I have a few friends who have struck out on careers in real estate. I wish them the best but I fear they picked a tough time to enter the industry.
The fixed-commission system is archaic and going to come under increasing pressure from substitutes and regulators. Then there is the supply and demand of the number of realtors. When the housing market cools, times will get very tough for the newbies. And what isn't mentioned in this article is that many realtors work part-time for extra income. They can outlast a market decline in ways that people who depend on the income cannot.
If you are considering a career in real estate, you should give this article a read.
Broker Commissions Are The Real Component To the Real-Estate Bubble
February 6, 2006
As home prices soared in recent years, so did the percentage-based commissions charged by agents. Residential real-estate commissions in the U.S. totaled $61 billion in 2004, up 42% from 2000, estimates Real Trends, an industry publication. That's bad news for people who buy or sell homes. But isn't this trend at least making Realtors happy?
Alas, no. The number of real-estate agents has grown even faster than total commissions. Membership in the National Association of Realtors, the dominant trade group, totals about 1.25 million, up 63% since 2000.
As a result, there's not even close to enough commission income to keep all those agents in Porsches. The median annual income of real-estate sales agents in 2004 was only $37,600, down from $39,300 in 2002, according to the Realtors. Even that figure overstates agents' well-being. Because most agents are independent contractors rather than employees of the firms where they work, they need to pay out of their own pockets for such things as health insurance, pension plans, driving customers to see homes, and even pumpkins.
The chance of joining the million-dollar club attracts hordes of greenhorns, though. A 2003 study by Mr. Hsieh and Enrico Moretti, a fellow associate professor of economics at Berkeley, found that when home prices go up in a city, more people become agents. Their productivity -- the number of transactions completed per agent -- then declines. The result is that income for the typical agent remains low, even though some top performers earn six-figure incomes.
