The longstanding 6% commission customary in home purchase transactions has been eliminated.
In a sweeping decision anticipated to significantly reduce the expenses associated with buying and selling homes, the National Association of Realtors revealed on Friday a settlement with groups of home sellers. This agreement marks the conclusion of landmark antitrust lawsuits, with the NAR agreeing to pay $418 million in damages and abolishing regulations concerning commissions.
National Association of Realtors
Representing over 1 million Realtors, the NAR has also committed to implementing a series of new regulations. One such regulation bars agents’ compensation from being listed on local centralized listing portals, known as multiple listing services (MLS), a practice criticized for incentivizing brokers to promote pricier properties to customers. Another regulation ends the obligation for brokers to subscribe to multiple listing services, many of which are NAR subsidiaries, where homes receive widespread exposure in local markets. Additionally, a new rule mandates that buyers’ brokers must establish written agreements with their clients.
This agreement effectively disrupts the current homebuying and selling business model, where sellers traditionally cover commissions for both their broker and the buyer’s broker, a practice criticized for artificially inflating housing prices.
According to TD Cowen Insights, real estate commissions are anticipated to decline by 25% to 50%, creating opportunities for alternative real estate selling models such as flat-fee and discount brokerages, which have had limited market share thus far.
Shares of real estate giants Zillow and Compass plummeted by over 13% on Friday as investors expressed concerns that reduced commission rates for agents might result in decreased business for real estate platforms.
In a 10-K filing last month, Zillow cautioned that “significant impacts on agent commissions could diminish the marketing budgets of real estate partners or reduce the participation of real estate partners in the industry, potentially impacting our financial health and operational outcomes.”
Similarly, shares of real estate brokerage firm Redfin experienced a nearly 5% decline.
Conversely, homebuilder stocks saw an uptick in response to the news: Lennar shares rose by 2.4%, PulteGroup shares by 1.1%, and Toll Brothers shares by 1.8%.
Brokerage Fees
For the average-priced American home listed at $417,000, sellers currently pay over $25,000 in brokerage fees. These costs are transferred to the buyer, inflating home prices across America. As per the analysis by TD Cowen Insights, this fee could decrease by $6,000 to $12,000.
Kevin Sears, president of the NAR, stated in a release, “Although the settlement comes with a substantial cost, we believe the advantages it will bring to our industry justify this expense.”
In November, a federal jury in Missouri found the NAR and two brokerages liable for $1.8 billion in damages for colluding to maintain artificially high agent commissions. Since this was an antitrust case, the NAR potentially faced triple damages amounting to $5.4 billion.
Although the NAR had planned to appeal the ruling, other brokerages settled, and eventually, the NAR also reached a settlement on Friday.
“In a statement, Nykia Wright, interim CEO of NAR, expressed, ‘NAR has devoted substantial effort over the years to reach a resolution in this litigation that benefits our members and American consumers. Preserving consumer choice and safeguarding our members to the fullest extent possible has always been our objective. This settlement accomplishes both aims.'”
The NAR previously mandated that home sellers disclose agent compensation when listing on a multiple listing service. While NAR consistently emphasized that commissions were negotiable and that this structure aided in making housing more accessible for buyers, critics contended that these fees were anticipated, leading home sellers to believe they might lose potential buyers if they didn’t offer them.
The Settlement has the Potential to Result in Reduced Expenses for Homebuyers
Sellers who initiated lawsuits against the NAR have contended that in a competitive market, the buyer’s agent commission should be borne by the buyer who benefits from the service, rather than by the seller. Those bringing the lawsuit against the NAR and brokerages argued that buyers should have the ability to negotiate this fee with their agents, absolving sellers from this financial responsibility.
This settlement, pending judicial approval, paves the way for a more competitive housing market. Realtors can now compete based on commission rates, enabling prospective buyers to compare rates before committing to a home purchase. Brokers may start advertising their fees, allowing clients to select lower-cost agents. Notably, the NAR did not specify a recommended fee in its announcement.
Norm Miller, professor emeritus of real estate at the University of San Diego, hailed this as the most significant change to the housing market in a century, remarking, “I’ve been anticipating this for 50 years.”
While the future landscape of the housing market remains uncertain, Miller anticipates an increase in homebuying activity as costs decrease significantly for buyers. He noted the potential for various models to emerge, with some brokers charging a flat fee, such as $3,000, for selling a home, while others may offer competitive commission rates.
Benjamin D. Brown, managing partner of Cohen Milstein Sellers & Toll and co-chair of its antitrust practice, who contributed to crafting the settlement, highlighted the sweeping reforms this agreement will bring to millions of Americans. He stated, “For years, anticompetitive regulations in the real estate sector have financially disadvantaged millions of Americans.”
Unfair System in the Real Estate Sector
Robert Braun, a partner in Cohen Milstein’s antitrust practice, noted that individual sellers often find themselves lacking the ability to negotiate better terms due to the risk of brokers diverting buyers elsewhere if lower commissions are offered.
Braun stated, “For too long, the real estate system has been viewed as inherently unfair by many home sellers. This class action lawsuit and subsequent settlement bring about justice for our clients and will enforce important reforms benefiting future home sellers.”
While the majority of realtors are part of the settlement, HomeServices of America is still contesting the case in court, according to the NAR.
The NAR explained that it had advocated for HomeServices of America agents to be included in the settlement, expressing satisfaction with over 1 million of its members agreeing to the terms.
Wright, in a statement, mentioned, “Continuing legal battles would have negatively impacted our members and their small businesses. While perfection isn’t possible, this settlement represents the best outcome given the circumstances.”
Miller warned that the settlement might lead to a significant number of brokers leaving the industry, potentially up to half of the 2 million agents in America.
He pointed out that lower fees could prompt less effective agents to exit, while top brokers stand to gain more business. “The competent ones will certainly thrive,” Miller added.
Miller also highlighted the contrast in fees between America and other countries, noting that brokers in Israel, Singapore, and the UK typically charge between 1% to 2%, considerably lower than agents in the United States.
You may also want to read: Beyond Numbers: Understanding Interest Rates’ Role in Home Acquisition Power
Years of trouble for NAR
The NAR has been embroiled in legal battles with US antitrust officials for years over alleged anti-competitive practices. However, the verdict in November represented a significant setback for the association, leading to the dissolution of longstanding rules safeguarding its compensation structure.
Additionally, the NAR is under scrutiny from the US Department of Justice, and it remains uncertain whether the settlement with sellers will impact the government’s examination of the brokerage industry.
The organization has also experienced significant leadership upheaval in recent times. Tracy Kasper, the former NAR president, resigned in January amid claims that she faced threats to disclose a personal matter unless she compromised her position. Sears assumed the presidency earlier this year.
Kasper had assumed the role in August 2023 following Kenny Parcell’s resignation due to sexual harassment allegations reported by the New York Times. NAR staff members alleged that Parcell engaged in inappropriate behavior, including unwelcome physical contact and sending explicit messages and images. Parcell denied these allegations in the Times article.
In November 2023, Bob Goldberg, NAR’s chief executive, also stepped down and was replaced by Wright. Goldberg’s resignation came shortly after the $1.8 billion judgment against the NAR.
