Tuesday, September 4th, 2018
Any homeowner knows that it costs a lot to buy and sell a home, but the magnitude of these costs may be underappreciated. A working paper by economist Charles Jones found that for someone owning a home for four years or less, the cost of buying and selling the home were higher than for all other costs—including interest payments, property taxes and insurance expenses.
Even after owning the home for a decade, the costs of buying and selling a home make up about one-fifth the total cost.
The problem with housing transaction costs is that they interfere with markets. To start, like any other costs, transaction costs discourage investment. One study found that Philadelphia’s 2.1% transfer tax drove down sales by 15%. Expensive closing costs can also impede mobility for workers, making it less likely they’ll sell their home to take a better job in a new location.
Subsidizing first-time home buyers can help defer the costs of buying a first home. During the housing crisis, the federal government temporarily offered a tax credit of up to $8,000 for qualifying first-time home buyers.
Better transparency can also help.
Closing costs can vary substantially even within a given market, and better-informed consumers can more easily find a better deal. One study of title charges in a handful of cities found that borrowers can shave almost one-third off their title charges just by shopping around for a deal.
But when it comes to buying and selling homes, real-estate-agent costs dominate — and those remain stubbornly high. As with title charges, one answer might be in homeowners’ ability to shop around. One analysis of real-estate agent fees showed that while 29% of sellers paid exactly 6% of the home price, 12% paid less than 4% — suggesting that the market has room for negotiation. If so, increased transparency can help.