Episode 4: Federalist Society Forum Discussion On The Future Of Real Estate Exchanges
Virtual roundtable looked at how consumers might complete transactions as real estate continues to evolve via digital disruption
(AUSTIN, TEXAS, Thursday, August, 20, 2020) - Recently, REX Senior Vice President for Public Policy and Special Counsel Michael Toth participated in a teleforum call with the Federalist Society to discuss real estate exchanges and the future of homebuying.
The program, entitled “Home Economics: Real Estate Exchanges and the Future of Homebuying,” featured Toth and Professor Richard A. Epstein, the inaugural Laurence A. Tisch Professor of Law at NYU School of Law.
During the nearly hour-long discussion, both Toth and Epstein engaged in dialogue discussing how digital technologies and innovations have disrupted the traditional ways of buying and selling a home and are redeveloping the way consumers complete what is likely the single largest transaction of their lives.
For those wondering why the real estate market matters, Toth said the sheer size of the real estate market is reason enough. He said that the total value of every single home in the United States adds up to $34 trillion dollars, pre-COVID.
“To put that number in perspective, it is as much as the gross domestic product of the United States and China combined,” he said, adding that number does not include commercial real estate.
The biggest aspect in the real estate market that has gone unchanged is the transaction cost, Toth noted, adding it is the same as it was decades ago.
When selling a $400K home, sellers will not net the full proceeds of the sale, Toth said, adding it costs on average between 5% and 6% just in brokerage commissions to sell that home. On a $400K home, that is anywhere from $20K-$24K in brokerage fees.
“So that brokerage commission alone to sell the home amounts essentially to the purchase of a new car,” Toth said.
While the transaction costs for real estate sales have stayed the same, when compared to the transaction costs of any other asset sales – stocks, bonds, mutual funds, etc. – Toth said, “the homes are the great outlier.”
There has been a larger movement, Toth said, to streamlining commissions in several marketplaces, including travel, insurance and groceries.
“Yet the transaction cost on U.S. homes remains at the same 5-6% level that they were decades ago,” he said.
Toth noted that from 2008-2018, the sales of new and existing homes stayed flat despite an increase in the GDP.
He then introduced the “Southwest thought experiment.”
“Imagine a world in which there was a 0% commission to buy or sell a home,” he said. “In the words of Southwest, you’d be free to move around the country.”
Toth said that research done by REX shows that if they reduce the transaction cost of getting into a home by just 1% more, then 250,000 people could afford the median home and 700,000 more Americans could afford it if they reduce the rate by 2%.
It’s the introduction of new market solutions, such as REX, that is changing the real estate market.
“We replicate much of what is standard in the real estate market but innovate on a few key pain points that have artificially driven up commissions,” Toth explained. “We use machine learning and AI techniques to find buyers and sellers, we market to sellers who are interested in selling their homes without paying commissions rates that no longer make sense in many home transactions.”
Toth said that in the marketplace REX has created, experienced home buyers and home sellers have done well, as adjustments in the real estate market continue.
“The directions that consumers are going to continue to take and the direction that the platforms like ours really depends on these adjustments that we’re making day to day based on the preferences that we receive,” Toth said. “These adjustments hold the key for the long awaited transformation of the realty market.”
Epstein explained to listeners that what Toth had said was clearly true when it came to working with experienced buyers and sellers.
“Their approximations come much more quickly,” Epstein said. “So that the delay essentially is going to be small and the rate of transactions that takes place is going to be more rapid.”
Epstein said while the services that Toth and REX offer are essentially more bareboned services than those which are offered by a traditional broker, Toth’s customers tend to be a little bit more savvy than everybody else.
When it comes to the larger theory of trying to figure out how to shake up markets, Epstein said the most powerful way to do it is through new entry from people who are not from the same industry.
“[They’re] not from the same line of business or same methodology as everybody else,” Epstein said.
Epstein mentioned that there is a theory in economics that when goods become novel and have very high rates of return, but become commoditized when they become customary. He said as a consumer, they would love the chance to be part of a well-serviced commoditized market because prices will be low and transactions will move.
“But if you’re an entrepreneur what you’re trying to do is to go into a space where nobody has gone and figure out the way in which this is done,” said Epstein, adding that one of the ways to do that is to take a look at markets with high transaction costs.
During the teleforum, Epstein further explored the pricing, transaction cost and commission structure of the real estate market in the U.S, compared it to the overseas markets and also discussed his experience with selling real estate 40 years ago compared to more recently.
He made a final observation that new entry is going to be the way to help make adjustments in the real estate market.
“I’m very confident in my judgment that with my own limited knowledge that new entry is in effect the way by which it turns out that both large and small innovations are going to start to take place,” Epstein said. “Just to sort of illustrate the point, what Michael did is he pointed out the novel ways in which his firm does business, but if you start looking at traditional brokerage firms and see the way in which they do business, it is completely transformed from what it was 10 or 15 years ago – with the Multiple Listing Services, with the online tours, with the photography and with everything else.
“So that the rest of the industry, to some extent, has been evolving as well, which is exactly what we would expect. And so even in the best of all possible worlds that are no regulatory constraints and so that different modes of behavior can start to go into competition with one another.”
Click here to listen to the teleforum in its entirety.
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