Residential real estate agents are paid a commission of 5-6 percent of a property’s selling price, paid by the seller to his or her agent. The commission is then split roughly 50-50 between the seller’s agent and the buyer’s agent.

Because residential real estate agent compensation is closely correlated with housing prices, unexpected or rapid increases in housing prices can confer an income windfall on agents. During a housing boom, agents reap a windfall as property prices (and their commissions) rapidly increase. In addition, because properties turn over so quickly on their own, agents spend much less time and effort promoting their client’s properties.

Income windfalls don’t pass unnoticed. And with low barriers to entry, new agents quickly entered the market. The figure below on the left shows that nearly half of the increase in real estate payrolls was because of new agents entering the occupation. Contrast real estate agents with all sales occupations (below on the right). In the broader occupation, employment increases accounted for a little more than a quarter of payroll increases.

The simple economics story: Windfalls cannot persist in face of competition.

This entry was posted on Friday, November 24th, 2006 at 12:54 pm and is filed under Competition, Real Estate. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.