March 15, 2024 (CNN: Real Estate Commissions in the US Upended After 100 Years)
A major change is happening in the US real estate market. For the first time in a century, the home sales commission structure is being completely overhauled.
The National Association of Realtors (NAR) announced on Friday that it has reached a settlement with a group of home sellers who filed an antitrust lawsuit. As part of the agreement, NAR will pay $418 million in damages and abolish its commission rules.
Until now, it has been a common practice for home sellers to pay a total commission of 6%, with 3% going to the seller's agent and 3% to the buyer's agent. This has been criticized as a factor that inflates home prices. However, this commission structure is expected to disappear moving forward.
NAR has also agreed to introduce new regulations. First, agents will be prohibited from publishing their compensation on the Multiple Listing Service (MLS), the regional real estate information sharing system. This is because there have been concerns that agents were incentivized to promote higher-priced homes through the MLS.
Additionally, the requirement for agents to join an MLS owned by an NAR subsidiary has been removed. Buyer's agents must now have a written contract with the buyer.
This settlement effectively undermines the current model of home sales, where sellers pay commissions to both their agent and the buyer's agent. Experts predict that real estate commissions could decrease by 25% to 50% going forward.
Different home sales methods, such as fixed commission structures or discounted brokerage services, are expected to gain traction.
As a result, the stock prices of real estate platform companies have fallen. Zillow and Compass saw their shares drop by more than 13%, due to concerns that lower commissions could lead to fewer transactions. On the other hand, homebuilder stocks rose, with Lennar up 2.4%, PulteGroup up 1.1%, and Toll Brothers up 1.8%.
The current average price of a home in the US is $417,000. With a 6% commission, that adds more than $25,000 in costs. TD Cowen Insights estimates that the commission reduction could lower home-buying costs by $6,000 to $12,000.
While NAR faced considerable costs in defending the lawsuit, it stated that this settlement was necessary for the industry's progress.
NAR President Kevin Sears said, "While the payment of the settlement money will be a significant expense, it will be a benefit to our industry." He added, "NAR has worked for a long time to find a resolution to this litigation that is in the best interests of our members and consumers."
Last November, a federal jury in Missouri ordered NAR and two brokerage firms to pay $18 billion in damages for allegedly conspiring to inflate commission rates. As an antitrust case, NAR faced potential damages of up to $54 billion. Ultimately, NAR agreed to the settlement to withdraw the lawsuit.
Experts predict that this settlement will bring massive changes to the housing market. Norm Miller, an emeritus professor of real estate at the University of San Diego, called it "the biggest change in how homes are sold" and said, "We've waited 50 years for this."
Professor Miller expects home sales to increase somewhat due to lower transaction costs. However, he added that it remains uncertain what new home sales models will emerge. Some options could include a flat fee of $3,000 per home or competitive commission rates.
Professor Miller also predicted that up to half of the current 2 million real estate agents could leave the profession due to reduced income from lower commissions. He suggests that average agents may depart, leaving only exceptional agents in the business.
Meanwhile, NAR is also facing an antitrust investigation by the U.S. Department of Justice. It is unclear how this settlement will affect the government's probe. Over the past year, NAR's leadership has undergone significant changes.
In January, former NAR President Tracy Casper resigned, citing threats of personal information being exposed. Kenny Parcell, who took over as president in August 2022, also stepped down due to sexual harassment allegations. In November, NAR CEO Bob Goldberg resigned just two days after the $18 billion verdict.
March 22, 2024: How do real estate agent fees and commissions work?