20240429 The Evolving Landscape of US Home Sales

The Evolving Landscape of US Home Sales

Last Tuesday, a federal judge preliminarily approved a $418 million settlement that could significantly alter the landscape of home buying and selling in the United States. The agreement resolves two similar lawsuits in Missouri and Illinois brought against four major real estate brokerages and the National Association of Realtors (NAR), a trade organization representing more than 1.5 million members, alleging NAR’s rules on agent commissions facilitated collusion and artificially inflated fees. Stemming from a jury verdict in October, it is expected to cover roughly 500,000 Missouri home sellers and others across 14 states.

This recent settlement only addresses a fraction of the NAR’s legal challenges. Another class action suit, including several new defendants alongside NAR, now covers home sellers in every state. The primary plaintiff, Gibson, and others seek $200 billion in damages in this suit. Alongside these, ongoing investigations by the Justice Department’s Antitrust Division have also placed significant pressure on the organization, prompting several industry experts to question its survival and speculate on the future.

The NAR, with a history spanning over a century, has primarily attracted members by offering access to its private databases for listing homes, known as Multiple Listing Services (MLS). Like most trade groups, members adhere to a code of ethics and standards of practice, guiding industry practices. Through the NAR’s enforcement of its “cooperative compensation rule,” they have long required commissions to be split between agents for the seller and buyer and that compensation be advertised when listing on the MLS. While the group maintains that commissions are negotiable, critics argue that the fees were essentially mandatory, as sellers felt they would lose buyers or risk brokers steering buyers to other properties if they didn’t offer them. This dynamic, coupled with many major brokerages mandating membership in the organization, has led to the prevalent 6% commission structure we are accustomed to.

The verdict in the Missouri district court requires NAR to draft new rules prohibiting broker compensation offers on its MLS. Consequently, sellers will no longer be obliged to pay buyer’s agents, and agents will be free to set their commission rates. These changes are expected to take effect by mid-July this year. Economists at the Federal Reserve Bank of Richmond estimate the changes could save home buyers $30 billion annually. However, some worry about how these new rules will impact first-time homebuyers, who may struggle to afford the buyer’s agent commission, especially since mortgage underwriting regulations would need adjustments for buyers to include those fees in their mortgages. In the interim, this could leave some individuals without guidance.

The implications of these developments on the residential real estate industry, including prices, remain uncertain. However, it is widely anticipated that it will significantly disrupt the status quo! New models may emerge, with some offering flat fees or more competitive rates. Younger buyers may opt for online platforms while seeking brokers with minimal services and fee structures. Nevertheless, it is unlikely that traditional arrangements will vanish entirely, as some individuals will still prefer a more full-service experience.

Whitney Butler