Home Prices to Stall as “Deflation” Concerns Pop Up

David Green:
This is the BiggerPockets Podcast show 814.

Dave Meyer:
I think BlackRock is going to come along and develop something to do this. And oh, by the way, when you go to them to sell their house, they will buy your house first offer and they’ll say, “Well, if you sold it on the MLS, we predict this much, but if you sold it to us, we’ll give you 98% of that.” They’re going to be soaking up even more of the inventory and it’s going to be harder and harder and harder for your everyday person to be able to buy a house. And I feel like this lawsuit, we may look back in 10 or 20 years and say, “That was the beginning of the end.”

David Green:
What’s going on everyone? It’s David Green, your Host of the BiggerPockets Real Estate podcast. And if you didn’t know, it’s the biggest, the best and the baddest real estate podcast on the planet. Joining me today will be my co-host, Dave Meyer, and yes, you guessed it. That means we’re doing a bigger news show. These are my favorite shows to do. In a bigger news show, we bring you news from across the real estate world, the financial market, the economic market, and more so you can understand the environment that you’re investing in and most importantly, how to use information that is relevant, up-to-date and current to make your investing decisions. Dave, welcome to the show.

Dave Meyer:
Thank you. I’m glad to be back. I feel like it’s been a while since we’ve done these kind of shows and obviously a lot is happening, so we have a lot of good stuff to talk about today.

David Green:
(Singing).

Dave Meyer:
Who sings that song?

David Green:
(Singing).

Dave Meyer:
Is that Creed?

David Green:
Stained.

Dave Meyer:
Stained

David Green:
It has been a while since we’ve seen cashflow in real estate. It’s getting harder and harder. But nice Creed reference there.

Dave Meyer:
Thank you. Well, it was a wrong Creed reference.

David Green:
That’s what interest rates have been saying, “Can you take me higher?” And the Fed said, “Hold my beer. Watch as I do so.”

Dave Meyer:
That was a really good reference.

David Green:
In today’s show, you’re going to be hearing about deflation. Goldman Sachs forecast cyber attacks hitting the multiple listing service and lawsuits that could impact real estate agent commissions. I’ve been paying a lot of attention to that one personally and it could change the way that real estate is bought and sold in a very, very, very significant way. All that and more in today’s show. But before we get into it, today’s quick dip, make sure to check out the BiggerPockets blog at biggerpockets.com. One of the articles we’re going to talk about today is actually from the blog, so stay tuned. All right, Dave, you’re ready to get into this thing?

Dave Meyer:
Let’s do it.

David Green:
First headline, deflation could soon hit the United States as real estate and stock prices are at risk of crashing, economists say. As a side note, I’m going to start adding “economists say” to the end of every single thing that I say in life and just see how well that plays out.

Dave Meyer:
Do you think people will just assume you’re wrong every time you say that?

David Green:
I think it’s more like or you have no responsibility for what you say as long as you claim economists said it. No one ever says which economist or where did they say that? So if you’re working at a restaurant and you’re like, “What do you guys like more, the salmon or the trout?” They could say, “Well, economists say salmon’s a better option.”

Dave Meyer:
I always want to know what the economist orders at every restaurant I go to.

David Green:
So according to economists, the US economy could soon be at risk of deflation, according to the Weymouth Asset Management Company. That actually helps that. We’ve got Weymouth here.

Dave Meyer:
All right, they’re on the hook.

David Green:
Yes they are. We’ve got some accountability. Wobbling commercial property values and a correction of lofty stock valuations would drag prices lower. And inflation accelerated 3.3% on an annual basis in July, well below the pace of inflation recorded last year. Dave, I know that you, like me, pay attention to this type of stuff. What say you about this prediction?

Dave Meyer:
I’ll just start by saying no, I don’t think that the US is at risk of deflation, at least the way the government tracks it, like the consumer price index because the way the CPI works is it tracks goods and services, but it doesn’t track asset values like the stock market or housing prices. When we talk about, yes, there is, I think, a risk that the stock market will go down, there is a risk that the housing market will go down, but that won’t be reflected, at least, in the official consumer price index. The other thing is that goods and services, which are what the consumer price index actually does track, are incredibly sticky. There’s very few times in US history and really even globally where you see deflation in terms of a service like going to get your haircut. When was the last time you actually saw that go down in price? Yours has gone to zero, David, so I know that that is deflated, but-

David Green:
That’s the secret to how I save so much money. If everybody wants to know.

Dave Meyer:
Just shave your own head. It’s so easy. But in reality, services in particular are very sticky and so no, I don’t think that we’re at risk of deflation. I think the real thing that’s going on, which is good, is what people call disinflation, which is basically the slowing down of inflation. So my belief is that prices won’t go negative, but they’ll go up less quickly all.

David Green:
So before I comment on that, Dave, can you just explain briefly to our listeners your definition of deflation?

Dave Meyer:
Yes. So deflation is just basically when prices go down. And disinflation, which I was mentioning, is basically the slowing down of price growth. And I think there’s a really big and important difference there because deflation where price goes down, that sounds good to people, but it’s actually really bad for an economy because it disincentivizes people to spend. If you just think about it a little bit, like if you were assuming prices were going to go down, you probably wouldn’t buy anything this month. You would wait till next month or the following month or the month after that because there would be a discount. And that reduces consumer spending, it reduces business spending and that slows down economic growth. So inflation is bad, deflation is bad. What you want is slight inflation, is at least what as you would say, economists say.

David Green:
Economists say. That’s exactly right. And it makes all the sense in the world because it’s the same way with the market. If you had a perfectly even buyer and seller market, in general the fear that buyers have would outweigh the incentive that sellers have. And you would get a form of a stalemate where a buyer goes and puts a house in contract, they find a reason to back out because that fear makes it easy to back out. So what I’ve always believed is you want almost like a 49, 51%. You want it to be a little bit more of a seller’s market at any given time because now the buyer thinks, well, if I back out because there was a crack in the sidewalk or there was a roof tile that’s broken, someone else will get that house and I might not get one at all.
It actually helps to make you get over your indecisiveness, and I think the same thing works with the economy. If you think there’s a chance prices will go down, you’ll wear that same pair of underwear for another nine months longer than you should. You won’t spend money. That slows the velocity of money and as the velocity of money slows, we all become poor, in a sense. You’re not spending money so the person that you’re spending it on, they’re not getting it so that they can’t buy anything. And it’s kind of taking the oil out of a car engine. It doesn’t take long before the whole thing gridlocks, you agree?

Dave Meyer:
Oh, absolutely. I think that’s a very good analogy too. The same thing that you just described in the housing market is true of basically the entire economy. You want people to have the incentive to keep spending and like you said, velocity, recycling money through the economy. That leads to economic growth. So yes, I agree with you. I think that that’s probably what will happen eventually. Inflation is taking longer than I think anyone would’ve hoped to come down, and I think there’s still a bit to go, but we’re probably trending in that direction. But again, that’s talking about goods and services. Asset prices are not typically measured in the traditional inflation measurement.

David Green:
That is a great point you made earlier that I didn’t want to gloss over. It is very rare that you ever see the cost of a haircut go down or the cost of an oil change go down or it’s tire rotation or really any… Prices tend to work like a ratchet. It can click up or it can stay the same, but it doesn’t go the other direction. It only moves one way. And so that’s what scares me about when inflation is rampant is it doesn’t go up quickly and then correct itself. It just goes up quickly and stays there. And that can happen much easier with the cost of goods and services than it can with wage growth. Employers aren’t just going to be shilling out money like vendors can shill out price increases. So you almost never see the money you’re making keep up with the cost of living and the wider that gap gets, it tends to stay at that same level of wideness.
I’m not articulating that well, but I think you know what I’m saying and it actually creates poverty, which is what we’re trying to avoid. We want everybody to become wealthier, so we just want, like you said, a slower increase in inflation. A nice predictable two to 3% is enough to keep people spending money, not hoarding things, not leading to a scarcity mindset where you’ve got people putting stockpiles of toilet paper somewhere so no one else can get it and at the same time doesn’t make anybody broke. So let’s hope that this is the case, as economists say. Last question, if we were to see deflation, what do you think would actually need to happen to the economy before prices would come down?

Dave Meyer:
This is not my area of expertise, but I would imagine it would have to be just a massive increase in unemployment. Where we get to the point where so few people are spending money that there’s sort of this race to the bottom. Where the different services have to cut prices in order to attract the fewer dollars that are going around. But I don’t really know. We saw a huge uptick in unemployment around the great financial crisis and it didn’t really lead to any significant deflation, so I don’t really see it happening just because the history of the US economy shows that goods and services, like you said, are pretty darn sticky.

David Green:
There you go. Thank you, Dave. What do we got next?

Dave Meyer:
All right. That’s actually a great segue to our second headline, which comes from the BiggerPockets blog and the headline is, Is Slow Growth, The New Normal For Home Prices? Goldman Sachs and Their Economists Think So. So basically what they’re saying is that housing appreciation from the pandemic, not likely to come back. Low supply, it’s putting upward pressure on home prices and a lot of people are hesitant to sell and they basically think that because rates are likely to stay high, they think above 6% for a while, that the average home price growth will be about 1.3% for 2023 and about 1.7% for 2024. So pretty slow, almost basically flat growth for the housing market. What do you think about that prediction?

David Green:
It’s hard to see prices coming down, so prices are frequently ticking up. We’re used to seeing that. And if you understand the way that psychology plays a role in prices, I think it makes us a lot simpler to understand. People tend to look at this frequently from this perspective of pure logic that, well, if the cost of living’s going up and interest rates went up, the math says prices should come down, but people don’t make decisions on math. I’ve never met a seller of their home who listed it at $600,000, who saw that inflation came out at a certain level or unemployment was too high and they said, “Let’s drop it to 592.” That’s the appropriate response. They don’t make the decision to drop their price until emotionally they’re in so much pain because they can’t get anyone to buy it that they finally do and they never drop it from 600 to 400 and create a bidding war and get it back up to 580.
They always say, “Let’s go from 600 to 595 and see what happens.” Those three words, “See what happens,” are frequently spoken about in these situations. It doesn’t work though because buyers don’t care. It’s hard for the seller to think of it from the perspective of the buyer, and it’s hard from the buyer to think of it from the perspective of the seller. Sellers drop their prices when their house has been on the market 90 days and nobody wants it and they have no choice. And if you get any kind of stimulus that happens during that 90-day period, they usually don’t have to drop the price, especially when we’re in the situation we’re in now where there is not enough supply. All the good inventory is still getting a ton of demand. Investors want these homes. People that are tired of their rent increasing want these homes.
People that want a place to invest that they can beat inflation want these homes. People that don’t have $600,000 cash that want to leverage money from the bank, they want these homes. It’s still the bell of the ball. Everybody wants the real estate, so it’s hard to see prices coming down. When they do come down, they tend to crash. I’ve only seen in my lifetime, prices come down when there was an extreme difference in supply and demand. There was way more supply than demand. It’s not talked about, but in the 2010 era, there was a lot of new home construction that was being built way more than was needed. So builders are watching prices go up. The lay person who doesn’t understand the fundamentals of real estate is watching prices go up. Everyone’s buying homes and builders were like, “Shoot, let’s just build them and sell them like hotcakes.” And people are scooping them up. Poor construction quality, bad areas, not understanding the taxes of it.
But when the interest rates started to adjust, it wasn’t just that the homes became more expensive, it was also we had way more houses than we needed. Now the speculative buyers back out of the market, prices are crashing because there’s way too much supply there. That would have to happen. But like I said, prices don’t tend to tick down. They tend to tick upwards because they can’t fly upwards because of our appraisal system. If somebody sells their house, that same buyer that put on the market for 600, if someone’s willing to pay 800, but they’re using financing, the appraiser’s not going to let us sell for 800, he’s going to say 625. So they have to tick upwards and they don’t tick downwards. They tend to crash downward.
So it looks sort of like the stairway as they go up and then a slide as they go down and then a stairway as they go back up again. So if people are expecting prices to just continually slowly drop, it’s hard for me to see a scenario where that would happen. I think it’s more like what you mentioned in the last segment, the disinflation, that they will not be going up as fast, but in general, people feel more comfortable buying homes when they see prices going up and people feel more comfortable selling their home when the price is going up.

Dave Meyer:
I agree with this whole premise that the market will be relatively flat over the next few years. I could see that coming, whether they drop a little bit this year, a little bit next year, go up a little bit this year, next year. Obviously no one knows. But to me, this whole concept of where the market’s going over the next year comes down to the idea of affordability and houses have just become deeply unaffordable. They’re at a 30 or 40 year low, but there are different ways that affordability can improve itself, and I think a lot of people assume that the way that affordability is going to get better is by the housing market crashing because that is a way that affordability can improve. But we had a guest on the market recently who was talking about how another way for affordability to improve is just for the market to grow steadily and slowly while wages catch up over the next couple of years.
And I can see some validity to that logic where I think we’re in for this kind of stalemate for the foreseeable future where there’s going to be relatively low supply and relatively low demand. So I don’t see prices moving too far in one direction or another, but hopefully. We have seen now, two months in a row, where wage growth has outpaced inflation. That’s a very new trend, and so it’s uncertain, but if that improves, I do think that is a good hypothesis, at least, here by these economists that maybe the market’s relatively flat, wages get a little bit better over the next few years, but this guest that we had it on the market said it’s going to take till 2027. So it’s not like this is going to happen overnight, it’s probably going to take several years, even if this scenario plays out at all.

David Green:
There’s a lot of very smart people that are all still buying real estate. The people who analyze all the different financial options that are out there to put money into find the most growth, a lot of these big firms and funds are all getting into the space of real estate. So just because it’s not as good as it used to be does not mean that it is bad.

Dave Meyer:
Yes. No. And honestly, I think people are constantly surprised by this, but as an investor, a flat market is fine for me, I don’t see that as this real negative detriment. I would like it to outpace inflation. I would like to see something where home prices at least keep up with inflation, but I’m not counting on that as being the main profit driver for an investment, but I don’t want it to lose value against inflation.

David Green:
The fundamentals of real estate are actually almost designed to make it make sense even in a flat market. So the amortization of your loan, every loan a little bit more goes towards your principal reduction as opposed to the interest rate. That benefits you. Even if the growth is flat, you’re still making a little bit more every month than you did the year before. The leverage component of it. So you buy a $500,000 house, if inflation is at 5% and your house goes up by 5%, that would be about, a year ago, from 500 to 525. But you probably only put $100,000 down on that $500,000 home.
So that 5% increase in the home value of 25,000 in equity equals a 25% on the increase in the money that you put down. So even when real estate appears to be growing slowly or staying flat, it exponentially benefits the person who used leverage to buy the asset. And this is before you get into the tax advantages or the rent increases, the ability that you could have bought it below market or you could have added value to it. It’s just so better than all your other options. There’s nothing I could do if I buy Apple stock to make Apple perform better, but it is the case with real estate.

Dave Meyer:
Very well said. Housing prices are not your returns.

David Green:
All right, next article here. Real estate agents grapple with cyber attacks on Rapattoni. A ransomware attack has crippled Rapattoni, a Southern California data host for property listings. So for those that don’t know, Rapattoni is like the software that is used to power a lot of the MLSs across the country. So if you’re a realtor and you work in Tennessee versus Alabama versus California, your MLS doesn’t look exactly the same, but there are companies that make software that the MLSs will purchase and that’s what the agent is trained in when running their specific MLSs in their area. In California, it’s weird, I can be looking in the Bay Area and then I can move out to the Central Valley and it’s two completely different forms of software.

Dave Meyer:
That’s weird.

David Green:
I have five different MLSs I belong to and if they’re not made by Rapattoni, it’s a completely different learning curve, to have to learn all of the different ways. It’s not fun.
Bay Area real estate service information and clients fell victim, the hacker encrypts the victim’s data and demands a ransom for its release. Some agents are now unable to add a new property price, adjust or access latest property information. So this is similar to what we see happening with social media where if they can figure out your password, they can hack your Instagram and say, “Hey, those 400,000 followers that you have, you don’t have them any more unless you pay us what we want.” They can actually hold people’s Instagram’s ransom. Now this is happening with the MLS, so if you’re selling your home and you have a listing agreement with the broker, they put your house on the market and you want to update the information, you want to adjust the price, you want to add another property in there, they can’t do it unless these ransoms are paid. What do you think, Dave?

Dave Meyer:
Unfortunately these types of things are happening more and more and it always hurts when it happens in your own industry, but I guess I’m not super surprised. I don’t know Rapattoni that well, but the MLSs I’ve been exposed to don’t seem like the most sophisticated software technologies that I’ve seen, and unfortunately this has real impacts on the lives of these agents and people who are just trying to go about their business. So I don’t know. It’s hard. It’s something that I hope will get resolved but maybe will be the impetus for more real estate agents and the whole real estate industry to take cybersecurity a bit more seriously because unfortunately, that just seems like the reality is that everyone is at risk, as you said, whether it’s your Instagram account or your bank account or whatever. These are things that unfortunately are just a part of modern life right now.

David Green:
The threats are all from the technology element, and nobody would’ve thought before this happened that this was a thing that could happen. I know a lot of people are unaware of how significant wire fraud is, but as a Real Estate Agent, I’m acutely aware of this one. It’s like the most brilliant crime, if you’re the criminal, where you find out somebody is selling their house and you email them and say, “Hey, I’m the title company. Wire your funds to this wired number or bank and the person does and $100,000, $400,000, $800,000 is gone.” There’s no way to get it back. And it’s so simple. They could just send out a bunch of these emails. There’s no recourse. You don’t have to go meet anybody in person.
So when we’re selling houses as an Agent, it’s like double, triple, quadruple checking. This is your title officer, this is what their voice sounds like. They’re going to be calling you. Don’t wire the money until we’ve confirmed and they’ve confirmed that this is the right place to actually send it. And we were talking before we recorded about how easy it is to deepfake someone’s voice. That just got me thinking, oh man, how many people are going to be fooled by that in the beginning?

Dave Meyer:
Oh, it’s terrible. It’s so scary. Now, if I fund a deal, I invest a lot in passive deals, I’ll insist on doing a $1 wire transfer to them to make sure that it goes to the right person, even though you pay a little fee. Just to make sure because wire fraud is terrifying. There’s absolutely no recourse if something goes bad for you.

David Green:
There’s no insurance for that. No one’s covering it. It’s just gone.

Dave Meyer:
One of the questions I have about this is just about the MLS in general. In my opinion, I’m not an agent, so you have way more experience with this than I, but it seems like a very antiquated system and that the way that all of these, like you said, different MLSs work together and the data’s aggregated is perhaps not a great system. And so not that I am happy that this happened, but maybe this will help spark some innovation in the MLS industry because I think there’s a lot of room to improve there.

David Green:
Well, there’s some room to improve in the entire real estate market in general. It’s funny you say this because I was just at a Keller Williams event. I was speaking there and I’m in the investor world and I’m in the agent world, and so I see where both sides don’t see the other’s perspective. And I had this little paradigm shift where I realized a lot of agents do not want to work really, really hard to find that client, like a wholesaler will, because their commission’s going to be a lot less and it’s not a guarantee that they’re actually going to close that buyer. There’s a lot of work that goes for the agent after you find the client, now your job starts, now you have to do a whole bunch of stuff. You probably only close one to 3% of the buyers that you’re working with.
People don’t realize that when they wonder why is a buyer agent commission so high? Well, if they close 100% of people, it’d be a lot lower, but it’s not that way. Then they have all the regulation, they have all the paperwork, they have all the lawsuits they have to worry about. They have a ton of education on how the MLS works and what the rules are of the MLSs and what the rules are for all the documentation that has to be done and the compliance issues. It’s incredibly complicated to go through the process legally, of using a realtor, versus the wholesale side is kind of the wild west. You, in most cases, do whatever you want and if you did break a rule somewhere, there’s not a whole lot of people that ever find out about it. It’s very rare that there’s any kind of recourse.
And so trying to convince an agent that they have to have the lead generation skills of a wholesaler with a much smaller amount of money they’re going to make and all of the fear of what could go wrong and all the work, you can see why it’s hard to get a good real estate agent. And so I agree with you. There is a lot of things that need to change with the way the industry works, but I understand why it’s tough, and I think for people that are on the outside looking in, they can’t understand why it’s so complicated. But whenever there’s a lot of regulation like this, it makes it complicated. And now we add pirates hacking into this stinking software and holding people hostage.

Dave Meyer:
It’s terrible. Well, that is a good segue to our last headline today, which I’m very curious to hear your opinion on because this one affects you directly or could. The headline is, The Multi-Billion Dollar Lawsuit That Could Radically Reshape How We Buy and Sell Homes Forever. On On The Market, we just actually had an expert on this topic come and talk to us about it, and basically what’s going on is there’s two class action lawsuits that could impact how agent commissions are paid out. They are looking to “decouple how agents are paid,” so basically buyers and sellers would pay for their own representation. That’s not usually how it works. Now, typically, the seller’s agent collects the commission and then pays out the buyer’s agent, and so this could be a really important thing that will obviously impact agents, but could have all of these ripple effects in how buyers and sellers work in the housing market. So I’ll just leave it there because, David, this obviously is right in your wheelhouse. I’m curious to know what you think about it.

David Green:
So here’s how it works right now, and then I’ll explain what this lawsuit is trying to accomplish, and then if it passes, how things would change. The way it works now, the seller pays the commission for both agents in general. So the listing agents will go and negotiate the commission that they’re going to get for their side as well as the buyer’s side. And sellers do this because they’re trying to get as many buyers for their houses as they can. And if the buyers had to pay for their own commission, there would be a lot less people that are interested in buying homes. Now it actually comes at a price. You can’t get in the car and drive around and look at houses for four months and it’s free to you. You’re going to have to pay. The same reason that people don’t call lawyers and have long conversations with them like they do with real estate agents because they’d be billed for every hour. The industry would be a lot different.
But what will frequently happen when the market gets too hot, which is what we saw, it was out of balance. The sellers have had way, way, way too much leverage in general. It’s unhealthy when you get to 90, 10 in favor of the seller as opposed to the 51, 49 I mentioned earlier. As listing agents realize that when they go say, “Hey, it’s going to be a 6% commission,” which typically has been 3% to buyer, 3% to seller, that the people selling their home would say, “Well, I don’t want to pay 6%. I want to pay five. I want to pay four and a half.” That’s always the struggle that you get into. So if a listing agent said, “No, I don’t do that,” they would just go find a discount agent. They’d go find a person who’s willing to do it.
That person sucks. You get a terrible job. Nobody blames themselves and say, “That’s what I get for paying a low commission.” They blame the real estate agent, they blame the industry. They call and yell at the broker. It causes all kinds of problems. And then you had a lot of brokerages that formed that were like, “Well, we’re here because we’re cheap, not because we’re good.” Which brings down the reputation of real estate agents as a whole. And all the agents listening to this are all saying, “Amen, hallelujah,” in their cars because this is a struggle that a lot of them have. Well, instead of losing the deal to somebody else because that person will take a lower commission, they said, “Yes, I’ll do it at 5%.” And then they kept 3% for themselves and gave 2% to the buyer’s agent. Now the seller doesn’t care.
All they care about is if they get their house sold, they probably didn’t even pay attention to what was happening. Or if you took it at 4%, they would pay 3% to the listing agent and 1% to the buyer’s agent. Now, that used to be something that wouldn’t work because all of the buyer’s agents would see there’s a 1% commission on this house. I’m not going to recommend it to my client because I’m going to make a third of the money as if I showed them a different house. But when realtors sold their rights to the MLS to Zillow and Redfin and realtor.com and Trulia, now everybody can see the house regardless of what the commission is. And realtors didn’t want to tell their clients, “Hey, that’s a 1% commission. You’re going to have to pay me the other 2% yourself if you want to buy it.” Because then the client would say, “Fine, I’ll go use another realtor.”
And you get into the same thing or there’s always someone willing to do it cheaper, and you don’t think about the fact that the cheaper person usually is going to give you a worse experience and you probably lose money because this is such a high ticket purchase to be gambling with. This lawsuit is a bunch of sellers that got together, my understanding of it, and said, “We don’t think we ever should have had to pay the commission for the buyer’s agent.” Now, I’m sure this was a class action lawyer that went and got a bunch of people that sold their house and who’s not going to say, “Yes, I’ll take some free money. I sold a house in the last 10 years.” And they said, “We never should have had to pay the buyer’s agents. They should have paid their own. So now we’re suing every brokerage that sold our home, even though we agreed to this in our listing agreement…” A contract that was signed. Saying, we should be compensated for all the money we pay to buyer’s agents.
Now, if this passes, buyer’s agents will no longer be compensated by listing sides. Now let’s talk about what the future would look like if that was the case. If you have to pay for your own buyer, I think a lot of people are not going to pursue home buying as much as when you got free representation. That’s one of the big perks of when you’re scared of being a home buyer. You have theoretically this licensed professional with experience that will hold your hand and walk you through a complicated process and you don’t have to pay them. In fact, you don’t have to pay for a lot of the stuff that goes into buying a house. You’re probably putting 3.5%, 5% down if this is a primary residence. So the bank’s putting in way more money than you. The listing agent is paying the commission for your person.
You’re paying for a home inspection and appraisal and whatever closing costs you have on the loan, and a lot of the time those closing costs can be wrapped into the loan. So even though we feel like real estate is expensive, it is still highly leveraged in most cases. If buyers had to pay for their own agents, I think many of them wouldn’t, or they would pay a very small fee. You would see brokerages pop up and they’re like, “Hey, we’re going to use AI to draft up a contract for you. We’re going to ask you a series of questions. We’ll fill out the form, we’ll submit it on your behalf, and now it’s up to you to try to get that offer accepted,” which is not good when there’s 10 offers on every house or five offers on every house. So now you’re going to have to call the listing agent and represent yourself, more or less, because you’re not going to get a professional that’s good at doing this, that’s going to do it for $500.
And I think that’s putting a lot more leverage on the hands of the sellers. This is creating even more imbalance to where the sellers are going to gain even more power. It’s like commercial real estate. You don’t go get an agent to represent you buying a commercial property. The listing agent is the only agent involved in the transaction most of the time, and they are clearly there to represent the seller because that’s where their bread is getting buttered. The expectation is that if you are buying commercial real estate, you are doing this because you already know how it works. You do not need your handheld, you do not need a person to walk you through this transaction. It is a buyer beware scenario. It’s ridiculous to expect a residential home buyer to have that level of understanding and acumen when it comes to buying a home, especially if they’ve never done it.
That will put even more power in the hands of somebody like us who buys real estate all the time and understands what we’re doing. It makes it harder for the average Joe to buy wealth. That’s why I hate this potential outcome. It’s going to give more power to sellers. It’s going to give less power to the people we want buying real estate, which are the people that are just trying to get into the game and want a fair shot. I can see this just becoming really ugly and making it so that real estate ownership is something that only the elite privileged wealthy people are able to do because you’re going to need a lot of money just to pay for the person to help you buy it.

Dave Meyer:
It’s super interesting. I have a hard time wrapping my head around it because like you said, it could obviously give sellers more power. I wonder would it decrease the number of buyers, which would just, like you said, could increase the number of investors or I think one of the worst possible outcomes is that there’s just a lot of really bad buyer’s agents who will do it for almost no money, and I think that seems like a really bad potential outcome, and I certainly hope that’s not… It’s a huge financial decision and agent-

David Green:
It creates a race to the bottom. That’s my prediction is that probably 75% of buyer’s agents will not be needed. So everyone who holds a license as a real estate agent, they typically start their career with buying, man, 87% of them are out within the first five years. Of the 13% that make it past five years, maybe 10% of them get into the era where I do mostly listings. It’s incredibly hard to get good at selling homes, but that’s where your skills come into play. It’s much less emotional and it’s much more like, “Well, how good are you at doing this?” Which is why I prefer selling homes. My knowledge of real estate benefits my clients a lot more than when it’s a buyer and you’re not competing with the other side, you’re competing with the 10 other people trying to buy the house. You don’t have leverage there.
Well, you’re going to knock out most of the buyer’s agents, the few that remain are going to have to take it for peanuts. So you’re not going to be getting highly skilled, educated, qualified professionals that are really good. You’re going to get more or less an Uber driver. I’m willing to take you to the house, walk you through it, ask your questions, use the software at my office that tells me how to fill out an offer, submit it, and you’re on your own because you’re paying 495 for my services or whatever. And there’s nothing wrong with driving an Uber, but I don’t think that you have to be a Formula One race car driver to be good at driving an Uber. You don’t really need to have any skills other than the ability to use navigation. I think that will happen to the buyer side.
Now you have all these other agents that can’t make money buying houses, so what are they going to do? They’re all going to chase after sellers. Well, now that sellers have five times as many agents that are competing to sell their home, you’re going to see billboards everywhere. We sell homes for half a percent. We do a flat fee of just $800, and AI is going to wretch into this space and take all of the personal element of it out. It’s just going to be a race to the bottom, who can sell homes for the cheapest, which means that the buyers and sellers will be at the mercy of whoever is better at playing that game.

Dave Meyer:
And it’ll probably be some big technology company like that.

David Green:
That’s exactly… I think BlackRock is going to come along and develop something to do this. And oh, by the way, when you go to them to sell their house, they will buy your house first offer and they’ll say, “Well, if you sold it on the MLS, we predict this much, but if you sold it to us, we’ll give you 98% of that.” They’re going to be soaking up even more of the inventory, and it’s going to be harder and harder and harder for your everyday person to be able to buy a house. And I feel like this lawsuit, we may look back in 10 or 20 years and say that was the beginning of the end.

Dave Meyer:
Do you think it’ll pass though? Do you have any sense of that?

David Green:
I, at first, thought this was complete BS, on its face, I really thought that there’s no way this makes it this far because when you fill out a listing agreement with a listing agent, it very clearly says, “This is the total commission. This is the portion that goes to the buyer’s agent.” And if you just blankly sign something like that, I don’t think you can come back and say, “I didn’t realize I was paying for the commission of the buyer’s agent,” or I believe their argument’s even worse than that. It’s, “I never should have had to in the first place.” If you said, “Hey, did you pay more than you wanted to for that car, would you like to come back and sue them because they should never have sold you a car for that much money?” Everybody in the country is going to say, “Yes, I’ll take some free money. I’m mad. I had to pay that for a car.”
So I’m not surprised that sellers were all jumping on this bandwagon to try to get money back, but I’m shocked it went this far. I thought a judge would’ve thrown this out a long time ago saying, “Hey, you agreed to do that. If you didn’t like it, you could have said no. Here’s a contract that spells out, in black and white, you saying this is something you want to do.” So I can’t say if it’s going to pass or not. I’m getting more scared, the more time that goes by, it seems like it’s getting more and more legit.

Dave Meyer:
It’s super interesting. I have no idea, but just objectively, you do see these lawsuits every couple of years. Like that Rex Company was suing NIR. I think that one just got thrown out, but for a long time, people have been trying to change the way that real estate agents get paid, and it hasn’t happened. So this does seem to have gotten further than many lawsuits, but it’ll be interesting. I think the trial, they’re slated to start this fall, I think in October, so that’ll probably take months, but we’ll see what happens probably in the next six to nine months here.

David Green:
I think in general, anytime you remove the guardrails, like having an agent to help you, you put power in the hands of the people that don’t need the guardrails. The professionals at these huge hedge funds that do this in their sleep, the people like us that already own a lot of real estate, the people that have invested $80,000 a month into sending out letters and pay per click and text messaging to try to find deals before they ever even hit the MLSs, they’re gaining power. The more that we take it away from the traditional way, which is that real estate agents represent clients and people can go buy a house without being an expert in it. I like the idea of owning a home, being the average American’s way of building really big wealth, getting out of the rat race and getting ahead. So I’d rather see them regulate wholesaling more.
I’d rather see, “Hey, if you’re going to be dealing in exchanges of real estate like this, you need to have a form of a license,” or I don’t even think it would be bad to say that if you want to be a wholesaler, the house has to be on the MLS for 20 days before you can buy that thing because the seller of the home, like the 80-year-old grandma who doesn’t realize that $100,000 is not a lot of money anymore, like it was a long time ago, might’ve got $400,000 for her house if it was in the open market. I understand that there’s a lot of people that listen to this, that make their living and do very well running a wholesaling business, and I’m not trying to irritate them or upset them by talking about it, but if we are looking to protect the people that are not experts in real estate, having in a market where you’ll get offers on that house from the public is better for them.
And if you’re looking at the people that want to buy a house that are not experts in it, having an agent that can walk you through the process and explain what a contingency period is, what an inspection should look like, how the appraisals work, what your financing contingency is, what all the closing costs are, and who pays what and how they could be negotiated is better for the people that aren’t experts in this. So if this lawsuit passes, I foresee the way we look at buying real estate, get online, look at houses, find a cute one, go look at it with your realtor, write an offer. I just think a lot of that could change, and this could turn into more high-powered stock brokering, like the boiler room type environment where inventory never hits a place where the public can see it.

Dave Meyer:
That’s not something I think would work out well.

David Green:
Unless you’re already super wealthy, in which case you’d love it.

Dave Meyer:
All right. Well, on the show, I think we’ll have to keep on top of these lawsuits on the future Bigger News episodes because this obviously, like you said, it impacts you as an agent, who knows exactly what would happen, but it would absolutely impact everyone whose even tangentially related to the real estate industry. So this one’s a big one that we’ll keep an eye on.

David Green:
Absolutely. Dave, thanks for joining me today. Always a pleasure when we get to do Bigger News together.

Dave Meyer:
This was a lot of fun. A great conversation.

David Green:
Yes, sir. Dave, for people that want to find out more about you, where can they go?

Dave Meyer:
You can find me on BiggerPockets of course, or on Instagram where I’m @The Data Deli.

David Green:
You can find me at DavidGreen24.com or at David Green 24 at any of your social media. Send me a DM and let me know what you think and let us know, a comment, if you’re listening to this on YouTube, what did you think about today’s show? Are you concerned about the industry changing? Are you worried that more real estate is going to fall into the hands of big hedge funds, firms, global conglomerates that have been able to raise money at much cheaper interest rates than we can get loans for in buying it? Or do you think that this is all overblown and it’s going to be fine? Let us know. Dave, any last words before I let you get out of here?

Dave Meyer:
No. Thanks for having me. I’ll see you all for the next episode of Bigger News Soon.

David Green:
All right. This is Dave and Dave signing out.