Real Estate Folks Learn About Fee Compression
The scourge of the investment industry is coming for real estate
Real Estate Agents Learn About Fee Compression
One of the pains of the financial services industry for been the pesky problem of fee compression. Trading stocks used to be expensive, and then discount brokers came along and things suddenly weren’t so expensive anymore. Money managers used to collect hefty fees1 of perhaps up to 2%—today, most are lucky if they can get 1% as investors ponder exactly what the value of an active manager is in a market increasingly dominated by passive ETFs.
Such is the cost of doing business in an increasingly commoditized field.
One profession, however, has always managed to avoid pernicious fee compression—real estate. But that could all be about the change.
A jury in Missouri just found a handful of brokerage agencies liable for $1.8 billion in damages, finding that they engaged in what amounted to a conspiracy to keep fees high. Per the FT:
Lawyers representing sellers of more than 260,000 homes in Missouri, where the case was heard, had argued that if such rules were not in place, the cost of buyer broker commissions would be borne by home buyers, not sellers, and “buyer brokers would thus have to compete with one another by offering a lower commission rate”.
As a result, broker fees for the typical home in the US total about 5-6 per cent of the sale price, about half of which goes to the buyer’s broker, according to the complaint.
“In competitive foreign markets, home buyers pay their brokers, if they choose to use one, and they pay less than half the rate paid to buyer brokers in the United States,” plaintiffs’ lawyers added.
As anyone who has sold a home can attest to, it’s expensive. Considering the fact that virtually no other industry charges a 6% transaction fee (one way!), it’s kind of incredible that this sort of case hasn’t been brought before.
While the fallout from the case is still being sorted through, it’s really not looking good for realtors overall. This month Bloomberg reported that the DOJ is looking into the NAR and the way it structures its commissions.
Well, it was a real nice racket you guys had there.
WeWork Drama
We talked here a few weeks ago about WeWork WE 0.00%↑ and the company’s missed bond payments that sent it into default. The news, which was reported by the Wall Street Journal, sent the stock crashing 51% as of this writing—shares closed at $2.70 yesterday and are currently at $1.11, which is 99% below where the stock started the year.
It’s worth remembering that at the start of this year, the stock traded as high as $88.
What I find most interesting, however, is the fact that WeWork failed to become a meme stock. Sure, there have been some rumblings here and there, but the stock has never captured the attention of the Reddit retail crowd the same way that GameStop GME 0.00%↑, or Bed Bath & Beyond did.2 That doesn’t mean, of course, that there were are no bulls left for the stock, because there are plenty.
However, it’s an interesting reminder for those tempted to buy just because something is cheap, because, as the old saying goes, it can always drop another 50%.
The Tweets
Things looking bad at SunRun.
It’s true, you know.
Final Thoughts…
A German politician is under investigation, and ‘Hitler wine’ is now a part of it. Countries are finally getting their act together on AI regulation. The economy is good, but you wouldn’t know it from earnings calls. Antitrust regulators are coming for sports. Wall Street is out over its skis on Ozempic.
Talking about non-hedge fund sorts of managers.
Which, to be honest, is kind of surprising when you consider that WeWork is arguably the only business that could survive based on the business model alone.
WeWork becoming a meme stock would have been epic.