Brokers are worried about the size of the real estate agent pool in 2023. Some predict a significant reduction in the number of agents in their markets. A gradual erosion of membership is more likely.
This article examines the relationship between the average commission per member, and the flow of agents into the real estate industry using National Association of Realtors membership data. The results show that income potential is a major driver of people entering the real estate industry. A tight correlation exists between average inflation-adjusted member commission and membership growth. The paper also includes projections for 2023, based on NAR’s stable price and declining home sales.
There are many reasons why people enter new industries. There are many other options available. Different careers offer different levels of appeal as people go through life. Income potential is the most important motivator in the decision to become an agent. As you can see, the average income of real estate agents has a significant impact on the flow to or from our industry.
There is a strong correlation between average commissions and agents leaving the business
We looked at the NAR membership trend and compared it with inflation adjusted commissions per NAR Member. To ensure that the last boom-bust cycle in realty was included, we used the 2004-2022 time period.
The results showed a strong correlation between the average commission per member of the business and the flow agents into and out of it.
NAR membership increased when the average member commission exceeded $55,000 per annum in 2005 dollars. The average member commission is higher, which means that there is more growth. If income levels are below this level, membership shrinkage occurs.
Average agent income should not be confused with average commission per Realtor. Splits are not included, and the business model clearly favors more income for agents.
We don’t take into account non-Realtor licensees or those who are members of NAR but have no business. These two groups may have changed over time. This shows that income potential is a major driver of people entering our industry. Additionally, NAR’s steady growth over the past few years has been due to the steady average commissions per member.
Forecasting 2023
Knowing the relationship between the commissions per member and the agent pool allows us to predict what 2023 will bring. We can forecast 2023 using NAR’s forecast for stable prices and a decline of existing home sales to 4.78million, and further assuming an inflation rate of 5%. We can expect:
NAR membership will fall to 1.5 million — a decline of 3%.
Inflation-adjusted per-member commissions will fall a total 5.7%
The current-year commissions per member will decrease slightly in dollars to $84,700.
This will result in a continuing decline in the number sides per member to 6.3. This number was 9.0 in 2015, compared to this number in 2015.
Recent forecasts by economists suggest that 2023’s existing home sales could fall below 4.0million. A scenario in which annual home sales fall to 3.9 million and home prices drop by 5% predicts a sharper decline in NAR membership.
NAR membership would fall to 1.3million — a 15% decrease.
Inflation-adjusted per-member commissions would fall a total 15.1%
The current-year commissions per member will fall to $76,311 in present dollars (11%).
Sides per member will drop to 5.9
Although 15% may seem small, it would be the largest percentage drop in 25 years and surpass the 11% drop between 2006 and 2007.
What does this mean to broker owners?
We can expect a shrinking pool of real estate agents, but not collapse. This is due to the fact that high producers produce more than the lower half of the office’s production ladder.
As low-producing agents move to team member positions, we can expect to see more agents who have second jobs. This trend could be a major driver of team expansion and formation. The 2007-09 process will be repeated, with fewer agents being involved and agent pools being realigned. Brokers who are able to anticipate and manage this trend will be able to gain share from those who are not.
Data: NAR, US Federal Reserve. Statistia historical average commission rates.
Rob Keefe is the president of Relitix Data Science which is a real-estate brokerage data intelligence company.