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Real Estate Commissions and Homebuying

Author

Listed:
  • Borys Grochulski
  • Zhu Wang

Abstract

We construct a model of home search and buying in the U.S. housing market and evaluate the commission paid to homebuyers' agents. In the model, as in reality, homebuyers enjoy free house showings without having to pay their agents out of pocket. Buyers' agents receive a commission equal to 3% of the house price only after a home is purchased. We show this compensation structure deviates from cost basis and may lead to elevated home prices, overused agent services, and prolonged home searches. Based on the model, we discuss policy interventions that may improve housing search efficiency and social welfare.

Suggested Citation

  • Borys Grochulski & Zhu Wang, 2024. "Real Estate Commissions and Homebuying," Working Paper 24-01, Federal Reserve Bank of Richmond.
    • Handle: RePEc:fip:fedrwp:97893
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Search and matching; Housing market; Real estate commission;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L8 - Industrial Organization - - Industry Studies: Services
    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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