A major shift in how Americans buy homes could come this summer after a powerful real estate group settled an antitrust lawsuit, agreeing to change a rule that dictates how real estate agents are compensated.
If the settlement is approved by a judge, the rule change will start in mid-July, leaving the real estate industry scrambling over what the future of buying or selling a home will look like.
Here’s what we know about the settlement and what it could mean for the housing market in the US.
What’s changing
Home sellers and buyers get their own agents, who are supposed to help them navigate the market. Most agents are members of the National Association of Realtors (NAR), paying dues to be a part of the organization of 1.5 million agents.
Being part of the NAR gives agents access to the organization’s listings, known as “multiple listing service” or the MLS, where seller agents can post properties up for sale and where buying agents can see what homes are on the market.
Currently, the NAR has a rule that requires seller agents to include the commission that is being paid to sell the house. The standard rate ranges from 5% to 6%, meaning commission on the US average home at the end of 2023, $391,700, could reach up to $23,502. Though sellers are the ones that pay the commission, the compensation is usually split between the seller’s agent and the buyer’s agent.
NAR has emphasized that the organization does not establish commission rates at 5% to 6% as a rule and that commissions are technically negotiable. Rather, the organization requires seller agents to list a commission, which is usually the standard rate.
As part of the settlement, NAR said it will no longer allow commission rates to be posted on its listings. The organization is also requiring buyer agents to have written agreements with buyers they work with.
Why this change is a big deal for homebuyers
Consumer advocates are praising the settlement as a step toward transparency in the home-buying marketplace.
“From a consumer standpoint, this is a complicated, opaque marketplace,” said Steve Brobeck, a senior fellow at the Consumer Federation of America who has written extensively about the real estate industry. After the settlement, the marketplace “will become a little less opaque”.
The settlement could ultimately change what is baked into the sale price of a home, making clear to buyers exactly what they are paying for.
Because seller agents and buyer agents usually split commission, which is paid for by a home seller, many homebuyers do not pay their agents directly. Rather, sellers increase the price of their homes to compensate for the commission they pay the real estate agents.
In other countries, commissions on real estate transactions tend to be lower. In the UK, the average commission is 1.3%, in Australia, it is 2.5%.
“The decoupling of seller agent and buyer agent fees allows for a lot more flexibility and novelty in how agents are going to get paid,” said Max Besbris, associate professor of sociology at the University of Wisconsin-Madison. “The possibilities are more open now than ever before. We’re really going to see, generally, a lot more transparency.”
Since buyer agents will be required to write up agreements with their clients, buyers will have more room to negotiate commissions with their agents, depending on what services they need from them. Some may opt for a flat-rate fee or pay their agent by the hour.
With the settlement upending the default relationship many buying agents have with their clients, homebuyers are going to have to become more savvy about what they can get from an agent and what services they are willing to pay for.
“It’s going to take a lot more consumer information and education to know that there are alternatives and other kinds of fee structures,” Besbris said.
Some buyer agents may still try to split commission with seller agents who advertise their commission on other platforms besides the MLS, but maintaining the practice will be harder for agents with the new rule.
Will this bring home prices down?
It’s unclear whether this change will have an impact on home prices, at least in the short-term. Experts agree that home prices won’t be impacted any time soon.
While sellers could price their homes lower because they no longer shoulder the cost of the seller and buying agents, many buyers will still be paying for their own agent, just in a more direct way. Thus the overall cost of buying a home could remain the same.
But the settlement can empower buyers to negotiate how much they pay their agent, which could also lead to an overall lower cost of buying a home.
A more transparent marketplace
While it’s unclear what changes the settlement will bring to home prices, experts agree that it will likely change who gets to continue working in the real estate industry.
The settlement will probably encourage buyers to become more invested in who they choose as their agent, as they will be paying them more directly, making it more competitive for buying agents to find clients.
Consumer advocates have argued that there is a glut of real estate agents working in the field, given the licensing process to become an agent is fairly simple. While there is demand for real estate agents with experience, some working in the field don’t always work in good faith.
“It’s very difficult to police this marketplace because the regulators have limited resources, and they’re not fully committed to this. It’s very difficult to see ethical and even legal violations,” Brobeck said. “A lot of this is just oral agreements between listing brokers, listing agents and buyer agents.”
The settlement could mean a “more experienced pool of real estate agents and, ultimately, better service for more competitive prices” for buyers, said Sonia Gilbukh, assistant professor of real estate at Baruch College.
“The high fixed fees that don’t depend on experience is what kept a lot of people in the market. Even working with just one deal makes it worthwhile for people to stay,” Gilbukh said.
What prompted the settlement
The settlement comes out of a series class-action lawsuit from home sellers who argued it was unfair they had to cover the commissions of buyer brokers.
The NAR agreed to pay $418m in damages and to change its commission rules to settle the suits.
In October, a federal jury had found the NAR guilty in on one of the suits, finding the organization and other residential brokerages liable for $1.78bn in damages for conspiring to artificially inflate commissions.
NAR has denied the price-fixing allegations. In a statement, NAR’s interim CEO, Nykia Wright, said that the organization’s goal is “to preserve consumer choice and protect our members to the greatest extent possible”.
“This settlement achieves both of those goals,” Wright said. While there could be no perfect outcome, this agreement is the best outcome we could achieve in the circumstances. It provides a path forward for our industry, which makes up nearly one-fifth of the American economy, and NAR.”
A powerful industry group heels
That the settlement is expected to have such a widespread impact on real estate transactions shows just how much power NAR has over the industry, experts point out.
“It is a very big deal to see them take a loss,” Bresbis said. “They haven’t really had to in the entirety of their existence, maybe since the New Deal.”
The group, which was founded in 1908, has $1bn in assets and has been a powerful lobbying arm for the real estate industry.
But the industry has been going through intense changes over the last decade. Record-high home prices have left many homebuyers disgruntled by the market – a majority of renters in a recent Harris poll indicated that the American dream of buying a home is dead – and new technology has empowered buyers with more information about the market. Instead of relying solely on a broker, homebuyers can also turn to websites like Zillow or Redfin – both alternatives to the NAR’s MLS – to try to find their home.
NAR’s settlement shows how the organization, while still powerful in the real estate industry, is starting to wobble under these pressures.
“For so many decades, NAR was essentially the central organization in determining the shape of housing policy,” Besbris said. “To see them on the backfoot is a big shift in how much power they have.”
