Homeowners don’t have cash to pay higher property taxes. It is tied up in their homes. Homebuyers need all their cash for downpayments and higher mortgages. Home sellers have cash only briefly. The proceeds from the sale of their home go towards buying a new place to live, and those places are also more expensive as real estate prices rise across the board.

But realtors have cash sitting on the table at every closing.

If we are going to tax anybody for affordable housing programs, tax realtors. They have money on hand and it is money that doesn’t build, buy or maintain housing.

Consider a sale I just watched in my neighborhood. A home was listed with a realtor. The owners did a lot of work getting it ready. The property received many views on Zillow and Redfin, but we saw very little activity in terms of showings. Indeed, I don’t recall ever seeing the realtor there.

Then one day the house sold to out of state buyers. It went for about $700,000. After closing costs, the state excise tax, and realtor’s commission, the owners had about $650,000. They needed all of that for their new home, the costs of moving and setting up a new residence and to recover the substantial cost of improvements over the years in the dwelling they just sold. The realtor got roughly $42,000.

$42,000 for what exactly? For advertising on Zillow and Redfin, mostly. For posting a sign at the street. For a few showings. For phone calls. For getting paperwork to the title company that really does most of the work on closing the sale.

The realtor paid the small 1.5% broker’s tax, $630, and still had more than $41,000 cash left.  I have proposed a ten percent tax on real estate commissions, with the existing 1.5% going to the state and the additional 8.5% retained here in Jefferson County for affordable housing, or to tackle our homelessness needs.  In the case of this transaction, that would translate to $3,570 for local housing programs from the sale of just one house. The realtor would still pocket $37,800 for not much work.  For most families in our county, it takes a year of full-time labor to earn that much.

That amount of money is still plenty of incentive for realtors to continue to list $700,000 properties. They may try to increase their commission rate, but homeowners are chaffing at paying 6% and would likely resist. There may be enough competitive pressure building with on-line marketing options to prevent realtors from simultaneously raising their commission rates, in effect, engaging in illegal price fixing. As we discussed in a previous article in this series, realtors are already under scrutiny for their anti-competitive practices, practices which contribute inexorably to higher real estate prices.

Why Haven’t Housing Activists Looked at Realtor Commissions as a Funding Source?

It seems so obvious. The money is right there, on the table at every closing. It is an enormous pot of money. In 2019 Americans forked over about $75 billion in realtor commissions. That is 7.5 times the amount of commissions paid to Wall Street for stock and bond trading, even though the value of real estate traded was 2.5 times less. (Some of the statistics cited here come from a 2/15/2020 Economist article, “Tearing Down the House: Technology is Poised to Upend America’s Property Market.“)

Activists continue to seek increases in property taxes to fund housing programs, with the result that they make housing more expensive and also contribute to rising rents. Property tax increases for affordable housing have been defeated in several communities around Washington state, and are increasingly unpopular even in Seattle. The harsh reality is that Washington homeowners are close to breaking under the weight of constantly heavier property taxes.

Housing activists certainly are aware of the enormous amount of money coming out of property sales and going to realtors. They know these commissions could fund affordable housing. But they have chosen not to go there.

For one thing, many housing activists are too dependent on funding from certain realtors. Realtor trade groups also provide funding to housing activists. Considering how realtors behave as a cartel, driving prices up by restraining competition and information, their token support for housing activism could be viewed as a public relations stunt. If they were serious, they would be driving down commissions and closing costs and embracing, rather than fighting, technological innovation.

Realtors and their trade groups also possess a good deal of political influence. There are 2 million realtors in the United States. The National Association of Realtors is the nation’s largest trade group and displays its power with an impressive high rise headquarters in Washington, D.C.

Locally, some realtors not only have great political influence, they are also influential politicians and office holders. Many of Port Townsend’s problems have been caused by regulations and infrastructure strategies that favor higher end real estate to the detriment of work force housing, and blue-collar jobs. The net result biases the market toward higher real estate prices, which makes it easier for realtor/politicans to earn higher commissions with the same amount of effort.

Housing activists run the risk of losing what political clout they enjoy by suggesting that realtors should be paying more to address the crisis they have helped to create. Rather than take on realtors, activists often target property owners, a group lacking equivalent political organization and power.

One salutrary effect of taxing realtors would be motivating them to use their considerable influence to see that their tax dollars were applied with maximum cost-effectiveness.  A sunset provision, say of ten years, would give realtors a target date for demanding real results so that the higher tax rate on their commissions need not be renewed.

Instead of settling for the few crumbs realtors cast their way, housing activists, perhaps gaining some insights and motivation from this series and articles we have linked, may realize that a more rational and more progressive source of funding should be seriously considered.

Related:

Tax Realtors to Fund Affordable Housing: A Proposal for Housing Activists

Realtors’ Anti-Competitive Practices Inflate Housing Costs