A significant agreement was made between the National Association of Realtors (NAR) and home sellers on Friday which might result in big changes in the real estate world.
The complete effects of the $418 million settlement on the U.S. housing market are not yet clear.
However, the NAR’s agreement to eliminate long-standing regulations about broker commission fees will greatly reduce a major expense for Americans when selling their homes.
Vasi Yiannoulis-Riva, a partner at Withers law firm in New York, said, "It’s completely changed the current system as we know it," to The Hill.
This agreement resolves four antitrust cases which accused the influential realtor organization of collaborating with real estate brokerage firms to establish regulations that required home sellers to pay buyer broker fees, resulting in inflated rates, as claimed by the cases.
Most home sellers currently pay around 5 to 6 percent in commission fees, divided between their own broker and the buyer’s broker. For a $1 million home, this could be $50,000 to $60,000 in fees.
Under the now eliminated NAR rules from the 1990s, sellers had 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 encouraged sellers to offer higher commission fees to buyer brokers, as they would be more likely to show homes with higher fees to potential buyers.
Tomasz Piskorski, a real estate professor at Columbia Business School, said, “Buyers and sellers lose some money because they have to pay these agent fees that would otherwise be lower.”
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Marty Green, a principal at mortgage law firm Polunsky Beitel Green, said, "Buyer broker fees are more likely to be “more heavily negotiated” and reduced following the settlement.
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 result in a significant shift for home buyers as they negotiate commission fees with brokers or even choose not to hire a broker, according to Yiannoulis-Riva.
“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 rise of new technology, home buyers are increasingly doing much of the work of finding a home on their own before involving a real estate agent, Piskorski noted.
“It’s very difficult to argue that these fees should be as inflexible as they are,” he said.
While Piskorksi said he believes the change will help consumers by reducing the cost of owning a home, he doesn’t expect a “dramatic change in home prices.”
“It’s a positive thing for consumers because the $20, $30 billion that goes to real estate agents every year might stay with homeowners,” he said.
“But I certainly don’t see 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 risen sharply since the start of the pandemic, which slowed new construction while low interest rates increased 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 risen 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, mentioned 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.”
