Consumers expecting big savings from a National Association of Realtors’ class-action settlement over agent commissions may instead be disappointed.
The deal drew plaudits from President Joe Biden, who said it “could save home buyers and sellers up to $10,000,” and former Treasury Secretary Larry Summers, who said breaking the “ real estate cartel” could save US families $100 billion. over time. But the real benefits remain unclear, especially for first-time buyers who need help the most.
This comes at a precarious time for the housing market, with higher mortgage rates pushing sales last year to their lowest level in nearly three decades. It’s especially difficult for first-time buyers looking to enter one of the most inaccessible markets in history. In theory, the deal could result in lower home prices by pushing down commissions. But experts say that this is not a given, especially in the short term.
“No seller I’ve met would lower the price just because the cost of the transaction has gone down,” said Steve Murray, senior advisor at data provider and consultant Real Trends. “That won’t happen.”
NAR said in a statement responding to Biden’s remarks that the fees were already negotiable before the settlement agreement and will continue to be.
“Realtor commissions are market-driven and are not the cause of the affordability crisis,” the NAR said.
How the changes will spread and impact the market is a matter of heated debate, in part because no one really knows.
The decades-old system for how U.S. agents are compensated has long been controversial. Sellers typically pay a commission to their agent of 5% or 6%. The listing agent then splits the money with the buyer’s representative. Critics argue that the structure inflates costs and creates bad incentives.
In October, a Missouri jury returned a $1.8 billion verdict that found NAR and others responsible for colluding to keep prices high. To settle this case and others, NAR agreed earlier this month to pay the sellers about $418 million and said it would change some of its rules. In the biggest move, the trade group would block sellers from including compensation details in the multiple listing service, which has long been the most important tool for marketing homes.
This change, which goes into effect this summer subject to court approval, could encourage sellers to negotiate lower commissions. But the industry is rife with speculation that agents will find ways to discuss commission splits through other methods, such as on brokerage websites.
“I expect fees to fall 4% to 5% over time, with variations based on home price and geography,” said Mark Zandi, chief economist at Moody’s Analytics. “This is a significant, but probably gradual, change. I expect the majority of the profit to be captured by the seller, so the impact on house prices will be minimal.”
Possible results
The deal was a hot topic at the American Real Estate Society’s annual gathering of academics in Orlando this week. Ken H. Johnson, a real estate law professor at Florida Atlantic University and a former broker, was in attendance, weighing possible outcomes with colleagues.
The question of who will benefit from lower fees – buyer or seller – also has no simple answer, he said. In theory, the seller should pass on some savings to the buyer, but perhaps not so much in a seller’s market.
And it could encourage more first-time homebuyers, who sometimes don’t have the money to pay brokers upfront, to go it alone, according to Johnson. More buyers are likely to turn to listing agents directly to avoid having to shell out commission costs. But that could mean more agents with potential conflicts of interest, representing buyers as well as the sellers who pay them.
“Now some buyers will have to pay out of pocket, or perhaps purchase less expensive homes,” Johnson said.
Another big question looms over the industry. The Justice Department has taken aim at commission sharing, advocating complete decoupling of compensation for seller and buyer representatives. It remains to be seen whether the NAR deal will satisfy regulators.
New rules
Agents are already adapting to the new rules under the proposed agreement. In New York, broker Keith Burkhardt is working on a new flat-fee service to assist with valuing properties, negotiating deals and navigating the city’s co-op and condo boards. He believes pricing will be key and estimates buyers will be charged between $5,000 and $7,500.
Meanwhile, buyers’ agents will also have to work harder to explain how they will add value to any deal, according to Iain Phillips, a real estate agent in California.
The deal is a start, said Larry Summers, a paid contributor to Bloomberg Television Wall Street Week with David Westin. But most observers don’t expect huge changes to happen overnight.
“Right now, everyone is making this ruling into what they want it to be,” said Mike DelPrete, who teaches courses on real estate technology at the University of Colorado Boulder. “Some say not much will change. Others want it to be a sea change for the sector. It’s all driven by fear and uncertainty.”
— With assistance from Jennifer Epstein, Paulina Cachero and Chris Anstey