Real estate is a large market where the agent has remained important. The share of Americans using real estate agents has increased considerably since 2001.
~6 million homes are sold each year in the United States. ~5.3M homes are existing and ~700K are new. The average existing home sells for $265,000, and the average new home sells for ~$350,000. This means the total value of home sold in the US each year is around $1.65 trillion. Remember there are two sides to each transaction, and for new homes, one side may be the builder or developer. As a result, there is ~$3.3 trillion of available sales volume. We'll focus only on existing sales, where agents frequently represent each side. The addressable agent market for homes is around $2.8 trillion.
We start with the addressable sales volume of $2.8 trillion. Roughly 87% of buyers purchased their home through a real estate agent or broker. This means ~$2.4 trillion ($2.8 trillion x 87%) of real estate sales volume involves an agent. The average commission is ~5.7%. We can assume half of this for each side, so 2.85%. This would mean that there are ~$70B in commissions (2.4 trillion x 2.85%) paid to agents each year.
The remaining market you will recognize from the popular sign text “For Sale by Owner”. The industry term is FSBO and pronounced “fizz-bo”. While you need a license to sell or rent someone else’s home, it is legal to sell or rent your own home without one. So why doesn’t everyone sell their own homes?:
That said, there are three shortcomings related to the data on FSBOs.
There are a few other sources of where you can buy homes not accounted for in the above markets. They can include agents. But they are smaller parts of the markets that are niches for agents.
There is a growing category of homes from companies called iBuyers. iBuyers make instant offers to sellers with their own money. These include Opendoor, Zillow Offers, and RedfinNow. iBuyers in some ways are replacing the function of agents. They often charge a fee for repairs and the service, usually ~5-10%. While they are often more expensive than agents, they provide speed that agent’s can’t.
iBuyers make small quick repairs, market the property, and aim to sell the home for a profit. The opportunity for iBuyers is to make a profit between the fees and increase in home value. Core expenses for iBuyers are the cost of improving the home. They also may get stuck with homes that don't sell.
iBuyers don’t replace all agents. If a client wants a high-touch experience or thinks their home should sell for more, an iBuyer won’t be a great fit. But iBuyers are quickly growing their share in the market. They will likely become a a large part of of non-agent business in residential real estate.
Like all asset classes, supply and demand drives pricing in real estate. Quite simply, a large driver of home pricing is competition over the number of homes for sale. One of the main metrics real estate agents track is days on market or DOM. In hot markets, DOM is lower. DOM goes along with months supply of inventory or MSI. This metric says how long it would take to sell all the available homes on the market at the current pace. As a result, it’s a combination of inventory and speed of sales. Absorption rate is the term for the rate at which homes sale.
The supply of housing is more limited lately. This has been driving prices up. There are a some recent trends worth noting:
Pricing is often tracked by experts using the Case-Shiller U.S. National Home Price NSA Index. It shows a consolidated view of many market pricing trends for existing home sales. It uses a repeat sales method where it is calculating the changes in sales price of the same piece of real estate.
Mortgage rates also have an impact on demand for real estate. When interest rates are low, the cost of borrowing (getting a mortgage) is lower. This means that lower interest rates can make purchasing a home more attractive. Rising rates tend to limit increases in home prices.
It is important to note that real estate sales is a seasonal business. Redfin notes in its annual report: “Residential real estate is a highly seasonal business. While individual markets may vary, transaction volume typically increases progressively from January through the summer months and then declines gradually over the last three to four months of the calendar year. We experience the most significant financial effect from this seasonality in the first and fourth quarters of each year, when our revenue is typically lower relative to the second and third quarters.” In short, more homes sell in the second and third quarters of the year.
In 2019, 255K homes sold in January, 482K sold in April, and 386K sold in December. This is why agents are much busier in the spring and summer. This is a challenging problem for brokerages employing full-time staff on salaries. Many agents take on additional jobs in the winter when things are quiet.