How a Recent Legal Settlement Could Impact the Way Homes Are Bought and Sold
Post Date: 4/11/2024
A recent legal settlement by the National Association of Realtors® (NAR) could have a major impact on how homes are bought and sold in the U.S.
In the case of Burnett v. NAR, NAR agreed to pay $418 million in damages to a group of home sellers who sued over NAR’s long-standing agent compensation policy. The plaintiffs alleged that this policy — in which home sellers pay commissions to both the buyer’s and seller’s agent — resulted in inflated fees and price-fixing.
As part of the settlement, NAR also agreed to rewrite the rules that led to this commission practice, which is known in the industry as cooperative compensation. The new rules are scheduled to take effect this July.
Commissions in U.S. Top Other Countries
Real estate commissions in the U.S. are much higher than in many other countries, mainly due to cooperative compensation. For example, commissions have averaged between 5% and 6% in the U.S. for many years, with half going to the seller’s agent and half to the buyer’s agent.
On a $400,000 home, the real estate commissions could total as much as $24,000 in the U.S., which is reflected in the home’s final sale price.
Previously, sellers were not required to pay buyer’s agents commission. Under the new rules, the National Association of Realtors cannot require listing agents or sellers’ agents to offer cooperative compensation to buyers’ agents. Additionally, sellers are prohibited from offering cooperative compensation to buyer agents via the Multiple Listing Service (MLS). Instead, the settlement agreement requires buyers and sellers to negotiate broker commission directly with their respective brokers and enter into written agreements that conspicuously specify and disclose brokerage compensation.
After the settlement was announced, NAR stated: “Two critical achievements of this resolution are the release of most NAR members and many industry stakeholders from liability in these matters, and the fact that cooperative compensation remains a choice for consumers when buying or selling a home.”
Today’s Homebuying Marketplace
The new rules reflect the reality of today’s home buying marketplace in which many buyers search for homes online themselves without assistance from an agent. However, buyer’s agents still earn up to 3% commissions regardless of how much (or little) they do to help buyers find a home.
Another criticism of this commission structure is that buyer’s agents aren’t incentivized to get the lowest price for their clients since they earn a higher commission on higher-priced homes. In fact, their incentive is just the opposite, at least financially.
Empirical evidence demonstrates that buyer’s agents tend to steer their clients away from homes if the seller’s agent is paying less than a 2.5% commission. On the Missouri multiple listing service (MLS), 90% of transactions paid the buyer’s agent a 3% commission.
“Decoupling will allow commissions to be removed and negotiated down, lowering both housing prices and overall consumer costs,” said Steve Brobeck, the retired executive director of the Consumer Federal of America in a New York Times article published in March. “Over time, both sellers and buyers will force rates down through negotiation and comparison shopping in a more price-transparent marketplace.”
According to Brobeck, Americans spend about $100 billion each year on real estate commissions. He believes that the NAR settlement could drop this by at least $20 billion and possibly as much as $50 billion.
How the Settlement Could Affect Homebuying
Nearly nine out of every 10 home sales are handled by a real estate agent associated with NAR, so the settlement is likely to have wide-ranging effects on the U.S. homebuying industry. Here are four ways the settlement could affect homebuying:
- A new real estate commission structure will emerge. The settlement probably spells the end of the traditional 5%-6% real estate commission that’s split equally between seller’s and buyer’s agents. Going forward, many real estate agents will have to negotiate commissions with clients to compete for business.
Exactly what the new commission structure will look like isn’t clear yet, but it will likely emerge over the next couple of years. In the New York Times article, Brobeck said he doesn’t expect commissions to drop as low as 1% or 2% like in the U.K. where there’s usually only one agent involved in a home sale. “But they certainly will decline substantially, and commissions will also increasingly reflect the competence and efforts of agents on sales,” he stated in the article.
- Home sellers and home buyers may need to shift their strategies. Under the previous commission structure, home buyers essentially paid no commission since their agent split the commission with seller’s agent. In the future, buyers may need to pay their agents themselves and negotiate this commission with the agent as either a flat fee or percentage of the sale.
Home buyers could still ask sellers for a price concession to help cover their agent’s commission. But this could put a buyer in a weaker negotiating position if there are multiple offers on a home, since the seller could accept an offer from another buyer who isn’t requesting a price concession.
- The practice of “steering” will become less common, if not eliminated. Previously, NAR required seller’s agents to post the commission paid to buyer’s agents on the database where homes were listed for sale (typically the MLS). This sometimes led buyer’s agents to “steer” their clients to more expensive homes where they would earn the highest commissions. The NAR settlement eliminates the requirement to post commissions paid to buyer’s agents, which should cut down on steering, if not eliminate it completely.
- There may be fewer real estate agents to choose from. NAR membership peaked at 1.6 million members in 2022 after a major influx of new Realtors® during the pandemic as mortgage rates fell and the housing market boomed. But many newer or part-time agents have struggled since interest rates have risen drastically over the past couple of years. In fact, half of all real estate agents sold just one home or less last year.
With the changes now coming to commissions, some experts predict a wave of departures by real estate agents in the coming years. For example, one investment banking firm predicts that one million agents will leave the field as a result of the new commission structure. Veteran agents with strong reputations and extensive networks will likely find it easier to stay in the industry than newer agents who are still struggling to find their footing.
Will Home Prices Fall?
It’s still unclear how the NAR settlement might affect home prices. At first glance it might seem like it would lower the total price since the agent commission may fall. The new rules from NAR don’t take effect until this summer so they won’t affect home sales during the spring buying season. This also gives buyers, sellers, and real estate agents a little bit more time to plan strategies for how they will adapt to the new environment.
https://www.nytimes.com/2024/03/15/realestate/nar-realtors-settlement-takeaways.html
