NAR’s commitments as part of its $418 million dollar settlement will create shockwaves in the real estate market for decades.

There is no reason in particular you would be paying attention to the legal battles being waged over the past few months between buyers, sellers and the National Association of Realtors. However, you won’t have to go and seek out this information, because soon enough, the way homes are bought and sold will be upended.

What just happened last week was the the NAR settled this lawsuit to the tune of $418 million. The bigger news is in the fine print—The changes it agreed to make at part of the settlement. This will impact the way that brokerage commissions are marketed and paid.

In November, I weighed in here on the first ruling against the National Association of Realtors in a Missouri courtroom. You can read it here.

The press is giving this settlement ample coverage now. So you can certainly read what the WSJ or NYT have to say. However, what’s missing is the practical perspective. I can hardly find a quote anywhere from an actual real estate agent. If you’re ever thinking about buying or selling a home, I’m aiming to provide a thoughtful, helpful outline to the entire discussion, from the history to the potential outcomes.

Perhaps this will move the conversation from the theoretical to the real world, before it’s too late.

**One last thing before we dive in. There are vast difference between how real estate is bought and sold in New York, how the industry operates outside of the five boroughs. I’ll write a separate post making the distinction, but I’ll point out some of these differences here and there as I write below.**

The History

Trade associations for Realtors across the country have a few functions. They establish rules of conduct, standards for operating, ways to resolve disputes, and most relevant to this moment in real estate history, Multiple Listing Service (MLS) databases to store and share information about homes that are bought and sold.

Over the past century, the American business model of residential real estate solidified as follows: In every situation where a seller hires a listing agent to represent them, the seller agrees to pay a commission to the listing agent, who then turns around and splits this commission with a buyer’s agent, if there is one. This commission is advertised to the brokerage community through the MLS. In doing so, buyer agents know what their compensation would be if their customer bought any particular home.

The commission amount, be it 6%, 5%, 4%, or less, may vary across markets and within markets. Different brokerage agencies have tried to implement different business models to win business. Some only charge sellers 1% and pay the buyer agents two to three times that amount. Some charge 3% and pay the buyer side an equal amount. There have been complaints that “the commission is too high” for years (You can read about the history of brokerage commissions here). Yet there had not been a successful lawsuit to show any collusion to keep these commissions artificially high.

Until now. This 108-year model is effectively dead.

The Argument Against The Status Quo

In NAR v Burnett, the plaintiff pointed out a few structural elements that didn’t exactly pass the smell test. First, it required that every listing showed what the buyer agent was going to be paid if it were to be allowed to be on the Multiple Listing Service. And further, without being an NAR member, real-estate agents would lose access to these databases of real-estate listings. Is that anticompetitive? As an agent in New York City, we don’t have an MLS. And 95% or more of listings are also on listing marketplaces like Streeteasy and Realtor.com. Buyers, of course, have access to these websites, just as realtors might. But you can see that if a listing is shut out from an MLS, that the audience for a property might be smaller.

The plaintiffs also claimed that this model made it harder to negotiate the commission that buyer agents are paid. I could share a hundred stories of listing-side or buyer-side commissions being negotiated to get deals done. But I’m not also not doing deals anywhere else in the US. I grant that negotiations over commissions might be less commonplace outside of NYC.

Regardless, the lawsuit’s end goal, other than to collect a big payday for aggrieved sellers and buyers (and their legal counsel), is to “decouple” listing-side commissions from buyer-side commissions. The theory is that if each side pays its own commission, it would drive up competition among buyer agents and drive down the commission that buyers pay. At the same time, sellers would not be responsible to pay the buyer agents, creating more room for buyers and sellers to negotiate commissions independently.

But that’s not it. Some also hoped that buyer-side commissions might disappear altogether. I responded to this part in November, writing:

Critics of NAR believe that it holds a de facto monopoly through its multiple listing service, and that were this “cartel” to be broken up, buyers could save more than $120 billion in fees per year. They argue that the sales commission commonly paid to a buy-side agent should remain in a buyer’s pocket.

Did they really think that no more buyer-side commission would be paid again? As much as I have to say about the business model that has been in place, these arguments ultimately bring the primary issue into focus: People simply want to pay less for service, if they can. Who can blame them?

I might take the moment to point out, as I did in my November post, that the average income of a real estate agent in 2021 was $54,330 according to the NAR. So it’s not like most agents across the US are exactly crushing it, compared to most industries. To put it in perspective, Real Median Household income in 2021 was over $70,000.

The Counterargument

On the other side, defendants pointed out that less well-heeled buyers cannot afford to pay buyer agents out of their own pocket. The numbers do bear this out; according to the NAR, buyers finance an average of 94% of their purchase price. I’ll put this another way: If buyers don’t have more than 6% to put as a downpayment, how will they pay 1-3% of the purchase price to cover the cost of having a buyer representative? One could call this a “poverty tax” in our housing system, where only those with the wealth to pay their own agent can purchase with the help of a home, transaction, and negotiations expert.

They also argue that by limiting the amount of buyers who can afford representation, the marketplace where buyers and sellers come together becomes smaller. In the words of the attorneys representing the NAR, the current practice “gives the greatest number of buyers a chance to afford a home and professional representation, while also giving sellers access to the greatest number of buyers.”

My read: The defendents are saying that this new “decoupled” model creates less competition for homes. By extension, it might mean lower prices for sellers. This would be good for buyers, right? But maybe not great for sellers.

Any Windows Into What Might Happen?

The lawsuit is settled, but the fun is just beginning in the courtrooms. There are and will be many more class action lawsuits which will try to punish the real estate industry further and rake in more cash. In the meantime, we should look to the past to see where changes to the old real estate model had already been attempted, and what happened as a result.

For instance, there have already been many tries to change the seller commission model to something more attractive to sellers. That is, lower. Foxtons, Purple Bricks, and many well-funded others took this on as their reason for being, and flopped. There hasn’t been a satisfactory answer as to why. But it seems that they could not cover their marketing costs to stay in business, while charging so little.

As to decoupling the seller and buyer commissions, I learned that some realtor associations have also already implemented that into their MLS. The WSJ reported the results: “Some 99.75% of sellers in those markets continue to offer compensation to buyer brokers, and 95% of those offers are at rates exceeding 2%, according to the documents.” So almost nothing changed.

Alongside the residential brokerage industry has been another brokerage model that has functioned quite effectively, one almost identical to what these lawsuits envision. It is within the commercial real estate market. There, the listing agent has primacy. Almost universally, buyers usually pay their own representatives. Often, these buyers don’t work with buyer agents at all.

Why might this not work in the residential world? That’s simple. The commercial real estate market is for professionals. Will caveat emptor be enough protection for first-time buyers, or even seasoned homeowners? Given the consumer apparatus that is in place for Joe Q Public as relates to Fair Housing, the mortgage industry, the banking industry, and so on, do you want this kind of system? Are buyers ready to go this alone? The data says absolutely, 100% not.

On The Margins: What Will Certainly Happen

Let’s start with the obvious parts of the post-settlement impact:

1. The plaintiffs got their big victory: There will no longer be a requirement for listing agents to state what the buyer-side agent will be paid.
2. Buyer agents will be papering up their relationships with buyers. These documents will outline more clearly what buyers can expect in terms of services, and what buyer agents are getting paid to do them.

What Could Happen, Theoretically

Beyond that, it is very unclear what happens next. We’ve seen little change in the status quo in the past on commissions and seller behavior even when these adjustments have been made. In the face of uncertainty, disruptive businesses may appear. Capitalism and market forces will be unleashed, and new players will try to enter a massive market with new ideas.  

I’ll try to lay out a few things that seem like plausible outcomes:

1. Government regulation as to what agents are paid to properly represent buyers. If title insurance is regulated, why not brokerage commission?
2. Even if this overreach never happens, surely local and federal government oversight of the brokerage industry could expand substantially. You can look to many other countries like Norway that highly regulate agent behavior, and penalize behavior more intensely. Look here to get a taste of what I’m talking about.
3. More buyers try to go it alone. As the WSJ mentioned, “Buyers will be price conscious when selecting an agent. Some might opt to save money by not using an agent at all.”
4. Or limited services. Again, the WSJ: “Buyers might try paying their agent a smaller fee in exchange for limited services. For example, a buyer could pay an agent to put together an offer and review an inspection report, but not to accompany the buyer on home tours.”
5. Fewer Real Estate Agents. If more buyers go it alone, surely the number of real estate agents would drop.

In The Main: What Will Happen

My opinion has been formed by watching buyer and seller behavior for twenty years, not studying economics in a classroom. It’s hard to quantify the numbers, but I feel very strongly that the cure being recommended in the NAR v Burnett settlement is much, must worse than the disease. So here goes:

First Time Buyers and Unsophisticated Buyers Are Screwed

I am very concerned buyers in America going forward. Rich Rosa, the president of the National Association of Exclusive Buyer Agents (again, from the WSJ), puts it well: “Any (new) system that makes it harder for first-time home buyers, or low- or moderate-income home buyers, to have their own loyal representation isn’t going to save them money.” I think he means that most buyers, when confronted with having to do this research and work themselves, will not fare well.

I’ll put it another way. The benefits of these trade organizations like NAR or the local Realtor associations have been that they keeps things from becoming the Wild West for buyers and sellers. They have pre-negotiated agreements about how agencies will work together. While this may sounds like collusion on one hand, what is the alternative? Are buyers really ready to counter unscrupulous real estate agents without an established framework? Are sellers aware of listing agent misbehavior designed to scare buyers from getting their own representation? What will the new rules of the road be? And who will enforce them?

Can you imagine inexperienced buyers negotiating on the home they want to buy against seasoned professionals? Who are going to win these fights? And what about the massive blind spots as it relates to every step of the process? There’s no doubt that buyers agents will remain valuable. If people don’t hire representation at the start of their homebuying process, it may cost them a lot more later.

How does this play out? From my friend, agent Paul Hyun from Compass in Brooklyn. “If a house has hidden unknown issues, who do you think will be more likely to buy it: the inexperienced and unrepresented first-time buyer, or someone working with a good, experienced agent?…More lemons will sell to those without means.”

The Government Will Step In

I am convinced that the government will ultimately allow buyers to finance buyer representation, to avoid what I’m writing about above. But how long will that take? How many bad decisions will get made before the corrections are made? Elements of the status quo will eventually reemerge, though. With more paperwork for everyone.

The Element of Trust

At the time of this writing, buyers aged 25-44 hire a buyer representative 94% of the time. But buyers currently hire the first real estate agent they meet 75% of the time. Are they instead going to shop around and compare the different services that each different buyer agent offers, then negotiate the price, and then, after that negotiation, open up and trust this agent? The entire dynamic will have an inherent level of mistrust even higher than what is currently in place. In other words, buyers are in for an even WORSE experience than they currently report.

The Rich Get Richer

Hyun continues his rant about the impact of out-of-pocket buyer representation: “Conversely, if a home is highly desirable, who is the more attractive buyer to a seller: one who has no guidance from a buyer’s agent whether they can afford it or not, or one who can afford an agent who will guide them through the ups and downs of a transaction? More unicorns will sell to those with means.”

But it’s more than that.

In a Hot Market

In a hot market, are sellers going to offer to roll in commission into their sale price, and go through the rigamarole of structuring their deals to accommodate less well-off buyers? Or will they act as they have with all-cash buyers today? That is, they will go with the easier deals. You can easily envision a market where the winners continue to win more often. And those who can’t afford to pay their buyer agent will lose even more often than they do today.

What About a Softer Market?

The pendulum will eventually swing back, where prices are dropping and inventory is rising. When that happens, what happens to sellers who are unwilling to offer commissions to buyer agents? Might buyer agents simply avoid bidding on these homes? Will listing agents have to start creating the same structure we have today—that is, splitting their commission—to entice buyer agents to come to their listings?

Where Will Buyers Look?

If buyers simply think, “Oh, I’ll look on Zillow and find my new house without an agent,” they are in for a surprise. Zillow makes $1 Billion in revenue annually from their buyer agent advertising platform. If buyer agents aren’t making money, neither will Zillow. Will Zillow continue to exist, then? And, if it doesn’t, then will another clearinghouse pop up that finds a way to make money? It seems that the buyer agents and real estate agencies become more powerful and more important than they are today. Buyers will find it much, much harder to do their own research and do price discovery. Less transparency, more frustration. The MLS databases will have a stranglehold like they did before Zillow and aggregators emerged.

The Big Question: What Happens To Home Prices?

What happens to home prices, when sellers are no longer paying buyer agents? Will they drop since that commission isn’t baked in anymore? Will prices drop if there are fewer buyers vying for properties?

Or what if Stephen Dubner had it right in Freakonomics? He claimed that because a $10,000 or $20,000 difference in the sale price only means a tiny difference in their commission, seller agents really didn’t care about squeezing out every last dollar in a negotiation. That is, the commission on a $500,000 sale might be $15,000 (3% of $500,000), while a commission on a $520,000 sale is $15,600 ($600 more). Will seller representation change at all if buyer agent aren’t involved? If listing agents are making the lion’s share of commission, will the negotiation harder, or less so, for sellers? Something to think about. Prices could drop as a result.

On the other side, what if a buyer agent had never cared about whittling the $520,000 price down to $500,000, for the same reason? What if they just wanted to maximize the commission (even if the different was $600)? Does the NAR settlement and change to the structure mean that buyer agents are going to become tougher negotiators? Will sellers going to end up making slightly less money on the sale of their homes when there’s still only $600 at stake (in our example)? I’m dubious. Buyer agents who are good will remain good. And buyer agents who don’t care about buyers will still not care. Except that maybe we’ll have fewer of them.

Other Thoughts

What I know for sure is that the cream will rise to the top. You’re going to see good agents building a huge moat around their businesses. And fewer people will enter the business in the future. I don’t know what that means for home prices, but it could kill the pipeline for future real estate professionals.

It’s certainly going to get very messy in the near term. And when people want to move forward in their lives, they are going to look for a way to buy and sell homes, it could get VERY ugly if the fallout from these lawsuits gets in the way.

Again, be on the lookout for another post about the New York City real estate market, specifically, where I expect a very different, and potentially muted, impact of these lawsuits and their settlements. – Scott & The HRT