Economist Patrick Gourley Talks About Prices, Rates, And The Realtors Settlement

Photo Credit: University of New Haven

As the spring selling season continues, there are growing concerns about the state of the housing market. Mortgage rates remain high, inventory is low, and a new Gallup poll shows 76% of Americans they surveyed think it’s a bad time to buy a home.

Writer Nicole Murray spoke with Patrick Gourley, an associate professor of economics at the University of New Haven in West Haven, Connecticut. He explained how the government’s response to the Covid pandemic helped create this problem, said that mortgage rates are unlikely to go down anytime soon, and talked about what the National Association of Realtors settlement means for the industry.

You can listen to the conversation here:

Murray: Let’s start with the pandemic because we are still feeling the aftereffects. Can you give me an idea of how that entire Covid-19 pandemic had an effect on the real estate market to this day?

Gourley: It’s interesting because a lot of things get lumped together into being from the Covid-19 pandemic. Really though when you want to look at the U.S. real estate market, what has happened is not so much the result of Covid itself but the government’s response. You had about five trillion dollars pumped into the economy in 2020 and 2021. That then caused inflation.

Once inflation took off, I think a lot of people realized, “Wait, rates are about to go up. We should buy housing now.” They did. That drove up the price of housing and then as rates did go up, that doesn’t drive up the sales price of a house but makes mortgages more expensive. So, we have seen an unprecedented rise in housing prices and especially the effective price that you are paying for any value home if you take out a conventional mortgage.

Murray: So all that money got pumped into the economy. Things are at where they are at. Where do you see things going with the market moving forward?

Gourley: I don’t have a crystal ball. Economists have correctly predicted seven of the last five recessions is the old joke. So, we’ll see. It is really hard to imagine housing going down by a specific amount compared to the 2007/2008 recession. Balance sheets are a lot stronger than back then.

It’s easy to say, “Oh, there is a bubble, just like there was in 2007 or 2008.” The reality is that as we get more and more data, there wasn’t even a bubble back then. With hindsight, if someone said, “Do you want to buy this house in 2007 at the peak of the bubble and hold onto it for ten to fifteen years?” You would say yes to every property. There are hardly any houses that are valued lower today than they were in 2007. Most are valued by significantly more.

I think with housing prices, I hope they plateau. I am a first-time homebuyer. I bought in 2022. I hope they go down even though it would hurt me just because I think things are getting too unaffordable. I just don’t think it’s going to happen.

Murray: Can I ask as far as …again, I know you don’t have a crystal ball but with your professional scope: interest rates. They have been a big topic of discussion. First of all, do you see them getting cut this year based on how things are going?

Gourley: I think there is a decent chance they get cut this year, but it is not going to be by the amount the markets were forecasting six months ago. At one point, the convailing wisdom was that we might have 1.5% worth of cuts in 2024. Now it might be half a point.

This is never going to happen but I would actually be in favor of a quarter point increase at this point just to really show the markets that the Fed is serious about getting down to their 2% inflation target. I don’t think that is going to happen; I think they will keep them level for at least the foreseeable future.

Now if inflation ticks up, if it goes up to 4% then we could see an additional rate increase which would trickle down to the mortgage market. Hopefully the interest rates that people are paying for new mortgages will remain relatively level for the next year. I wouldn’t expect a large increase or decrease.

Murray: Another big topic of discussion that comes with interest rates: Should people be waiting to buy based on the interest rates? Can I ask your opinion on that?

Gourley: I don’t think people should wait to buy. It would be nice to say that rates will come down but I think a year from now, 18 months from now, 2 years from now, the rates are not going to be much different than they are today. If they are, you should be able to refinance.

Financial status, of course, is not the only thing that you think about when buying a house. Do you want a home or do you want to rent? If you are someone who wants to own and have your own property, then by all means buy today. And if you enjoy renting, then rent. I have never been a fan of the idea that when you rent you are throwing your money away.  I don’t think there is a clear argument for doing something differently than what you want to do because of the current financial markets.

Murray: You are probably the first person I’ve ever heard who has said, “You are not necessarily throwing your money away renting.” Can I ask why?

Gourley: You are definitely not throwing your money away. As an economist, that is a totally incoherent and wrong take. You are paying money for someplace to live. It’s an exchange for goods and services. You are not throwing your own money away anymore than if you buy your own vegetables instead of growing your own in the backyard. It’s an exchange.

There are definitely advantages to renting a place as I like to say. I had an apartment with a pool before I moved into a house without a pool. I could never afford a house with a pool but I could afford an apartment with a pool and I loved having that there. That is just one example, for me, of an amenity I can get when I rent that I can’t when I buy.

I think it is very foolish to say that you are throwing your money away. It just depends on what your individual goals and preferences are.

Murray: Thank you. Let’s pivot a little bit because obviously the state of the market and everything with real estate is very tightly intertwined with that settlement with the National Association of Realtors. First of all, for someone who is hearing about this for the first time, can you give me a thirty-second overview of what that settlement was?

Gourley: So, in the United States, realtors get a higher commission than basically anywhere else in the world. A lot of times it is a 6% commission then split between the buyers and the sellers agent. Of course, there are different conditions with different sales but that is kind of the norm. That is much higher than other countries where you would expect to see things around two, three, four percent, definitely not above five. So 6% is high.

It looks like a lot of different realtors were colluding and kind of pushing business toward other realtors that charged their 3%. 6% became the norm and it wasn’t a free market. This court case found that they were colluding and now you have a nine-figure penalty that was paid.

Murray: I have a question. When you say “collude”, can you give me an idea of what exactly you are saying went on behind the scenes?

Gourley: Apparently, agents were only working with other agents who charge that 3%. If you were the buyer’s agent, you would strongly suggest that your customer go to properties where you will get the 3% commission as opposed to the homes the buyer might be most interested in. Seller’s agents were also working with agents who wanted that 6% split. Everyone was kind of in agreement that, “Okay. I charge 3%. I am only doing business with people who charge 3%.” You can’t do that.

Murray: How do you see this settlement affecting things moving forward with the real estate market overall?

Gourley: I think with the real estate market, this is a nice step forward. You don’t want collusion in any market. That’s a bad thing and so that’s good. It might or should result in a small decrease in home prices all else equal. But again, we are talking about moving from a 6% commission to 3 or 4 percent commission. It will be nice if you are selling a house and you only have to pay 4% commission versus the full 6.

Murray: How do you foresee the pay structure changing then? Any predictions?

Gourley: Again, I don’t know. I wish I knew. I am not sure anybody does. It will be interesting to see what happens.

Murray: How do you see this affecting real estate agents? The people on the professional side – whether it be how they work with people or how they work with one another?

Gourley: It could have some pretty big consequences. While 4% versus 6% is only a 2% difference in the value of the home, it is a big difference in what the agent is getting.

If you are a successful realtor today, you make a lot of money. And that could change. There will always be people at the top who do very well. There will still be people who it is not their forte so they don’t succeed at all. But in the middle, you could see agents who were making $200K a year now only make $150K or even less.

Murray: The way I understand it is that sellers will still have the option to offer buyer’s agents commission and if they don’t, they are at a loss. Do you still foresee people offering that?

Gourley: That you would have to talk to a realtor about. I don’t really know the firm background and why that developed that way in the United States or if it is the norm everywhere. It will be interesting to see. It might be on a case-by-case basis. You could also just have a status quo where that’s the way it has always been done so it continues. You could also see seller’s agents say, “Now that my fee is getting cut, I am not going to do that anymore.” It could go either way.

Murray: Any specific sector of buyers you see this settlement affecting more than the other?

Gourley: No.

Murray: Any other overall comments you have whether it be about the market, the settlement or anything in between?

Gourley: I am hesitant to make predictions in general but I really don’t think there is any type of bubble. Could housing prices go down by 5%? Sure, but that’s not a bubble. We are not going to have a 2008 style housing market crash. And the second thing is, the settlement is positive because it should be harder for realtors to collude but at the end of the day, it is a couple of percentage points, so it won’t cause this massive shift in the housing market.

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