The 6% real state agent commission is gone, but here’s why it could backfire
Under pressure from a string of lawsuits, the National Association of Realtors (NAR) has agreed to remove the traditional 6% sales commission rule tied to real estate deals.
The settlement decision is in response to multiple complaints from homeowners accusing the organization of strong-arming them into paying hefty fees.
While fees aren’t going away entirely, the change is expected to trigger a massive overhaul of the U.S. real estate market as consumers know it.
Last year, a Missouri jury found the NAR guilty of its part in conspiring to keep commissions elevated, a verdict they determined violated federal antitrust laws.
That ruling would save Americans tens of billions of dollars each year in real estate commissions, according to the Consumer Federation of America. The most recent settlement is a direct result of an appeal related to that case.
As part of the settlement, NAR on behalf of its 1.5 million industry members has agreed to pay $418 million in damages over roughly four years to disgruntled home sellers while simultaneously changing some of its rules, including the commission standard.
Home sellers, not buyers, are currently on the hook for real estate commissions paid to licensed agents, including the agent on the other side of the deal when there is one.
But the decision is expected to have wider implications for the entire real estate industry, driving housing costs lower in an era of elevated interest rates and high property values.
NAR Interim CEO Nykia Wright explained the decision to surrender, stating:
“Ultimately, continuing to litigate would have 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. It provides a path forward for our industry, which makes up nearly one-fifth of the American economy, and NAR.”
The timing of the NAR settlement couldn’t be better, with the housing market headed into its busy spring season.
While the agreement is expected to boost inventory by giving sellers more control of the sales process, it does little to entice more buyers. And with interest rates still elevated and home prices out of reach, the jury is still out on whether the rule change will move the needle this year.
"Reset button"
Real estate is an industry embedded in tradition, chief among being a 5-6% sales commission based on the sale price. This settlement disrupts that payment model.
For years, licensed agents representing buyers have had the luxury of advertising commissions to buyer agents on the MLS platform, thanks to a rule implemented back in the 1990s.
While NAR doesn’t own regional MLS platforms, most of them are controlled by realtor associations that are linked to the trade group.
However, homeowners have cried foul over this rule, saying the industry used it as their ticket to charge high fees and accusing buyer agents of steering their clients toward pricier properties.
As part of the rule change reached in the settlement, which must still receive the green light from the courts, agent commissions will no longer be published on the MLS system, starting in July.
Instead, fees will be negotiated on a deal-by-deal basis between consumers and licensed real estate professionals “off-MLS,” according to NAR.
The change removes the transparency that agents once had access to and calls into question the platform’s future relevance for licensed agents. It also creates a more negotiable setting for real estate agent commissions.
While the mechanics of the rule change must be hammered out, it should put sellers more in the driver’s seat. A couple of potential replacements to the standard commission include an hourly rate or flat fee that sellers pay to agents.
Attorney Michael Ketchmark, who represented home sellers in the complaint, took a victory lap, saying the “NAR is finally out of the business of forcing homeowners to pay inflated commissions.”
“The reset button on the sale of homes was hit today. Anyone who owns a home or dreams of owning one will benefit tremendously from this settlement,” he said.
In addition to NAR, other defendants named in the original Missouri complaint were Anywhere, Berkshire Hathaway HomeServices, Keller Williams, and RE/MAX.
More sellers than buyers
Although the housing market has been characterized by a lack of supply in recent years, things may be changing ahead of the busier spring season. So far this year, the number of new listings continues to rise, increasing nearly 15% in February, the biggest gain in three years.
In theory, this should help improve the supply/demand imbalance in the market, but the reality is more complicated.
While the NAR settlement might entice more sellers, it doesn’t necessarily attract more buyers, who aren’t burdened by commission fees anyway. All eyes are on interest rates, which could make or break the season.
Meanwhile, cash-strapped Americans face record-high home prices and multi-decade-high mortgage rates that could cause this year to be an anomaly.
At an average price of nearly $350,000, home valuations continue to hover above pre-pandemic levels.
With many homebuyers still having to contend with a 7% interest rate on their mortgage, there’s little relief for monthly payments in sight. Average mortgage payments have more than doubled since Covid, per Zillow.
Nevertheless, green shoots of recovery are emerging as the April-June stretch leads the way for activity in the housing market. An Opendoor survey revealed a 7% jump in the number of homeowners preparing to sell in Q1 versus a year ago. If that momentum continues, it might bode well for the spring months, too.