American homeowners could see a significant drop in the cost of selling their homes after a real estate trade group agreed to a landmark deal that will eliminate a bedrock of the industry, the 6% sales commission.
The National Association of Realtors, a powerful organization that has set the guidelines for home sales for decades, has agreed to settle a series of lawsuits by paying $418 million in damages and by eliminating its rules on commissions.
The deal, which lawyers anticipate will be filed within weeks and still needs a federal court's approval, would end a multitude of legal claims from home sellers who argued that the rules forced them to pay excessive fees.
In a statement, Nykia Wright, the interim chief executive of NAR, said "It has always been our goal to preserve consumer choice and protect our members to the greatest extent possible. This settlement achieves both of those goals."
Kadi Brown, president of the Greater Chattanooga Association of Realtors (GCAR), said she believes that overall the NAR agreement "is positive and provides a path forward for consumers and Realtors.
"It reinforces the importance of representation agreements to help consumers understand exactly what services and value will be provided by their Realtor and for how much," Brown said in her monthly report to GCAR members. "Also, the proposed agreement retains consumers' rights to continue to have cooperative compensation as an option."
Housing experts said the deal, and the expected savings for homeowners, could trigger one of the most significant jolts in the U.S. housing market in 100 years.
"This will blow up the market and would force a new business model," said Norm Miller, a professor emeritus of real estate at the University of San Diego.
Americans pay roughly $100 billion in real estate commissions annually, and real estate agents in the United States have some of the highest standard commissions in the world. In many other countries, commission rates hover between 1% and 3%. In the United States, most agents specify a commission of 5% or 6%, paid by the seller. If the buyer has an agent, the seller's agent agrees to share a portion of the commission with that agent when listing the home on the market.
An American homeowner currently looking to sell a $1 million home should expect to spend up to $60,000 on real estate commissions alone, with $30,000 going to his agent and $30,000 going to the agent who brings a buyer. Even for a home that costs $400,000 — close to the current median for homes across the United States — sellers are still paying around $24,000 in commissions, a cost that is baked into the final sales price of the home.
Legal counsel for NAR approved the agreement March 15 and The New York Times obtained a copy of the signed document.
The lawsuits argued that NAR, and brokerages who required their agents to be members of NAR, had violated antitrust laws by mandating that the seller's agent make an offer of payment to the buyer's agent, and setting rules that led to an industrywide standard commission of 5% or 6%. Without that rate essentially guaranteed, agents will now most likely have to lower their commissions as they compete for business.
Economists estimate that commissions could now be reduced by 30%, driving down home prices across the board. The opening of a free market for Realtor compensation could mirror the shake-up that occurred in the travel industry with the emergence of online broker sites such as Expedia and Kayak.
"The forces of competition will be let loose," said Benjamin Brown, co-chair of the antitrust practice at Cohen Milstein and one of the lawyers who hammered out the settlement. "You'll see some new pricing models, and some new and creative ways to provide services to homebuyers. It'll be a really exciting time for the industry."
The policy changes could help spur price competition for agents' services and lower the cost for sellers who now typically cover the commission for the buyer's agent, as well as that of their own. In turn, more homebuyers could face pressure to pay for their agent's commission out of pocket. That could be a challenge, especially for buyers already stretching financially to make a down payment and cover other upfront costs involved in buying a home.
Still, housing market watchers say it can't be immediately determined how significantly any changes that potentially shift the cost of hiring an agent to a homebuyer will affect home sales. An adjustment period is likely as buyers, sellers and agents figure out how to navigate what comes next.
"I just think it's too soon to tell," said Greg Kling, an associate professor at the University of Southern California Marshall School of Business who has taught and written about real estate taxation. "We're going to either see prices are going up for buyers, or the market is going to correct itself."
The original lawsuit, filed in April 2019 by a group of Missouri home sellers, ended in a verdict of $1.8 billion in October. Because the suit included accusations of antitrust violations, plaintiffs could have been eligible for triple damages of up to $5.4 billion. In exchange for the reduction in damages, the association gave up its right to appeal. The verdict sent shock waves through the real estate industry and has since catalyzed into more than a dozen copycat suits across the country, including a nationwide class-action case that ensnares the country's largest brokerage and its owner, Warren Buffett. That brokerage, Berkshire Hathaway, has not settled, but others, including Keller Williams and Re/Max, have settled in separate cases. NAR now joins them.
Under the settlement, tens of millions of home sellers will likely be eligible to receive a small piece of a consolidated class-action payout.
The legal loss struck a blow to the power wielded by the organization, which has long been considered untouchable, insulated by its influence. Founded in 1908, NAR has more than $1 billion in assets, 1.3 million members and a political action committee that pours millions into the coffers of candidates across the political spectrum.
The antitrust division of the Department of Justice is continuing its investigation of NAR's practices, including the organization's oversight of databases for home listings, called multiple listing sites or the MLS. The sites are owned and operated by NAR's local affiliates. For decades, the Justice Department has questioned whether these databases stifle competition and whether some NAR rules foster price-fixing on commissions.
Some experts said the shift on commission structure, and the billions of dollars that would flow into the housing market as a result, could spark a recovery in the housing market, going so far as to say that it could be as significant as the 1930s New Deal, a flurry of legislation and executive orders signed by President Franklin D. Roosevelt designed to stabilize and rebuild the nation's economic recovery following the Great Depression. This included the Better Housing Program, which was designed to make housing and mortgages more accessible and led to the creation of the Federal Housing Administration.
The financial crisis of 2008, when home values imploded, and earlier changes to the mortgage industry in the 1970s and 1980s, including the creation of Freddie Mac and the introduction of the adjustable rate mortgage, also set off permanent transformations. With Friday's settlement, the process of buying and selling a home is now in for another historical change.
"This will be a really fundamental shift in how Americans buy, search for, and purchase and sell their housing. It will absolutely transform the real estate industry," said Max Besbris, an associate professor of sociology at the University of Wisconsin-Madison and the author of "Upsold," a book exploring the link between housing prices and the real estate business. "It will prompt one of the biggest transformations to the housing market since New Deal-era regulations were put in place."
The October verdict landed at a time of swirling controversy for the organization, and in the last five months, its internal turmoil reached a fever pitch. Its chief executive, Bob Goldberg, announced in a closed-door meeting that he would retire, just days after the verdict. His exit followed that of NAR President Kenny Parcell, who resigned in August two days after a Times investigation revealed widespread allegations of sexual harassment.
In January, NAR's new president, Tracy Kasper, who had stepped into the role early with a pledge of reshaping the organization's culture and fighting the lawsuits at all costs, announced her own sudden exit after NAR said Kasper was the target of blackmail.
Despite NAR's turbulence over the last several months, however, there was one constant: their insistence that the lawsuits were flawed and they intended to appeal. With Friday's settlement agreement, NAR gave up the fight.
The settlement includes many significant rule changes. It bans NAR from establishing any sort of rules that would allow a seller's agent to set compensation for a buyer's agent, a practice that critics say has long led to "steering," in which buyers' agents direct their clients to pricier homes in a bid to collect a bigger commission check.
And on the online databases used to buy and sell homes, the MLS, the settlement requires that any fields displaying broker compensation be eliminated entirely. It also places a blanket ban on the longtime requirement that agents subscribe to multiple listing services in the first place in order to offer or accept compensation for their work.
NAR has repeatedly insisted that it does not own multiple listing sites, but the majority of them are owned and operated by the local Realtor associations that operate as NAR subsidiaries. Now, with the settlement effectively severing the link between agent compensation and MLS access, many agents are likely to rethink their membership in the association.
"The reset button on the sale of homes was hit today," said Michael Ketchmark, the Kansas City lawyer who represented the home sellers in the main lawsuit. "Anyone who owns a home or dreams of owning one will benefit tremendously from this settlement."