have seen housing construction at rates above national or regional averages – Austin, Phoenix, Atlanta, Raleigh, Minneapolis and more – have enjoyed slower rent and home price appreciation.
Unfortunately, regulation is a big problem here too, severely restricting the construction of market-rate housing across the country and thus boosting prices. The biggest impediments, studies show, are local zoning and land use regulations that dictate home sizes, yard sizes, parking and more, while giving politicians and residents an effective veto over anything that might deviate from these strict terms.
The restrictions’ effect on prices is significant: One recent study examined 24 different metropolitan areas and calculated a “zoning tax” of up to $500,000 per quarter-acre in cities with onerous land-use regimes – a finding consistent with previous research.
In case after case, in the U.S. and abroad, the lesson is always the same: new housing supply lowers prices; land use regulation discourages new supply; and homebuyers suffer as a result.
Other policies do further damage. Federal tariffs on construction materials, hard caps on immigration, high local permitting and building fees, and property and other taxes increase American homebuilders’ costs and thus discourage the construction of smaller starter homes with lower profit margins. National housing subsidies and city building codes preference traditional, “stick-built” homes over less expensive manufactured housing. And the U.S. government’s ownership of large amounts of land, particularly in the West, makes it unavailable for development and acts as hard barrier to the expansion of neighboring localities.
Combine state-sanctioned Realtor cartels with a witches’ brew of federal, state and local regulation, and it’s no surprise that home prices are skyrocketing today. Unfortunately, there’s no settlement amount that will change this troubling reality.
Scott Lincicome is vice president of general economics and trade at the Cato Institute.
Greater Louisville’s elected officials and business leaders have been busy in recent years implementing policies to create a more competitive and business-friendly environment. As many of our peer cities are seeing exorbitant housing prices and costs of doing business, Greater Louisville is seizing this opportunity to market our advantages in affordability, logistics and quality of life. Over the past year, the Kentucky General Assembly lowered the state’s personal income tax by a full percent and is working diligently to meet revenue triggers to further reduce it in the coming years. Plus, they have invested in innovative programs like the Kentucky Product Development Initiative, that are helping to make our state more attractive to corporate investment.
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We are already seeing the pay-off from these programs and other policies. Last year, Greater Louisville Inc. grew our economic development project pipeline by 93%, showing there is rising interest in businesses relocating and expanding to our region. But we cannot stop here. In addition to addressing long-term issues like workforce participation and public safety, we have to finish what we started with tax reform by creating more opportunities for community investment through local tax structures.
Louisville has a unique economy that employs hundreds of thousands of people and welcomes millions more through tourism. Right now, much of the city’s funding comes from taxation on our workers through an occupational tax. If we can change the model—taxing consumption rather than production—not only will we keep more money in Louisvillians pockets, we will also increase our ability to invest in community assets by capturing consumption-based revenue.
What can Louisville learn from other cities to improve tax law?
Two years ago, GLI took a group of 120 business and elected leaders to Jacksonville, Florida for our annual Greater Louisville Idea Development Expedition. We heard from Jacksonville’s top leaders who attributed much of their success to updated infrastructure and improvement projects funded by small and incremental local taxes. From infrastructure investments to downtown revitalization, local funding for these large-scale projects and a competitive tax code has helped Jacksonville grow at an accelerated rate with more than 100 people moving to the region per day. One of our top takeaways from that trip was that Louisville, and all of Kentucky’s cities, needs more flexibility in creating revenue streams to fund projects and support the needs of their communities.
Will Tax reform help Louisville?Submit your letter to the editor here.
Right now, Kentucky’s Constitution limits the General Assembly from being able to update revenue-raising options at the county and municipal level. Occupational taxes remain the primary revenue generator in Greater Louisville. While the passage of state tax reform in 2022 emphasizes a move from production-based taxes to consumption-based taxes, our local governments are not reaping the same benefits.
GLI has prioritized local tax reform for many years. However, there has never been a more important time to make it a reality. If we are serious about making Louisville and all of Kentucky an economic powerhouse, we cannot afford to kick the can on local tax reform another year or two. Businesses are eager to invest in our region, so the time for building a competitive taxing structure is now.
A few weeks ago, Rep. Jonathan Dixon filed Kentucky House Bill 14, which will set up a voter referendum in November, and if approved by the majority of Kentuckians will amend Section 181 of the State Constitution to allow the General Assembly to create parameters in which a county, city, town or municipality could review and revise taxing structures. We strongly encourage the General Assembly to pass this measure and give Kentuckians the freedom and tools needed to create new local opportunities for investment.
Condrad Daniels is the president of HJI Supply Chain Solutions and Chair of the Greater Louisville Inc. Board of Directors. Sarah Davasher-Wisdom is president and CEO of Greater Louisville Inc.
Five years ago, when a real estate agent advised my wife and me to make an offer on a house we had seen only once − at night − and were unsure about, I thought she was being ridiculous. Today, I concede that she was being pragmatic because buyers significantly outnumbered sellers.
We bought another home before it was listed, happening to spot the “Coming Soon” sign out front. That was my preview of the housing shortage. Then COVID-19 supercharged the national housing crisis.
You may know the rule of thumb not to spend more than 30% of your income on housing. Redfin calculated that only 15.5% of homes bought last year would have a mortgage costing less than 30% of local median income, a record well below the pre-pandemic norm.
A new report from Harvard’s Joint Center for Housing Studies found that in 2022, a record half of U.S. renters were “cost burdened,” spending more than 30% of their income on rent and utilities. About 27% of renter households spent more than half of their income on housing.
The root cause of this financial hardship is a shortage of homes, although some housing advocates question or deny that reality. But the housing shortage is a literal shortage. We can see it from various pieces of evidence.
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Housing price index is at near record high
America built far fewer homes in recent years. U.S. private home construction crashed before the 2008 mortgage crisis (measured in total units). Only in late 2021 did it climb back up to its pre-Great Recession peak.
Homebuilding is rebounding, but we have a lot of catching up to do. The Case-Shiller housing price index sits near an all-time high.
The median age of first-time homebuyers also is near a record high, at 35.
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Investment firms have owned many multifamily buildings for decades. They now are buying a significant number of houses because they expect a continued shortage to boost those properties’ values.
Economists argue about inflation and minimum wage laws, but they overwhelmingly agree we have a housing shortage. “Place the Blame Where It Belongs,” declared a recent Urban Institute report on the shortage. Economists are still figuring out how to measure it, but various estimates place the national shortage of homes in a broad range, from 4 million to 20 million.
Rising rents trigger increase in people without stable housing
It was a moment, not a number, that finally convinced me of the housing shortage. I started an all-volunteer housing advocacy group in 2021 and about a year later was invited to tour a homeless shelter. A staff member explained that rising rents had increased the local population without stable housing, and that the shelter struggled to find available homes to place its clients in.
I have since heard the same thing from staff at other shelters in my state. I have also heard chilling stories about residents of my city living in unsafe, overcrowded conditions.
Low supply lets landlords jack up rents. It prevents people from leaving abusive partners. It forces California college students to sleep in their cars.
The housing shortage is all too real. Only building many more homes will make housing affordable again.
Luca Gattoni-Celli is a Young Voices contributor and the founder of YIMBYs of Northern Virginia. Follow him on X @TheGattoniCelli
In this image produced by DPZ CoDesign Feb. 7, 2024, Vero Beach planning consultants, potential homes for teachers are shown along the northern perimeter of the Freshman Leaning Center on 19th Street.
CONTRIBUTED IMAGE FROM XAVIER IGLESIAS
In this image produced by DPZ CoDesign Feb. 7, 2024, Vero Beach planning consultants, Pocahontas Park as it exists in 2024 is shown at left. DPZ proposes changes to the park, right. They would include eliminating a small parking area and moving shuffleboard courts north, adjacent to more pickleball courts, and creating a pathway into and through the park.
CONTRIBUTED IMAGE FROM XAVIER IGLESIAS
Highly visible crosswalks, including elevated pavement near an intersection on Clematis Street in West Palm Beach, are shown in this undated photo provided by DPZ CoDesign, downtown master planning consultants for the city of Vero Beach. Consultants proposed a similar look for 14th Avenue intersections with the Twin Pairs of State Road 60.
CONTRIBUTED IMAGE FROM XAVIER IGLESIAS
The Courthouse Executive Center on 14th Avenue in Vero Beach is shown Feb. 7, 2024. Opened in 1937, the former Indian River County Courthouse would make a good Vero Beach City Hall, according to Andres Duany, working on a master plan for the city’s downtown.
LAURENCE REISMAN/TCPALM
The Heritage Center on 14th Avenue in Vero Beach is shown Feb. 7, 2024. It was built as the city’s community center in 1935.
LAURENCE REISMAN/TCPALM
The south side of the Heritage Center along 21st Street in Vero Beach is seen Feb. 7, 2024. DPZ CoDesign, Vero Beach planning consultants, proposed making the elevated grassy area, foreground, into an outdoor entertainment area,
LAURENCE REISMAN/TCPALM