April 4, 2024 • 26 mins
Join us as we unravel the implications of a game-changing $418 million settlement that is sending shockwaves through the real estate sector. We discuss how the National Association of Realtors' landmark decision is upending the traditional commission model, and what it means for the pockets of buyers and sellers alike. You'll gain a new perspective on the future of real estate transactions, with an in-depth analysis on how the Federal Reserve's latest move—or lack thereof—on interest rates adds to the complex decision-making process in today's market.
Joining the conversation is Keith Munsell, a seasoned expert with four decades in the field, who brings clarity to the often murky waters of housing trends and challenges. We dissect the Fed's influence, the relentless imbalance of supply and demand, and the daunting barriers faced by prospective homeowners. Get ready for a compelling episode filled with expert insights that will arm you with the knowledge to navigate the shifting terrain of the housing market, whether you're a first-time buyer or an experienced investor looking for your next big opportunity.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
J.P. Matychak (00:18):
Hello everyone and welcome to another episode
of the Insights@Questrom Podcast.
I'm JP Matychak.
My co-host, Shannon Light, ison another assignment today, so
I am flying solo for thisimportant conversation about the
real estate market.
The real estate market tookcenter stage in the national
news due to a recent settlementreached by the National
(00:39):
Association of Realtors to endlitigation of claims brought on
behalf of home sellers relatedto broker commissions.
The National Association ofRealtors to end litigation of
claims brought on behalf of homesellers related to broker
commissions.
The National Association ofRealtors, which hasn't admitted
any wrongdoing in the settlement, will pay $418 million over
four years to compensate homesellers.
And under the terms of thesettlement, the multiple listing
(01:00):
services, or the MLS governedby the association are no longer
allowed to offer a commissionto a buyer's agent.
This could potentially havewide-ranging implications on the
real estate business.
But this settlement wasn't theonly news impacting the real
estate market.
Last week, the Fed announcedthat they would hold interest
rates at current levels for thetime being, although they do
(01:20):
still expect to make three ratereductions this year.
For many homebuyers and sellersfor that matter hoping for some
relief, they are left with thetough decision to make a move
now or hold out for later thisyear.
Here to talk about both ofthese topics is Keith Munsell,
master Lecturer in Strategy andInnovation at Boston University
Questrom School of Business.
Keith is a real estateexecutive with over 45 years of
(01:42):
experience in real estatemanagement, development, finance
and construction.
He's an accomplished housingmanager, turnaround specialist,
entrepreneur, author and teacher, holding numerous licenses and
awards.
Keith, thanks for joining me.
Keith Munsell (01:56):
Thank you for having me.
J.P. Matychak (01:58):
So let's start first with the news that came
out last week related to thesettlement agreement between the
NAR and home sellers across thecountry.
So the lawsuit claimed that thepolicy surrounding broker
commissions allowed for inflatedfees, and some of the claims
even stated that may haveviolated antitrust laws.
(02:18):
So can you talk a little bitabout how seller and buyer
commissions have and currentlywork under the current model of
home buying.
Keith Munsell (02:27):
Certainly.
I'd like to start that bysaying that typically in the
purchase and sale of a home youhave a listing agent or a
listing broker and a sellingbroker.
Now, typically the listingbroker negotiates the contract
between the seller and the ownerand the proposed terms,
conditions under which theseller will accept an offer, and
(02:51):
in fact those items arenegotiable, like what fixtures
may go with it, does the TV comewith it, do the andirons in the
fireplace, et cetera, handirons in the fireplace, et
cetera.
The listing broker currentlygets paid to market the property
(03:12):
to clients and peers byadvertising in newspapers, on
the web, creating brochures,staging the home, conducting
open houses for both clients andcompetitors, or other brokers
install yard signs and the like,for which they typically charge
a commission, and thatcommission is negotiated.
And what was unclear in thesettlement is some of the
(03:36):
verbiage appeared that brokersfix the commissions at either 5%
or 6% and that actually is notaccurate.
They are always negotiable,though industry standards might
dictate that it was 5% or 6%,but you could always negotiate
that.
On the other side of the tablewe have the buyer's broker and
(03:58):
the buyer's broker shows theirprospective clients the property
and helps negotiate thepurchase and sale agreement and
any additional conditions.
Typically, the way this workedis under the listing contract,
that's the contract between thelisting broker and the seller.
They would figure out what thefee would be Once that property
(04:20):
sold the selling broker or thelisting broker same thing sold
the selling broker or thelisting broker, same thing would
split that commission with thebuyer's broker.
Today, according to that suitwhich, by the way, still has to
be ratified by a judge that isno longer allowed, so that the
buyer will have to hire theirown agent will have to hire
(04:44):
their own agent.
J.P. Matychak (04:44):
So what might this look like now?
You laid it out very clearly ashow this worked.
You had the standard commission, you'd split it and whatnot.
Now, if they can't do that,what might this look like For,
say, the buyer side, whotypically would have had those
fees kind of wrapped into theirfinancing or whatnot at closing?
(05:07):
What could this look like?
Keith Munsell (05:09):
Well, you've made a very good point, because
historically that fee is bakedinto the price of the property
and, if I can take yourlisteners just through a small
little math problem, Perfect, Idid.
I think you'll find that, infact, this settlement is
actually injurious to the buyeras opposed to helping the buyer.
(05:32):
I think the unintendedconsequences are that this will
actually cost the buyer moremoney.
J.P. Matychak (05:38):
Interesting Okay.
Keith Munsell (05:39):
So let's take a look.
Let's pretend that the math isrelatively easy.
But let's pretend that the saleprice is $800,000 and the
broker charges, under today'smarket, a 5% commission.
So that's $40,000.
Typically that would be splitsomewhere along the lines of
50-50, 50% going to the listingbroker, 50% going to the buyer's
(06:04):
broker.
Now that would be $20,000 foreach broker.
Now when I say broker, I alsomean brokerage firm.
So typically that broker wouldthen split their commission with
the firm.
So maybe it's split again 50-50, which means that the selling
broker would get $10,000 to putin their pocket and the buyer's
(06:28):
broker would get $10,000 to putin their pocket.
Now one of the things that youmentioned which I think we need
to go back to for a second isthat that $800,000 price has
baked into that price thecommission Today that is going
to be extracted from that price.
(06:49):
So let's take a look andextract half of that.
So let us say, instead of nowselling the house for $800,000,
we're going to subtract out the20,000 that would be the buyer's
broker's commission.
So now we have that house onthe market for 780.
Two and a half percent of that,the listing broker's commission
(07:12):
, would therefore be 19 and ahalf thousand dollars.
Again, split 50-50 with thehouse or their employer.
So really what's happening onthe listing side of the equation
is the broker might be getting$250 less.
Instead of putting $10,000 intheir pocket, they're going to
put $97.50.
(07:33):
Not a huge difference.
But let's look at the buyer'sbroker scenario.
So if I look at the buyer'sbroker scenario now, the buyer
is going to have to hire theirown agent.
So let's take a look at what atypical transaction might look
(07:53):
like.
If I look at the under today'sterms.
I look and say if you finance80% of this purchase or you put
down 20% equity and there arereasons for the 20% which have
to do with lenders' exposure tothe market If you put down 20%,
that would be $160,000 undertoday's scenario.
(08:17):
And let's say you have $15,000worth of closing costs and
moving expenses and alike.
If we move over to the proposedor we'll assume the judge will
go along with this in what thefuture will look like come the
middle of July, we're going tosay that 20% of that $780,000 is
(08:40):
$156,000.
So that would be your downpayment.
If I add the same closing cost$15,000, that means I'd come up
with having to come out ofpocket $171,000 instead of
$175,000 today.
So you'd say, well, I'm savingsome money.
Ah, but we haven't accountedfor the buyer's broker.
So what are you going to paythe buyer's broker?
(09:02):
What are you going to paysomebody to help you find your
home?
If it's that same $19,500 or$20,000, then it ends up that
you're going to pay somethingcloser the $175,000 you might
pay now, because that fee is nolonger baked into the purchase
(09:29):
price.
And we haven't even talkedabout how appraisers might look
at this.
J.P. Matychak (09:34):
Right.
Keith Munsell (09:35):
Because appraisers are going to look
back in history and say what didsimilar properties sell for,
given a reasonable marketexposure, similar locale, no
adverse effects, and they'regoing to look at that $800,000
price.
They're not going to look atthe new, maybe $780,000 price.
(09:57):
So consequently, I don't seethe prices coming down, but I
see the out-of-pocket expensesby the buyer increase.
I don't know if that washelpful and I don't know if
there was too much math in that,and if so I apologize.
J.P. Matychak (10:09):
No, no, no.
I think it's good to illustratethat because I think, when
you've been around real estateenough and, as I told you before
the show, I'm in the process ofbuying a house right now, and
so I've been keeping an eye on alot of this stuff and you, of
course, do the calculus of likeokay, what is my monthly fee
going?
(10:29):
to be or my monthly mortgage andeverything like that.
But obviously a part of thecalculus is like how much money
do I have to bring to the tablewhen I sign the papers, right I
have to bring to the table whenI sign the papers right?
And it's interesting to kind ofsee this transition that will
happen potentially of more moneyhaving to be out of pocket up
front and that takes away frompotentially money that you'd be
(10:54):
putting into renovations thatyou might need to make or
upgrades that you might want todo, because people have a budget
of what they want to bring outof pocket to the table and I
think this is one of thoseunintended consequences of that.
So talk a little bit more aboutthis sort of the antitrust part
of this.
And, as you said, peoplethought it was fixed and whatnot
.
And clearly Things can appearfixed because a lot of the times
(11:17):
when you see what is thecommission and whatnot, it's
very similar.
But there's a market standard,right.
You can't go out there andcharge all of a sudden a 10% fee
if no one else is doing thatright.
So it may appear as people arefixing those prices, but they're
not.
It's just a market standardstandard.
(11:43):
So talk a little bit more aboutthat and how this settlement
will handle that, or will itaddress those issues?
Or is it really like that was ared herring and they're just
kind of trying to appease thisand we're just going to have to
deal with the consequences of it?
Keith Munsell (11:52):
Well, I would take your last sentence as
exactly right.
We're just going to have todeal with the consequences of
this.
I think that there has been theappearance of a 5% or 6%
commission as standard.
And I think that has beenpretty standard in the industry.
But I think what people forgetis that this is all negotiable.
(12:13):
You know, 5% of $100,000purchase price is probably not
enough money to get brokers,listing brokers and selling
brokers interested.
On the other hand, if you'reselling a million-dollar piece
of property, 5% might be toomuch.
So, I think part of it isdependent upon the value of the
(12:35):
property.
If I could digress from yourquestion for a moment, I think
one of the problems that we'regoing to find is that we have
been under building for decadesand so, consequently, if you
look at the supply and demandsituation, typically in typical
(12:55):
times Typically in typical timesa listing should probably be on
the market for 90 to 120 days.
Today, that property for salegoes under agreement typically
within 30 days.
I should never ask a question Idon't know the answer for, but
(13:17):
you just said you were lookingfor a house.
How quickly did your brokerindicate you had to move to
secure that property?
J.P. Matychak (13:24):
So let me get a clarification.
So you know we're interested.
And how quickly did they say weneed to get an offer in?
Keith Munsell (13:30):
Yes.
J.P. Matychak (13:30):
Oh, it was within days.
I mean it hit the market and itwas.
We were under agreement withina week.
Keith Munsell (13:38):
That is atypical in normal times.
For 20 years back in the 80sand 90s, my brother and I owned
a residential I should sayresidential real estate sales
company in Chestnut Hill part of.
Newton, brookline and Boston,and I would say, during that
(13:58):
time you might entertain offers,but they wouldn't come out for
30 or 45 days.
It was never the way it istoday.
But, when you've underproducedfor decades and there's very
little product out there.
The product is not coming downin price, even though the
interest rates are high.
The hope is you can buy a housenow.
(14:21):
If the interest rates come downand, as you suggested, the Fed
is talking about some ratereductions over the ensuing
months or years, then you canrefinance that.
But you need to get your footin the door now and that is very
difficult.
J.P. Matychak (14:37):
It is.
And the deals that arehappening right now are just
crazy the amount of differentcontingencies that are just
being waived throughout theprocess because of this feeling
of like you have to move andyou've got to move now because
supply is just not there.
So I want to put a pin in that,because I'm going to come back
to the supply and demand,because I think there's a bigger
conversation to have there onthe broader market.
(14:59):
And let's shift theconversation to the announcement
by the Fed last week that theywere going to hold interest
rates steady for the time being.
They weren't convinced, aroundinflation and everything like
that, that they should bringthem down yet, but still
committed and signaled that theywere planning on reducing them
at least three times over thenext year, and I think that
(15:23):
people were a little surprisedthat they didn't take at least a
marginal step toward reducing.
We started to come down a littlebit.
We were in the high sixes andthen quickly rebounded right up
to the low sevens.
What effect is this going tohave?
Because I think people werewaiting around.
We're starting to go into thehot spring sales season.
(15:45):
What is the impact of thisgoing to be?
Are people going to make movesor not?
What do you think is going tohappen?
Keith Munsell (15:54):
A simple question with a somewhat complex answer.
J.P. Matychak (15:57):
Yeah.
Keith Munsell (15:57):
So I would say a couple of things here.
One is that if you're movinginto a house that's already been
built, that means somebody ismoving out of that house and
that somebody now might have tosecure a mortgage at, as you
suggested, a 7% rate.
On the other hand, if theyrefinanced two years ago, three
(16:18):
years ago, four years ago, fiveyears ago, they are probably
somewhere plus or minus 3%.
Yeah, most people are not goingto move from a 3% mortgage to a
7% mortgage.
Hibosh, on a lot of productthat, as you suggested,
typically comes online in thespring, because if you have a
(16:48):
family and you want to securethe property, you want to move
over the summer, you want to putyour kids in the local school
system.
That's not going to happen,right.
I just don't see, without a lotmore product out there, I don't
see any slackening of pricingperiod.
J.P. Matychak (17:06):
And it's interesting you say that,
because I know I've talked tosome folks that kids have moved
off to college and they'relooking to downsize and we're
hanging around the barbecue orwhatever.
And they're talking about likewe can't afford to downsize and
we're hanging around thebarbecue or whatever.
They're talking about like wecan't afford to downsize.
One would expect, like if Idownsize, I'm going to be able
to pay less, but I'm not.
(17:26):
I'm going to pay more becauseduring COVID, I decided to
refinance my home when mortgagerates were 2% right, and so it
really has created this supplyshortage of housing, and so it
sounds like this has all beenconnected for decades of new
homes being built, and thecombination of lack of homes
(17:48):
being built, combined withpeople not selling, leaves this
situation of supply.
And it's simple supply anddemand right?
I think it is.
Yeah, if there's not enoughsupply out there, people are
going to be fighting for theseproperties.
And so what?
What impact does this have longterm though, on, say, the
prices of these houses?
Are we looking at a, a bubbleof some sort in the next five,
(18:12):
ten years, where maybe we turnaround with interest rates, more
supply hits the market and youknow home prices coming back
down.
What are you thinking there?
Keith Munsell (18:22):
You know I should have been prepared for all
these questions.
You should have sent me allthese questions.
J.P. Matychak (18:29):
You're bringing some good points up and I want
to just ask that you know.
Keith Munsell (18:32):
You know.
Going back to what you said,there's not enough supply.
I don't see municipalities justopening up their zoning and
some of them have under the newMBTA zoning requirements Yep,
yep.
But to get something zonedversus to get something built is
totally different.
So if you look at items likecopper has gone up 60% over the
(18:56):
last 18 months you can't gethelp to fix your toilet or
repair your electrical systembecause people are busy.
I think that without governmentinterference and I don't mean
interference in a bad way here,but government interference,
(19:18):
maybe government impetus thatwe're going to run into this
problem not only locally butnationally.
I mean, we are not the onlyhigh-priced area around the
country and it's just gettingharder, I think, to be able to
purchase a home.
I want to go back for a momentto talk about the example that I
(19:42):
mentioned.
So I was looking and saying youmight have to come up with
somewhere between $175,000 and$190,000.
That down payment is typicallythe biggest impetus for home
buyers.
It is not the monthlyaffordability but is the ability
to save the down payment andthrough the NAR suit we have
(20:08):
just made that more difficult,in my opinion.
So interest rates let's saythey come down.
Where are they going to comedown To 5%, pretty good rate
historically speaking, butconversely, house prices are
going to go up.
So I don't think it's going tocost you a lot less to get into
(20:28):
a home from a cash flow point ofview.
Anyway, I'm not sure I answeredyour question.
J.P. Matychak (20:35):
No, no, you did.
I probably rambled on.
No no no, I think that that'sexactly right.
That is the piece of this that,as you said, can almost be the
barrier.
Sometimes it's not the monthlypayment.
It's okay, that's great, that'sfine, we can do that.
It's right now, in times whereyou have a little bit of
(20:58):
inflation going on.
Prices of everything are up forthe most part, and have been
for the last year.
A lot of families the averagefamily is living paycheck to
paycheck.
It's hard to put away and savefor a massive outflow of cash
(21:18):
for the purpose of buying a home, and so I think it, just like
you said, this has the potentialof making that even harder, and
that's one of these unintendedconsequences.
Keith Munsell (21:28):
I totally agree with that.
And then you look at what isbeing built, and let's just take
the Boston area and you say,well, what's being built in
Boston?
Well, you're looking at anumber of apartments, very few
condos, because banks don't wantto finance the condos because
they're afraid that the buyersare not going to obligate
themselves to a 7% mortgage.
(21:48):
So you have some residentialfor rent properties going up.
They're expensive.
They're expensive to build andthey're expensive to rent.
Without naming any names, myclass and I visited a local
property, nice, two bedroom unit, small, you know, maybe 800
(22:09):
square feet.
It's renting for $4,200 a monthsquare feet.
It's renting for $4,200 a month.
Now you get a roommate, sothat's $2,100 a month and you
have some cable expense,electrical expense, et cetera.
You've got to be making thebetter part of $100,000 in order
to be able to afford thatrental.
How are you going to rent thatapartment and save money for a
(22:32):
house at the same time?
I think we are in kind of acyclone here, where I don't see
us getting out without somegovernment help and I don't see
the government stepping in.
J.P. Matychak (22:46):
Wow.
So a lot to think about here,and I think all eyes will be on
the real estate market here inthe coming months, especially
during the home buying seasonand as the Fed continues to meet
throughout the year.
Keith, thank you for joining me.
This was incredibly helpful.
Thanks for shedding light onthe real estate market.
I appreciate it.
Keith Munsell (23:07):
It is my pleasure .
May I make one final comment?
Sure, yeah, absolutely Go ahead.
So, in my opinion, the majortakeaway from the NAR settlement
which is where we started- thisis that buyers brokers must
have a contract and remember acontract requires consideration
(23:28):
money with their clients.
So the buyer's broker and thebuyer have to have a contract.
Where before we said that wasbaked in.
Yeah, and the clients, unlikethe past, where the commission
is paid, is going to be theunintended consequence of
(23:49):
actually raising the price ofbuying a home.
J.P. Matychak (23:53):
Wow.
Keith Munsell (23:57):
Keith, thank you, I appreciate it, my pleasure,
jp.
J.P. Matychak (23:58):
JP.
Thanks, call me up again nexttime.
Yeah, well, that'll wrap thingsup for this episode of the
insights at Questrom podcast.
I'd like to thank our guestagain, keith Munsell, master
lecturer of strategy andinnovation at Boston University,
Questrom School of Business,remember.
For additional information onthis show, our previous shows as
well as additional insightsfrom Questrom faculty on the
(24:21):
world of business, visit insights.
bu.
edu.
On behalf of the entireInsights at Questrom team, I'm
JP Matychak.
So long.
Hello everyone and welcome to another episode
of the Insights@Questrom Podcast.
I'm JP Matychak.
My co-host, Shannon Light, ison another assignment today, so
I am flying solo for thisimportant conversation about the
real estate market.
The real estate market tookcenter stage in the national
news due to a recent settlementreached by the National
(00:39):
Association of Realtors to endlitigation of claims brought on
behalf of home sellers relatedto broker commissions.
The National Association ofRealtors to end litigation of
claims brought on behalf of homesellers related to broker
commissions.
The National Association ofRealtors, which hasn't admitted
any wrongdoing in the settlement, will pay $418 million over
four years to compensate homesellers.
And under the terms of thesettlement, the multiple listing
(01:00):
services, or the MLS governedby the association are no longer
allowed to offer a commissionto a buyer's agent.
This could potentially havewide-ranging implications on the
real estate business.
But this settlement wasn't theonly news impacting the real
estate market.
Last week, the Fed announcedthat they would hold interest
rates at current levels for thetime being, although they do
(01:20):
still expect to make three ratereductions this year.
For many homebuyers and sellersfor that matter hoping for some
relief, they are left with thetough decision to make a move
now or hold out for later thisyear.
Here to talk about both ofthese topics is Keith Munsell,
master Lecturer in Strategy andInnovation at Boston University
Questrom School of Business.
Keith is a real estateexecutive with over 45 years of
(01:42):
experience in real estatemanagement, development, finance
and construction.
He's an accomplished housingmanager, turnaround specialist,
entrepreneur, author and teacher, holding numerous licenses and
awards.
Keith, thanks for joining me.
Keith Munsell (01:56):
Thank you for having me.
J.P. Matychak (01:58):
So let's start first with the news that came
out last week related to thesettlement agreement between the
NAR and home sellers across thecountry.
So the lawsuit claimed that thepolicy surrounding broker
commissions allowed for inflatedfees, and some of the claims
even stated that may haveviolated antitrust laws.
(02:18):
So can you talk a little bitabout how seller and buyer
commissions have and currentlywork under the current model of
home buying.
Keith Munsell (02:27):
Certainly.
I'd like to start that bysaying that typically in the
purchase and sale of a home youhave a listing agent or a
listing broker and a sellingbroker.
Now, typically the listingbroker negotiates the contract
between the seller and the ownerand the proposed terms,
conditions under which theseller will accept an offer, and
(02:51):
in fact those items arenegotiable, like what fixtures
may go with it, does the TV comewith it, do the andirons in the
fireplace, et cetera, handirons in the fireplace, et
cetera.
The listing broker currentlygets paid to market the property
(03:12):
to clients and peers byadvertising in newspapers, on
the web, creating brochures,staging the home, conducting
open houses for both clients andcompetitors, or other brokers
install yard signs and the like,for which they typically charge
a commission, and thatcommission is negotiated.
And what was unclear in thesettlement is some of the
(03:36):
verbiage appeared that brokersfix the commissions at either 5%
or 6% and that actually is notaccurate.
They are always negotiable,though industry standards might
dictate that it was 5% or 6%,but you could always negotiate
that.
On the other side of the tablewe have the buyer's broker and
(03:58):
the buyer's broker shows theirprospective clients the property
and helps negotiate thepurchase and sale agreement and
any additional conditions.
Typically, the way this workedis under the listing contract,
that's the contract between thelisting broker and the seller.
They would figure out what thefee would be Once that property
(04:20):
sold the selling broker or thelisting broker same thing sold
the selling broker or thelisting broker, same thing would
split that commission with thebuyer's broker.
Today, according to that suitwhich, by the way, still has to
be ratified by a judge that isno longer allowed, so that the
buyer will have to hire theirown agent will have to hire
(04:44):
their own agent.
J.P. Matychak (04:44):
So what might this look like now?
You laid it out very clearly ashow this worked.
You had the standard commission, you'd split it and whatnot.
Now, if they can't do that,what might this look like For,
say, the buyer side, whotypically would have had those
fees kind of wrapped into theirfinancing or whatnot at closing?
(05:07):
What could this look like?
Keith Munsell (05:09):
Well, you've made a very good point, because
historically that fee is bakedinto the price of the property
and, if I can take yourlisteners just through a small
little math problem, Perfect, Idid.
I think you'll find that, infact, this settlement is
actually injurious to the buyeras opposed to helping the buyer.
(05:32):
I think the unintendedconsequences are that this will
actually cost the buyer moremoney.
J.P. Matychak (05:38):
Interesting Okay.
Keith Munsell (05:39):
So let's take a look.
Let's pretend that the math isrelatively easy.
But let's pretend that the saleprice is $800,000 and the
broker charges, under today'smarket, a 5% commission.
So that's $40,000.
Typically that would be splitsomewhere along the lines of
50-50, 50% going to the listingbroker, 50% going to the buyer's
(06:04):
broker.
Now that would be $20,000 foreach broker.
Now when I say broker, I alsomean brokerage firm.
So typically that broker wouldthen split their commission with
the firm.
So maybe it's split again 50-50, which means that the selling
broker would get $10,000 to putin their pocket and the buyer's
(06:28):
broker would get $10,000 to putin their pocket.
Now one of the things that youmentioned which I think we need
to go back to for a second isthat that $800,000 price has
baked into that price thecommission Today that is going
to be extracted from that price.
(06:49):
So let's take a look andextract half of that.
So let us say, instead of nowselling the house for $800,000,
we're going to subtract out the20,000 that would be the buyer's
broker's commission.
So now we have that house onthe market for 780.
Two and a half percent of that,the listing broker's commission
(07:12):
, would therefore be 19 and ahalf thousand dollars.
Again, split 50-50 with thehouse or their employer.
So really what's happening onthe listing side of the equation
is the broker might be getting$250 less.
Instead of putting $10,000 intheir pocket, they're going to
put $97.50.
(07:33):
Not a huge difference.
But let's look at the buyer'sbroker scenario.
So if I look at the buyer'sbroker scenario now, the buyer
is going to have to hire theirown agent.
So let's take a look at what atypical transaction might look
(07:53):
like.
If I look at the under today'sterms.
I look and say if you finance80% of this purchase or you put
down 20% equity and there arereasons for the 20% which have
to do with lenders' exposure tothe market If you put down 20%,
that would be $160,000 undertoday's scenario.
(08:17):
And let's say you have $15,000worth of closing costs and
moving expenses and alike.
If we move over to the proposedor we'll assume the judge will
go along with this in what thefuture will look like come the
middle of July, we're going tosay that 20% of that $780,000 is
(08:40):
$156,000.
So that would be your downpayment.
If I add the same closing cost$15,000, that means I'd come up
with having to come out ofpocket $171,000 instead of
$175,000 today.
So you'd say, well, I'm savingsome money.
Ah, but we haven't accountedfor the buyer's broker.
So what are you going to paythe buyer's broker?
(09:02):
What are you going to paysomebody to help you find your
home?
If it's that same $19,500 or$20,000, then it ends up that
you're going to pay somethingcloser the $175,000 you might
pay now, because that fee is nolonger baked into the purchase
(09:29):
price.
And we haven't even talkedabout how appraisers might look
at this.
J.P. Matychak (09:34):
Right.
Keith Munsell (09:35):
Because appraisers are going to look
back in history and say what didsimilar properties sell for,
given a reasonable marketexposure, similar locale, no
adverse effects, and they'regoing to look at that $800,000
price.
They're not going to look atthe new, maybe $780,000 price.
(09:57):
So consequently, I don't seethe prices coming down, but I
see the out-of-pocket expensesby the buyer increase.
I don't know if that washelpful and I don't know if
there was too much math in that,and if so I apologize.
J.P. Matychak (10:09):
No, no, no.
I think it's good to illustratethat because I think, when
you've been around real estateenough and, as I told you before
the show, I'm in the process ofbuying a house right now, and
so I've been keeping an eye on alot of this stuff and you, of
course, do the calculus of likeokay, what is my monthly fee
going?
(10:29):
to be or my monthly mortgage andeverything like that.
But obviously a part of thecalculus is like how much money
do I have to bring to the tablewhen I sign the papers, right I
have to bring to the table whenI sign the papers right?
And it's interesting to kind ofsee this transition that will
happen potentially of more moneyhaving to be out of pocket up
front and that takes away frompotentially money that you'd be
(10:54):
putting into renovations thatyou might need to make or
upgrades that you might want todo, because people have a budget
of what they want to bring outof pocket to the table and I
think this is one of thoseunintended consequences of that.
So talk a little bit more aboutthis sort of the antitrust part
of this.
And, as you said, peoplethought it was fixed and whatnot
.
And clearly Things can appearfixed because a lot of the times
(11:17):
when you see what is thecommission and whatnot, it's
very similar.
But there's a market standard,right.
You can't go out there andcharge all of a sudden a 10% fee
if no one else is doing thatright.
So it may appear as people arefixing those prices, but they're
not.
It's just a market standardstandard.
(11:43):
So talk a little bit more aboutthat and how this settlement
will handle that, or will itaddress those issues?
Or is it really like that was ared herring and they're just
kind of trying to appease thisand we're just going to have to
deal with the consequences of it?
Keith Munsell (11:52):
Well, I would take your last sentence as
exactly right.
We're just going to have todeal with the consequences of
this.
I think that there has been theappearance of a 5% or 6%
commission as standard.
And I think that has beenpretty standard in the industry.
But I think what people forgetis that this is all negotiable.
(12:13):
You know, 5% of $100,000purchase price is probably not
enough money to get brokers,listing brokers and selling
brokers interested.
On the other hand, if you'reselling a million-dollar piece
of property, 5% might be toomuch.
So, I think part of it isdependent upon the value of the
(12:35):
property.
If I could digress from yourquestion for a moment, I think
one of the problems that we'regoing to find is that we have
been under building for decadesand so, consequently, if you
look at the supply and demandsituation, typically in typical
(12:55):
times Typically in typical timesa listing should probably be on
the market for 90 to 120 days.
Today, that property for salegoes under agreement typically
within 30 days.
I should never ask a question Idon't know the answer for, but
(13:17):
you just said you were lookingfor a house.
How quickly did your brokerindicate you had to move to
secure that property?
J.P. Matychak (13:24):
So let me get a clarification.
So you know we're interested.
And how quickly did they say weneed to get an offer in?
Keith Munsell (13:30):
Yes.
J.P. Matychak (13:30):
Oh, it was within days.
I mean it hit the market and itwas.
We were under agreement withina week.
Keith Munsell (13:38):
That is atypical in normal times.
For 20 years back in the 80sand 90s, my brother and I owned
a residential I should sayresidential real estate sales
company in Chestnut Hill part of.
Newton, brookline and Boston,and I would say, during that
(13:58):
time you might entertain offers,but they wouldn't come out for
30 or 45 days.
It was never the way it istoday.
But, when you've underproducedfor decades and there's very
little product out there.
The product is not coming downin price, even though the
interest rates are high.
The hope is you can buy a housenow.
(14:21):
If the interest rates come downand, as you suggested, the Fed
is talking about some ratereductions over the ensuing
months or years, then you canrefinance that.
But you need to get your footin the door now and that is very
difficult.
J.P. Matychak (14:37):
It is.
And the deals that arehappening right now are just
crazy the amount of differentcontingencies that are just
being waived throughout theprocess because of this feeling
of like you have to move andyou've got to move now because
supply is just not there.
So I want to put a pin in that,because I'm going to come back
to the supply and demand,because I think there's a bigger
conversation to have there onthe broader market.
(14:59):
And let's shift theconversation to the announcement
by the Fed last week that theywere going to hold interest
rates steady for the time being.
They weren't convinced, aroundinflation and everything like
that, that they should bringthem down yet, but still
committed and signaled that theywere planning on reducing them
at least three times over thenext year, and I think that
(15:23):
people were a little surprisedthat they didn't take at least a
marginal step toward reducing.
We started to come down a littlebit.
We were in the high sixes andthen quickly rebounded right up
to the low sevens.
What effect is this going tohave?
Because I think people werewaiting around.
We're starting to go into thehot spring sales season.
(15:45):
What is the impact of thisgoing to be?
Are people going to make movesor not?
What do you think is going tohappen?
Keith Munsell (15:54):
A simple question with a somewhat complex answer.
J.P. Matychak (15:57):
Yeah.
Keith Munsell (15:57):
So I would say a couple of things here.
One is that if you're movinginto a house that's already been
built, that means somebody ismoving out of that house and
that somebody now might have tosecure a mortgage at, as you
suggested, a 7% rate.
On the other hand, if theyrefinanced two years ago, three
(16:18):
years ago, four years ago, fiveyears ago, they are probably
somewhere plus or minus 3%.
Yeah, most people are not goingto move from a 3% mortgage to a
7% mortgage.
Hibosh, on a lot of productthat, as you suggested,
typically comes online in thespring, because if you have a
(16:48):
family and you want to securethe property, you want to move
over the summer, you want to putyour kids in the local school
system.
That's not going to happen,right.
I just don't see, without a lotmore product out there, I don't
see any slackening of pricingperiod.
J.P. Matychak (17:06):
And it's interesting you say that,
because I know I've talked tosome folks that kids have moved
off to college and they'relooking to downsize and we're
hanging around the barbecue orwhatever.
And they're talking about likewe can't afford to downsize and
we're hanging around thebarbecue or whatever.
They're talking about like wecan't afford to downsize.
One would expect, like if Idownsize, I'm going to be able
to pay less, but I'm not.
(17:26):
I'm going to pay more becauseduring COVID, I decided to
refinance my home when mortgagerates were 2% right, and so it
really has created this supplyshortage of housing, and so it
sounds like this has all beenconnected for decades of new
homes being built, and thecombination of lack of homes
(17:48):
being built, combined withpeople not selling, leaves this
situation of supply.
And it's simple supply anddemand right?
I think it is.
Yeah, if there's not enoughsupply out there, people are
going to be fighting for theseproperties.
And so what?
What impact does this have longterm though, on, say, the
prices of these houses?
Are we looking at a, a bubbleof some sort in the next five,
(18:12):
ten years, where maybe we turnaround with interest rates, more
supply hits the market and youknow home prices coming back
down.
What are you thinking there?
Keith Munsell (18:22):
You know I should have been prepared for all
these questions.
You should have sent me allthese questions.
J.P. Matychak (18:29):
You're bringing some good points up and I want
to just ask that you know.
Keith Munsell (18:32):
You know.
Going back to what you said,there's not enough supply.
I don't see municipalities justopening up their zoning and
some of them have under the newMBTA zoning requirements Yep,
yep.
But to get something zonedversus to get something built is
totally different.
So if you look at items likecopper has gone up 60% over the
(18:56):
last 18 months you can't gethelp to fix your toilet or
repair your electrical systembecause people are busy.
I think that without governmentinterference and I don't mean
interference in a bad way here,but government interference,
(19:18):
maybe government impetus thatwe're going to run into this
problem not only locally butnationally.
I mean, we are not the onlyhigh-priced area around the
country and it's just gettingharder, I think, to be able to
purchase a home.
I want to go back for a momentto talk about the example that I
(19:42):
mentioned.
So I was looking and saying youmight have to come up with
somewhere between $175,000 and$190,000.
That down payment is typicallythe biggest impetus for home
buyers.
It is not the monthlyaffordability but is the ability
to save the down payment andthrough the NAR suit we have
(20:08):
just made that more difficult,in my opinion.
So interest rates let's saythey come down.
Where are they going to comedown To 5%, pretty good rate
historically speaking, butconversely, house prices are
going to go up.
So I don't think it's going tocost you a lot less to get into
(20:28):
a home from a cash flow point ofview.
Anyway, I'm not sure I answeredyour question.
J.P. Matychak (20:35):
No, no, you did.
I probably rambled on.
No no no, I think that that'sexactly right.
That is the piece of this that,as you said, can almost be the
barrier.
Sometimes it's not the monthlypayment.
It's okay, that's great, that'sfine, we can do that.
It's right now, in times whereyou have a little bit of
(20:58):
inflation going on.
Prices of everything are up forthe most part, and have been
for the last year.
A lot of families the averagefamily is living paycheck to
paycheck.
It's hard to put away and savefor a massive outflow of cash
(21:18):
for the purpose of buying a home, and so I think it, just like
you said, this has the potentialof making that even harder, and
that's one of these unintendedconsequences.
Keith Munsell (21:28):
I totally agree with that.
And then you look at what isbeing built, and let's just take
the Boston area and you say,well, what's being built in
Boston?
Well, you're looking at anumber of apartments, very few
condos, because banks don't wantto finance the condos because
they're afraid that the buyersare not going to obligate
themselves to a 7% mortgage.
(21:48):
So you have some residentialfor rent properties going up.
They're expensive.
They're expensive to build andthey're expensive to rent.
Without naming any names, myclass and I visited a local
property, nice, two bedroom unit, small, you know, maybe 800
(22:09):
square feet.
It's renting for $4,200 a monthsquare feet.
It's renting for $4,200 a month.
Now you get a roommate, sothat's $2,100 a month and you
have some cable expense,electrical expense, et cetera.
You've got to be making thebetter part of $100,000 in order
to be able to afford thatrental.
How are you going to rent thatapartment and save money for a
(22:32):
house at the same time?
I think we are in kind of acyclone here, where I don't see
us getting out without somegovernment help and I don't see
the government stepping in.
J.P. Matychak (22:46):
Wow.
So a lot to think about here,and I think all eyes will be on
the real estate market here inthe coming months, especially
during the home buying seasonand as the Fed continues to meet
throughout the year.
Keith, thank you for joining me.
This was incredibly helpful.
Thanks for shedding light onthe real estate market.
I appreciate it.
Keith Munsell (23:07):
It is my pleasure .
May I make one final comment?
Sure, yeah, absolutely Go ahead.
So, in my opinion, the majortakeaway from the NAR settlement
which is where we started- thisis that buyers brokers must
have a contract and remember acontract requires consideration
(23:28):
money with their clients.
So the buyer's broker and thebuyer have to have a contract.
Where before we said that wasbaked in.
Yeah, and the clients, unlikethe past, where the commission
is paid, is going to be theunintended consequence of
(23:49):
actually raising the price ofbuying a home.
J.P. Matychak (23:53):
Wow.
Keith Munsell (23:57):
Keith, thank you, I appreciate it, my pleasure,
jp.
J.P. Matychak (23:58):
JP.
Thanks, call me up again nexttime.
Yeah, well, that'll wrap thingsup for this episode of the
insights at Questrom podcast.
I'd like to thank our guestagain, keith Munsell, master
lecturer of strategy andinnovation at Boston University,
Questrom School of Business,remember.
For additional information onthis show, our previous shows as
well as additional insightsfrom Questrom faculty on the
(24:21):
world of business, visit insights.
bu.
edu.
On behalf of the entireInsights at Questrom team, I'm
JP Matychak.
So long.
Popular Podcasts
Crime Junkie
Does hearing about a true crime case always leave you scouring the internet for the truth behind the story? Dive into your next mystery with Crime Junkie. Every Monday, join your host Ashley Flowers as she unravels all the details of infamous and underreported true crime cases with her best friend Brit Prawat. From cold cases to missing persons and heroes in our community who seek justice, Crime Junkie is your destination for theories and stories you won’t hear anywhere else. Whether you're a seasoned true crime enthusiast or new to the genre, you'll find yourself on the edge of your seat awaiting a new episode every Monday. If you can never get enough true crime... Congratulations, you’ve found your people. Follow to join a community of Crime Junkies! Crime Junkie is presented by audiochuck Media Company.
24/7 News: The Latest
The latest news in 4 minutes updated every hour, every day.
Stuff You Should Know
If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.