One of the most intriguing subjects in real estate is commissions and the rising cost of home ownership.
Statistics developed by the National Association of Realtors show that between 1967 and 1977 housing services substantially outpaced the cost of living. While the purchasing power of the dollar fell to 55 cents in real terms during this period, the true value of a dollar invested in real estate rose to $1.23. These figures indicate that home ownership was a good investment during the past decade.
Even though housing prices have risen faster than the cost of living, the expense of real estate marketing has increased still faster in many cases. Consider this example:
A home bought in 1967 cost [WORD ILLEGIBLE]. Since dollar invested in real estate was truly worth $1.23 by 1977, the real value of this home grew to [WORD ILLEGIBLE]
From 1967 to 1977, the real worth of paper money fell to 55 cents. That means that at the end of the decade that $50,000 house would have had an actual cash cost of $111,818 in 1977 dollars.
A 6 percent real estate commission on a [WORD ILLEGIBLE]house in 1967 would have been [WORD ILLEGIBLE]. To get equal buying power in 1977 you would have to earn an $5,454.
In 1977, a 6 percent commission on a home worth $111,818 was $6,709. A 7 percent commission was $7,827. To earn a commission of $5,454 would only require a fee of 4.88 percent.
To keep pace with the cost of living one could argue that real estate commissions should decline. Instead, the real cost of home marketing services has risen not only through inflation but through a movement toward higher proportional fees. Going from a 6 percent commission on the house above in 1967 to a 7 percent commission in 1977 produces a true increase of 144 percent.
The average family moves once every five years, according to the Census Bureau. House owners are believed to move less frequently. During the 10-year period above a house was probably sold once. Working from the statistics of the National Association of Realtors, a house purchased in 1967 for $50,000 was likely to be worth $71,250 in 1972. (At this point the dollar was worth 80 cents while the real value of a house was up to $1.14, according to the NAR.)
While the cash value of the property rose $21,250, if the house was sold in 1972 fully one-fifth of that increase could have gone for marketing expenses ($4,275 at 6 percent). In areas of rapid housing turnover, marketing costs may intensify inflationary trends.
From these calculations, one might conclude that part of the reason that housing prices have risen faster than the cost of living concerns excessive and disproportional marketing costs. The social problem here is that we are rapidly creating two groups of citizens. Those who currently own houses benefit from inflation because they are "vested" in the rising cost of living. But for those who rent, the probability of home ownership declines as the cost of housing outpaces the general rate of inflation.