An earth-shattering, multibillion-dollar antitrust ruling against the National Association of Realtors late last year led to a settlement on Friday that will loosen the powerful trade group’s stranglehold on America’s housing market. The $418 million settlement with a group of homebuyers is expected to take effect sometime around July, pending a judge’s approval. It would transform a number of rules and guidelines set by the NAR that critics say have kept housing prices artificially inflated.

The TL;DR: 6% commissions, split between the buyer’s and seller’s brokers, will no longer be the norm. Agent commissions are expected to fall — in some cases, dramatically — because they will be competitive and negotiable, and sellers will be able to shop around for better rates. And other broker tactics that critics say are anticompetitive, such as a rule that made sellers’ agents set compensation for buyers’ agents, will be prohibited.

It’s not all good news: Buyers may have to pay their broker directly in the future, which could be tough for buyers accustomed to financing that commission as part of their mortgage. And some buyers could choose to forgo using a broker altogether. Also, a bunch of brokers are probably about to quit.

But the biggest takeaway for homebuyers is undoubtedly welcome: The overall cost to buy a home should fall by thousands of dollars on average.

Goodbye, 6% commissions

For decades, Americans have paid a standard commission of around 6% when selling a home, split between the seller’s broker and the buyer’s broker. The National Association of Realtors and its 1.5 million agents say those fees are negotiable. But certain NAR rules have kept commissions significantly higher than in other countries, where they can average around 1% or 2%.

After the settlement, those commissions will be fully competitive, meaning brokers can advertise their rates to prospective sellers, and people can shop around for bargains.

Real estate commissions are expected to fall between 25% and 50% because of the new rules, according to TD Cowen Insights.

Buyers may have to pay their own agents

Without the guidelines that buyers’ and sellers’ brokers split commissions evenly, homebuyers may have to change they way they pay their own agents.

Typically, the 6% commission (typically 3% for the seller’s broker and 3% for their own agent) was passed on to the buyer in the overall cost of the home, which buyers can pay off over decades in their mortgages.

But after the settlement is finalized, buyers may end up paying their agents in new ways; including, perhaps, a flat fee. A separate new rule will require buyers’ brokers to enter into written agreements with their buyers.

Although that will add transparency to the homebuying process, it could become burdensome — particularly for first-time buyers, many of whom already have difficulty coming up with all the money they need for a down payment, closing costs, a lawyer and all the other fees associated with buying a home.

New rules for brokers

One rule that particularly irritated NAR critics is going away: The requirement that sellers’ brokers advertise the commission they will pay brokers’ agents. The NAR now prohibits brokers from advertising that compensation.

That rule had led to two bad outcomes for buyers, affordable housing advocates claim: The first is that it kept commissions artificially high. Second, it led buyers’ brokers to push more expensive homes on buyers, so their payout would be higher.

Buying a home should be cheaper

The ultimate question: Will buying a home get cheaper? Industry experts almost universally expect the answer to be yes. As brokers grow competitive on rates, commissions could fall significantly.

For the median-priced American home for sale — $387,000 — sellers are paying more than $23,000 in brokerage fees. Those costs are passed on to the buyer, boosting the price of homes in America. That fee could fall by around $6,000 to $12,000, according to analysis from TD Cowen Insights.

In aggregate, that will save people a ton of money: Americans pay around $100 billion in commission fees each year, and homebuyers could stand to save between a quarter to half of that once the settlement is finalized, according to Stephen Brobeck, a senior fellow at the Consumer Federation of America, an umbrella group of nonprofit consumer organizations.

Brokers will probably quit

The new reality could be tough on brokers, particularly people who don’t sell a lot of homes.

US home purchases dropped to nearly a 30-year low in 2023 as supply has dried up, mortgage rates have surged and home prices continue to rise in most areas of the country. Although falling commissions could persuade some buyers and sellers to get back into the market, Norm Miller, professor emeritus of real estate at the University of San Diego, said the settlement could lead to a mass exodus of brokers from the industry.

Potentially half of the 2 million or so agents in America could quit, Miller predicts, as the new rules become unworkable for many brokers.

In a sign of how nervous this ruling has already made the industry, stocks of real estate companies like Zillow (Z), Compass (COMP) and Redfin (RDFN) were down 13%, 14% and 5%, respectively, Friday, and Zillow.

Source: https://www.cnn.com/2024/03/18/investing/nar-realtor-commissions-settlement-explained/index.html

Mon March 18, 2024