Real Estate Commissions and Homebuying (Revised November 2024)

We study home search and buying in the U.S. housing market and evaluate the commission for homebuyers' agents. In our model, as in practice, homebuyers receive free house showings and buyers' agents earn a 3% commission from the seller upon a home purchase. We show this commission structure deviates from cost basis, leading to excessive agent profits and inefficient home searches. Switching to a cost-based commission system could increase social welfare by $35 billion annually, driven by improved home search efficiency and reduced rent-seeking behavior by agents. We discuss the policy implications of our findings, including the recent NAR settlement.