Residential real estate market size and trends

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.

Annual home sales and agent opportunity

~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.

Total annual home sales market size
There is roughly $1.65 trillion in residential real estate sold each year.

Commission market size

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.

Annual real estate agent commissions
Residential agents generate ~$70B in gross commissions per year.

Where non-agent existing homes fit in: FSBOs

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?: 

  • FSBOs often sell for less: According to NAR, average FSBOs sell for $200,000. Agent represented homes sell for $265,000 on average. But this may be a reflection of agents being less likely to take on cheaper homes. Lower-priced homes may require more renovations and marketing than an owner wants to make. And the commissions are lower.
  • It’s a lot of work to sell a home: As I mentioned in what real estate agents do, it’s a lot of work to sell a home. Many homeowners realize this and hire an agent.
  • Agents have proprietary resources: Non-agents can't post on the MLS. They may also struggle to gain traction with Zillow. Buyer agents may be apprehensive to work directly with the seller. These are only a few of many issues overcome with an agent.

That said, there are three shortcomings related to the data on FSBOs.

  • FSBO prices don’t count fees: Selling a home yourself does save 5%+ in commissions. But many sellers still to offer a buyer agent commission, meaning the savings might only be closer to 2.5%. That said, both amounts are well below the increased median price of using an agent.
  • FSBOs may require lower investments: Real estate agents are trying to get owners the best price. They may encourage more repairs and marketing to present the home better. FSBO sellers may put in less money by having a “take-it-or-leave-it" approach.
  • The definition of agent work is changing: Some agents charge flat fees for services. This means sellers may work with an agent. But they may not be paying agents as much as they used to. It's hard to call an agent getting paid $400 to list on the MLS and nothing else the same as a traditional agent.

New development, Foreclosures, REOs, and Short sales

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.

  • New homes: This is pretty self explanatory - new homes built for potential buyers. There are lots of sub-categories here we won't discuss. Agents do help developers move their new homes. This can be listing these homes or bringing in buyers. That said, some developers handle this entire process in-house.
  • Foreclosure: this is when a homeowner defaults on their mortgage (stops paying). The home then goes into foreclosure and is auctioned to the public. In some markets agents may represent buyers to assist in the auction process.
  • Short sale: this occurs when a seller defaulted but the property has not yet been auctioned. The seller negotiates a reduced loan amount with the lender so that the seller can sell the property at a competitive price. At this point, real estate agents do sometimes get involved to help with the sale, or to help investors/buyers, often who plan to flip these homes as investments.
  • Real estate owned (REO): this term is for real estate owned by the lender (often a bank). If no auction bid covers the amount owed on the property, the lender becomes the owner. Often times lenders hire specialist agents to market these homes and find buyers.

The impact of iBuyers

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.

Opendoor fee structure
Companies like Opendoor charge more than agents but provide instant sales. Source: Opendoor.

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.

Growing iBuyer market share data from Redfin
iBuyers are only 3% of volume in the top markets but didn’t exist 5 years ago. Source: Redfin.

Pricing dynamics

Supply has been a constraint lately

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:

  • Many people are renting longer than they used to. It’s likely that part of this is because entry homes are more expensive.
  • There are more companies that buy homes to rent them out. These are often called single-family rentals or SFRs. This reduces available sale inventory.
  • The growth of companies that buy single family homes to rent them out reduces available inventory on the market.
  • Homeowners aren’t moving as much as they used to. The means homes that come off the market are staying off the market.
  • Regulations and construction costs, especially in downtown markets are burdensome. As a result developers are building other types of properties.
  • The size and location of units built in the past 20-30 years are not always a match for new buyers. Larger homes may have high selling prices, but many new buyers don’t want larger homes. This is especially true in downtowns.

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.

FRED home price appreciation chart
It’s safe to say prices are on a steady increase. Source: FRED Economic Data.

Mortgage rates

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.

Real estate is seasonal business

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.

NAR table of home sales by month
Seasonal adjustments take into account that more homes sell in Q2 and Q3. Source: NAR.

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