Home realtors need a new pricing strategy

Dear Friends,

Setting prices for artificial intelligence applications is a complicated challenge, as my colleagues and I described in this article and in a previous edition of this newsletter. Last week, Fortune published an article on the topic and highlighted the perspectives of my colleague John Pineda. You can read my post and access the full article here.

In case you missed them, here are some posts since last week’s newsletter.

Apple Vision Pro as a business tool: Apple CEO Tim Cook said that the Vision Pro device is making inroads into the enterprise market, in line with my prediction a few months ago. You can read the full post here.

Yes, pricing does shape society: Scott Galloway’s TED talk provides a perspective on points that my co-author Arnab Sinha and I emphasized in Game Changer: structural pricing decisions about tax rates, social security, minimum wages, and so on have a significant effect on society. You can read the full post here.

Sometimes companies can seize the initiative and change their pricing game because they see a new market opportunity or develop a groundbreaking technology. In other cases, the forces are external, such as legislation or new legal frameworks that can make the previous game obsolete.

The latter case will play out soon in the residential home market in the United States. This week, Arnab explores how the elimination of fixed realtor commissions will create new opportunities for home buyers and realtors … if they play the right pricing game.

?

Home realtors need a new pricing strategy

Ongoing macroeconomic volatility will create interesting dynamics as the peak home-buying season (May to July) gets underway in the United States. The Federal Reserve left interest rates unchanged earlier this month and prospects for a rate cut remain uncertain. The latest National Housing Survey by Fannie Mae, published this week, shows that 67% of consumers think it is a good time to sell a home, but only 20% think it's a good time to buy one, as mortgage rates remain high and supply remains low.

One impending change that can disrupt the “wait and see” home-buying market is the National Association of Realtors’?settlement of a major lawsuit. The settlement effectively ends the standard practice of buyer and seller agents’ splitting the seller’s commission. Pending final court approval, the settlement will take effect in August.

From the Uniform Game to … what?

The compensation of realtors in the United States was traditionally a Uniform Game. The total commission was typically 5-6% of the sale price, shared equally between buyer and seller agents. Under the new rules, the buyer’s agents will now need to negotiate their prices with the selling agent or with the buyers themselves. They will no longer have their commission specified in advance in the Multiple Listing System (MLS).

At first glance, this seems to mark a shift to the Custom Game, with agents negotiating their fees for each transaction, taking the specific aspects of the individual sale into account. Home buying is already complex enough, however, without adding a new negotiation into the mix. The added complexity of an additional negotiation may also dissuade some home buyers. At the same time, the average fee per realtor is expected to decline to 1% to 1.5%, or less than half of what realtors currently earn.

These are among the reasons why we believe that the market will eventually end up in the Choice Game instead of the Custom Game. The Choice Game will allow buyers and sellers to navigate to their preferred outcomes by selecting from a menu of options that correspond to the value that buyers and sellers expect their respective agents to deliver.

• Good: This option provides bare-bones commissions for?the agents of buyers not looking for value-added services. These are buyers who are willing to navigate home buying primarily on their own via websites, open houses, or other self-guided sources.
• Better: Curated searches and individual showings could mean slightly higher commissions for dedicated buyer support.
• Best: Agents who provide white-glove support – such as personalized searches or access to private screenings – can earn top-of-the-line commissions. ?

Of course, the ultimate form of the Choice Game may have more than three menu options. To optimize these options, agents should make them balanced, simple, and fenced, with clearly communicated differences. Otherwise, they risk home buyers trying to pay a “good” price for a “better” level of service.

While the full evolution will take time, this market is ripe for disruption and innovation. The changes to the MLS system won’t officially occur until August, but in the meantime, it is definitely worth watching the pricing ideas that emerge in the market.

As always, please continue to share your thoughts and questions with us. If you haven’t ordered your copy of Game Changer yet, you can do that HERE. Thanks for your interest and support.