by Calculated Risk on 12/11/2006 07:16:00 PM

One of the incredible stories of the housing boom was the surge in brokers' commissions over the last 5 years. Brokers' commissions are included in residential investment, and are the third largest category behind new single family residential construction and home improvements. See BEA GDP underlying Table 5.4.5BU, line 43.

Click on graph for larger image.

This graph shows the dollar value of existing home sales as a percent of GDP, and the dollar value of commissions as a percent of GDP. Commissions have averaged approximately 6% of gross sales for years. (2006 estimated from first three quarters).

My initial reaction was that the surge in commissions, and the total value of existing home sales, was primarily related to the recent rapid increase in house prices.

Actually the increase in house prices is the second most important factor with respect to the rapid increase in commissions (as percent of GDP). The most important factor was the increase in turnover of the existing stock.

The second graph shows existing home sales and inventory normalized by the number of owner occupied units. This shows the extraordinary level of sales for the last few years, reaching 9.5% of owner occupied units in 2005. The median level is 6.0% for the last 35 years. Inventory is only available since 1982.

The primary factor in the rapid increase in commissions, as a percent of GDP, was the increased turnover of existing stock. If sales return to normal (6% of existing stock per year), commissions will drop dramatically from the levels of recent years.

When brokers talk about the housing market returning to "normal", I don't think they mean sales dropping to 6% of existing stock (or about 4.5 million units per year currently). From CNN: Realtors: Home sales may keep falling in 2007

Next year will likely bring a second annual decline in existing home sales, the National Association of Realtors predicted Monday.

Sales of existing homes are expected to decline 8.6 percent to 6.47 million for 2006 and contract another 1 percent to 6.40 million units next year.

Still, the housing sector should see a rebound by the end of next year, said David Lereah, the association's chief economist.

So NAR is forecasting another year with sales above 8% of existing stock; far above the median level of the last 35 years.