Consumers expect big savings from a National Association of RealtorsThe brokerage commission class action lawsuit could spell disappointment instead.
The deal was cheered by President Joe Biden, who said in one example that it could “save home buyers and sellers up to $10,000,” and by former Treasury Secretary Larry Summers, who said that breaking up the “realtor cartel” It could save US households $100 billion over time. But the true benefits remain unclear, especially for first-time buyers who need the most help.
It comes at a precarious Time for the housing market as higher mortgage rates pushed sales last year to their lowest level in nearly three decades. It’s particularly difficult for first-time buyers looking to enter one of the most unaffordable markets in history. In theory, the agreement could lead to lower property prices by reducing commissions. But experts say this is not a given, especially in the short term.
“No seller I have encountered is going to lower the price just because their transaction costs have gone down,” said Steve Murray, senior adviser at data provider and advisor Real Trends. “That will not happen.”
The NAR said in a statement responding to Biden’s comments that commissions were negotiable before the settlement agreement and will continue to be so.
“Real estate agent commissions are determined by the market and are not the cause of the affordability crisis,” the NAR said.
How the changes will play out and how they will affect the market is the subject of heated debate, partly because no one really knows.
The decades-old system for paying U.S. agents has long been controversial. Sellers typically pay their agent a 5% or 6% commission. The agent then splits the money with the buyer’s agent. Critics argue that the structure drives up costs and creates bad incentives.
In October, a Missouri jury handed down a $1.8 billion verdict that found the NAR and others guilty of colluding to keep prices high. The NAR is responsible for settling this and other cases agreed Earlier this month, the company paid sellers around $418 million and announced it would change some of its rules. In the most significant change, the trade group would ban sellers from providing compensation details on the multiple listing service, long the primary tool for marketing homes.
This change, which is expected to take effect this summer pending court approval, could encourage sellers to negotiate lower commissions. However, there is a lot of speculation in the industry that brokers will find ways to discuss commission splits in other ways, such as on broker websites.
“I expect commissions to decline to 4% to 5% over time, although it will vary depending on home price and geographic location,” said Mark Zandi, chief economist at Moody’s Analytics. “It is a significant change but is likely to be gradual. I expect the seller will take most of the profit, so the impact on property prices will be small.”
Possible results
The comparison was a hot topic at the American Real Estate Society’s annual meeting of academics in Orlando this week. Ken H. Johnson, a real estate professor at Florida Atlantic University and a former real estate agent, was in attendance and discussed the possible outcomes with colleagues.
Even when asked who benefits from lower commissions – buyers or sellers – there is no easy answer, he said. In theory, the seller should pass some savings on to the buyer, but in a seller’s market, perhaps not as much.
And it could encourage more first-time homebuyers, who sometimes lack the money to pay agents up front, to go it alone, according to Johnson. It is likely that more and more buyers will turn to brokers directly to avoid commission costs. However, this could lead to more agents with potential conflicts of interest representing both buyers and sellers who pay them.
“Now some buyers will have to pay out of pocket or perhaps buy cheaper homes,” Johnson said.
Another big question looms over the industry. The Justice Department has Target taken in the division of commissions and advocated a complete decoupling of remuneration for seller and buyer representatives. It remains to be seen whether the NAR agreement will satisfy regulators.
New rules
Agents are already adapting to the new rules under the proposed settlement. In New York, broker Keith Burkhardt is working on a new all-inclusive service that offers help with valuing properties, negotiating deals and navigating the city’s co-op and condo markets. He expects pricing to be key and estimates buyers will be charged between $5,000 and $7,500.
Meanwhile, buyer agents also need to work harder to explain how they add value to any deal, according to Iain Phillips, a real estate agent in California.
The settlement is a start, said Larry Summers, a paid employee of Bloomberg Television Wall Street Week with David Westin. However, most observers do not expect major changes to occur overnight.
“Right now everyone is translating that judgment into what they want,” said Mike DelPrete, who teaches real estate technology courses at the University of Colorado Boulder. “Some people say not much will change. Others want it to be a seismic shift for the industry. The whole thing is driven by fear and uncertainty.”
– With support from Jennifer Epstein, Paulina Cachero and Chris Anstey