As nervous as brokers are about the 2008 residential market, there may be one bright light: Commissions might be back. Nationally, that’s happening, according to Steve Murray, editor of Real Trends, which tracks commission rates.
From 2001 to 2005, the average commission paid to brokers dropped on average from 6.1 percent to 5.02 percent, according to Murray.
But in 2006, when prices started stabilizing and housing sales began to drop off, the average broker commission actually went back up, to 5.18 percent.
“The downturn really started in July 2005,” said Murray. “That was when brokers saw for the first time in 15 years that they had less business,” he noted.
Why would commissions – basically an expense to the seller – rise as the market slows down?
Most brokers say the reason is that it now takes them longer to sell the same apartment, and they are still looking to make as much – or at least enough money to live on.
A sample American home that might have sold for $1.45 million in the summer of 2005 might perhaps now be selling for $1.2 million – and 5 percent of $1.45 million is equivalent to 6 percent of $1.2 million.
Murray said there is also a direct correlation between a property’s time on the market and the commission – the longer the wait, in general, the greater the commission. Therefore, when the market is soft, commissions, and a broker’s resolve to get his or her due, stiffens.
How does this affect New York City? Recent rumors that commissions being paid to brokers were being cut at Bellmarc, Prudential Douglas Elliman and the Corcoran Group turned out to be wrong, at least according to brokers from those companies.
According to Janice Silver, manager at Bellmarc Realty’s East Side location, occasionally the firm will discount from its normal 6 percent commission for large sales to 5 percent, but it will rarely go below that. The difference is split between the company and the broker, she said.
She also indicated that in certain categories, such as the $2 million to $4 million price point, apartments are “selling pretty fast, and there are bidding wars.”
Certain property categories are moving slower, such as higher priced one-bedrooms, she said, and she currently does not see the company offering commission discounts on slow-moving properties.
Still, some brokers might be tempted to cut their commissions in a declining economy. This could explain why brokers at Prudential Douglas Elliman were reminded recently by management that the firm does not allow broker discounts below 5 percent.
A broker at Prudential Douglas Elliman who did not want to be identified said that despite the firm’s official policy of not going below the 5 percent commission rate, some brokers have negotiated their own deals with the company, depending on their performance. The difference, however, often comes out of the broker’s pocket once the commission strays under 5 percent, he said.
Another broker wishing to remain anonymous confirmed that Bellmarc’s policies were similar. The firm negotiates deals with the corporate entity depending on a broker’s performance, but normally, the broker takes the hit if the percentage is below 5 percent.
Tamir Shemesh, a managing director at Elliman and one of the firm’s top 10 brokers, said he was willing to negotiate to 5 percent last year. But in a slower market where apartments can languish for 130 days, he said he does not want to cannibalize fellow brokers’ commissions. He estimated that 45 percent of his 200 or so sales per year were as a seller’s broker, and 65 percent were as a buyer’s broker.
Sometimes new developments will also offer higher commissions at different parts of their marketing cycle. The Platinum at 247 West 46th Street, for example, is being sold by the Marketing Directors Inc., which is currently trumpeting an offer of 4 percent commission at closing for brokers bringing in a buyer.
Another element in the economic picture is that prices in New York did not fall in the fourth quarter of 2007. According to Real Trends, the only region of the country that showed positive gains in prices was the Northeast. Brokers confirmed that prices continue to hold firm in New York City. Shemesh also said he has seen bidding wars for apartments in the $2 million to $4 million range.
Appraisal company Miller Samuel, a division of Radar Logic, in its report for Prudential Douglas Elliman, noted that in the fourth quarter of 2007, Manhattan condo and co-op median prices were 6.4 percent higher than in the same quarter a year ago – in other words, $850,000 in 2007 versus $799,000 in 2006. Quarter over quarter, median prices were down by 1.7 percent.
As a result, Miller Samuel concluded that the credit crunch has not had a huge effect on the Manhattan condo and co-op market yet.
Furthermore, the firm and a number of other experts note that relatively little inventory is coming to market in some segments, meaning that especially with co-ops and luxury apartments, supply should continue to tighten and prices should stabilize.
Notable numbers
The average commission paid to brokers for all U.S. regions in 2005: 5.02%
The average U.S. broker commission in 2006: 5.18 %
The median price of Manhattan condo and co-op apartments in the fourth quarter of 2006: $799,000
The median price of Manhattan condo and co-op apartments in the fourth quarter of 2007: $850,000