The long-standing tradition of the 6% commission in home purchase transactions is undergoing a significant transformation. In a monumental decision poised to reshape the real estate landscape, the National Association of Realtors (NAR) announced a groundbreaking settlement on Friday, marking the end of landmark antitrust lawsuits. As part of the settlement, the NAR has agreed to pay $418 million in damages and abolish rules about commissions.
Representing over 1 million Realtors, the National Association of Realtors has also committed to implementing a series of new regulations. One key regulation prohibits the inclusion of agents’ compensation on listings placed on local centralized listing portals, known as multiple listing services (MLS). Critics argue that this practice led brokers to prioritize more expensive properties, thus influencing customer decisions. Another regulation discontinues the requirement for brokers to subscribe to multiple listing services, many of which are owned by NAR subsidiaries. Additionally, a new rule mandates that buyers’ brokers must enter into written agreements with their clients.
Disrupting Traditional Models: Impact of the NAR’s Commission Overhaul
This move is expected to disrupt the prevailing home buying and selling business model, wherein sellers cover the costs of both their broker and the buyer’s broker. Critics contend that this model has artificially inflated housing prices.
According to estimates by TD Cowen Insights, real estate commissions are anticipated to decrease by 25% to 50%, paving the way for alternative selling models such as flat-fee and discount brokerages, which have so far held minimal market share.
The announcement sent shockwaves through the real estate industry, with shares of major real estate firms Zillow and Compass plummeting by more than 13% on Friday. Investors expressed concerns that lower commission rates for agents could lead to reduced business for real estate platforms.
Conversely, homebuilder stocks experienced a surge following the news. Lennar, PulteGroup, and Toll Brothers all saw gains in their shares. The average-priced American home for sale, priced at $417,000, currently incurs over $25,000 in brokerage fees. With the anticipated reduction in commissions, buyers could potentially save between $6,000 and $12,000, as per TD Cowen Insights’ analysis.
Market Reactions and Future Implications: Analyzing the Aftermath of the Landmark Settlement
Kevin Sears, president of the National Association of Realtors, emphasized the significance of the settlement, stating, “While the settlement comes at a significant cost, we believe the benefits it will provide to our industry are worth that cost.” The settlement comes after a federal jury in Missouri found the NAR and two brokerages liable for $1.8 billion in damages for conspiring to maintain artificially high agent commissions. The potential triple damages amounted to $5.4 billion.
Nykia Wright, interim CEO of NAR, expressed satisfaction with the settlement, stating, “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.”
The requirement by the NAR for home sellers to disclose agent compensation on MLS listings has been a contentious issue. While the National Association of Realtors has maintained that commissions are negotiable and contribute to making housing more affordable for buyers, critics argue that the fees were expected and sellers felt compelled to offer them to attract buyers.
