Realtors’ settlement could dramatically change cost of housing sales

“Ultimately, continuing to litigate would have hurt members and their small businesses,” said Nykia Wright, interim chief executive of NAR. “While there could be no perfect outcome, this agreement is the best outcome we could achieve in the circumstances.”

NAR said it continues to deny wrongdoing.

The rule changes have the strong potential to lower fees paid by sellers in home sales — and may even bring down home prices overall — by aligning fees closer to the true value of real estate agent services, according to consumer advocates, academics and lawyers involved in the cases.

“There’s no doubt in my mind that this is going to bring about tremendous savings to homeowners,” said Michael Ketchmark, a plaintiff attorney representing Missouri home sellers in one of the cases, adding that he was confident that agreement would fundamentally change the real estate market and help lower the cost of housing and home sales.

Benjamin D. Brown, managing partner at Cohen Milstein, which represented the plaintiffs in the Illinois case, said that the “settlement will bring sweeping reforms that will help countless American families.”

The association’s century-old commissions structure provided that sellers’ and buyers’ agents split an amount that typically ranges between 5 and 6 percent of the home sale price. Home sellers in Illinois and Missouri alleged in a pair of class-action lawsuits that NAR’s rules artificially inflated commissions by requiring sellers’ agents to make a compensation offer to list on the Multiple Listing Service, a home selling database.

In October, a Kansas City, Mo., jury found that NAR and major brokerages conspired to keep commissions artificially high and awarded a class of Missouri home sellers $1.8 billion in damages. Meanwhile, the case in Illinois had been moving toward a trial, focused on similar allegations. The agreement announced Friday, if approved by a judge, would resolve those cases and end the long-standing commissions structure, said Ketchmark, who represented the Missouri plaintiffs.

Since the October verdict, experts predicted that the commissions system was poised for change. Not only was it threatened by the class-action cases, but the Justice Department had been asking the U.S. Court of Appeals for the District of Columbia Circuit to reopen an antitrust investigation into NAR’s commissions rules that it had settled in 2020.

Experts say the proposed rule changes will result in a “decoupling” of commissions that have been traditionally borne by the seller and shared with the buyer’s agent — a system that critics say was anticompetitive and kept fees high.

The settlement unveiled Friday would bar seller agents from using multiple listing services — Realtor-accessible databases where new homes are marketed — to post commissions they offer to buying agents. The option to denote buyer compensation will simply not appear in the multiple listing services, according to attorneys involved in the case.

If a federal court approves the settlement, the rules will take effect in July, according to a person close to the settlement talks who spoke on the condition of anonymity because they were not authorized to discuss it publicly.

It’s likely that agents representing buyers will now have to seek compensation directly from their clients because they will no longer get a guaranteed commission from the seller, according to Sonia Gilbukh, assistant professor at CUNY Baruch College.

That could make it harder for cash-strapped parties to buy a home, she said. But she added that commissions should decrease, attracting less-experienced Realtors and exerting downward pressure on prices. Sellers, Gilbukh said, probably will see lower transaction costs if they no longer pay buyers’ commissions.

“It might take time for the industry to shake out into a new equilibrium,” Gilbukh said. “But overall, the reduced transaction fees should bring the [home] prices down.”

The new system would not necessarily hurt low- and lower-income buyers, said Jenny Schuetz, a senior fellow at the Brookings Institution focused on housing. Already, closing costs like buying down points or paying for title insurance get bundled into mortgage loans, and a buyer agent’s fee could similarly be included in the loan. Plus, if sellers halve the fee they’re paying to real estate agents, they might sell their home at a lower price because they keep more of the proceeds, Schuetz said.

“This doesn’t have to be bad for low-income, first-time home buyers if we put in place supports so they understand how the process works, are empowered to negotiate with brokers over this and understand going into it what they’re getting,” she said.

Steve Brobeck, a senior fellow with the Consumer Federation of America, which has long studied the commissions issue, agreed that the agreement has the potential to shake up the industry — and he said it’s for the best.

“NAR has done the sensible thing and agreed to try to put this controversial issue behind them,” he said.

Consumers “will be the big beneficiaries,” said Brobeck, whose organization estimates that they will save $30 billion per year. “But these savings will not materialize until the industry and consumers adjust to a more competitive and transparent market,” Brobeck added.

Others analysts also expect large savings for consumers. An October report by investment firm Keefe, Bruyette & Woods predicted that changes to the commissions structure could eventually result in a 30 percent reduction in the $100 billion annually that U.S. consumers pay in real estate commissions.

The settlement would set up two negotiations in the home sale process — one between the buyer and their agent, and another between the seller and their agent, Schuetz said.

“It’s going to be really interesting to see, particularly on the buyer side, how much buyers are willing to pay in a fee to their broker to help them purchase a home, when before there was sort of this impression that buyers didn’t pay a fee at all,” Schuetz said.

In general, she said, people tend to be more sensitive to a tax or fee that is written out, rather than baked into the price. But buyers’ needs vary widely, depending on their level of knowledge, the local market and the complexity of the transaction. Ideally, Schuetz said, agents will offer fees that match their skill level and the actual services provided — what others have referred to as an “a la carte” model.

“I could see some buyer’s agents marketing themselves as, ‘We are a full-service agent, we help you do all the things, we make this easier for you, and we charge a higher fee,’ ” Schuetz said. “And other buyer’s agents saying, ‘Hey, we’re working with buyers who don’t need a ton of help. We’re kind of cut-rate, we’ll offer you a reasonably low fee.’ ”