16 March 2024
(The Hill) — A major settlement reached between the National Association of Realtors (NAR) and home sellers Friday could bring significant changes to the real estate world.
The full implications of the $418 million settlement for the U.S. housing market are not yet clear.
Even so, NAR’s agreement to scrap longstanding rules governing broker commission fees will slash a key expense Americans face when selling their homes.
“It’s totally upended the current system as we know it,” Vasi Yiannoulis-Riva, a partner in the New York real estate team at Withers law firm, told The Hill.
The agreement settles four antitrust cases that accused the powerful realtor organization of working with real estate brokerage firms to establish rules requiring home sellers to pay buyer broker fees, which they argue resulted in inflated rates.
Most home sellers currently pay about 5 to 6 percent in commission fees, split between their own broker and the buyer’s broker. For a $1 million home, this could amount to $50,000 to $60,000 in fees.
Under the newly scrapped NAR rules, which were enacted in the 1990s, sellers were required to pay for the broker representing the buyer and offer a commission for the buyer’s broker when initially listing a property.
The realtor group, which denied any wrongdoing, argued that these rules “help make professional representation more accessible, decrease costs for home buyers to secure these services, increase fair housing opportunities, and increase the potential buyer pool for sellers.”
However, the lawsuits alleged that this incentivized sellers to offer higher commission fees to buyer brokers, since they would be more likely to show homes with higher fees to potential buyers.
“Buyers and sellers lose some money because they have to pay these agent fees that would otherwise be lower,” said Tomasz Piskorski, a real estate professor at Columbia Business School.
Buyer broker fees are more likely to be “more heavily negotiated” and reduced following the settlement, said Marty Green, a principal at mortgage law firm Polunsky Beitel Green.
Piskorski suggested that the NAR’s decision to eliminate these rules could drive down broker commission fees by 20 to 30 percent.
This could also produce a “pretty seismic shift” for home buyers, as they negotiate commission fees with brokers or even opt not to hire a broker, Yiannoulis-Riva said.
“I think on the sell side, you’re still going to see sellers entering into agreements with selling agents because … it’s a little easier to see sort of the value that a broker adds because there’s a lot of work that goes into preparing a house for sale and marketing,” she said.
With the advent of new technology, home buyers increasingly do much of the work of finding a home on their own before involving a real estate agent, Piskorski noted.
“It’s very hard to argue that these fees should be as rigid as they are,” he said.
While Piskorksi said he thinks the shift will benefit consumers by lowering the cost of homeownership, he doesn’t foresee a “dramatic change in home prices.”
“It’s a good thing for consumers for sure because the $20, $30 billion that goes to real estate agents per year might stay with owners of the home,” he said.
“But I certainly don’t view it as solving the so-called affordability problem in the U.S.,” Piskorsksi added. “I think it will increase liquidity, may encourage housing turnover, maybe a little bit more listings, but I don’t see it as a game changer in this regard.”
Housing costs have skyrocketed since the beginning of the pandemic, which throttled new construction while low interest rates fueled demand.
The average price of an existing single-family home in January was $379,100, up 5.1 percent from one year earlier, according to NAR data. Home prices rose in 85 percent of U.S. cities in the fourth quarter of last year, with 15 percent posting double-digit increases.
Mortgage rates have also climbed above 7 percent, as the Federal Reserve has raised interest rates to a two-decade high over the past two years.
Both Piskorski and Greene cautioned that any changes from the NAR settlement won’t happen “overnight.”
“The industry will be in transition as everyone digests the settlements and market forces begin working,” Green said in a statement.
The settlement was likely the “only viable resolution” for NAR, Green added, after a federal jury in October found that the realtor group had conspired with brokerage firms to inflate commission fees.
It was ordered to pay $1.8 billion in damages, a total that could have been tripled to more than $5 billion under antitrust law.
“It’s been evident since the jury in Kansas City delivered a multi-billion verdict, after barely a few hours of deliberations, that a global settlement including NAR was the only viable resolution,” Green said in a statement.
“In my view, NAR made the correct choice to resolve the claims because the settlement, although extraordinarily expensive, provides a path forward where NAR can help the industry navigate the path to a new commission structure that becomes more negotiable,” he added.
Nykia Wright, interim CEO of NAR, noted in a statement Friday that continuing to litigate the issue would have ultimately “hurt members and their small businesses.”
“While there could be no perfect outcome, this agreement is the best outcome we could achieve in the circumstances,” she said. “It provides a path forward for our industry, which makes up nearly one fifth of the American economy, and NAR.”