The longstanding practice of charging a 6% commission on home sales transactions has come to an end.
In a major development anticipated to significantly decrease the expenses associated with purchasing and selling residential properties, the National Association of Realtors (NAR) revealed on Friday that it has reached a settlement agreement with groups representing home sellers.
As part of this settlement, the National Association of Realtors (NAR) has consented to pay $418 million in damages and abolish its regulations pertaining to real estate commissions. This action effectively resolves high-profile antitrust lawsuits that had been filed against the organization.
The elimination of mandated commission rates is expected to substantially reshape the dynamics of the residential real estate market by introducing greater cost flexibility for consumers engaged in home-buying and home-selling activities.
As part of the settlement, the NAR, which represents over 1 million real estate agents, has also consented to implement a set of new regulations. One of these rules prohibits the inclusion of information about agents' compensation on listings published on local centralized listing platforms known as multiple listing services (MLS).
Critics have argued that this practice led brokers to steer customers toward more expensive properties. Another new rule eliminates the requirement for brokers to subscribe to MLS systems, many of which are owned by NAR subsidiaries, where homes are widely marketed within a local area. An additional rule mandates that buyer's brokers must establish written agreements with their clients.
This agreement effectively dismantles the present model for residential real estate transactions, in which sellers pay commissions to both their own broker and the buyer's broker. Critics have contended that this commission structure has artificially inflated housing prices.
The changes ushered in by the settlement are anticipated to fundamentally transform established practices governing home buying and selling.
According to projections from TD Cowen Insights, this settlement is anticipated to result in a 25% to 50% reduction in real estate commissions. This development paves the way for alternative models of facilitating real estate transactions, such as flat-fee and discount brokerages, to gain increased market share. While these alternative models currently exist, they have thus far commanded only a small portion of the overall market.
In response to the news, shares of prominent real estate firms Zillow and Compass both experienced a decline of more than 13% on Friday. Investors appear concerned that lower commission rates for real estate agents could adversely impact the business volumes and revenues for platforms operating in the real estate sector.
The prospect of significantly reduced commissions stands to fundamentally disrupt existing norms within the residential real estate industry, enabling the proliferation of more cost-effective transaction models while also potentially reshaping the competitive landscape among major real estate platforms and service providers.
Last month, Zillow warned that “if agent commissions are meaningfully impacted, it could reduce the marketing budgets of real estate partners or reduce the number of real estate partners participating in the industry, which could adversely affect our financial condition and results of operations.”
Shares of the real estate brokerage firm Redfin also experienced a nearly 5% decline in response to the news.
In contrast, stock prices of homebuilding companies rose after the announcement. Lennar's shares gained 2.4%, PulteGroup's shares increased by 1.1%, and Toll Brothers' shares added 1.8%.
For a typically priced American home listed at $417,000, sellers currently pay over $25,000 in brokerage fees and commissions. These costs are effectively transferred to the buyer, driving up home prices nationwide. Based on analysis from TD Cowen Insights, this settlement could reduce those fees by $6,000 to $12,000.
Commenting on the settlement, Kevin Sears, president of the National Association of Realtors, stated: “While the settlement comes at a significant cost, we believe the benefits it will provide to our industry are worth that cost.”
The divergent stock movements highlight the anticipated impacts across different segments of the real estate sector, with brokerage firms facing headwinds from lower commissions while homebuilders may benefit from improved home affordability for buyers.
In November, a federal jury in Missouri found the National Association of Realtors (NAR) and two brokerage firms liable for $1.8 billion in damages, having determined that they conspired to keep real estate agent commissions artificially elevated. Due to it being an antitrust case, the NAR potentially faced treble damages amounting to $5.4 billion.
Although the NAR had initially pledged to appeal the verdict, it ultimately decided to settle the case, following the lead of other brokerages that had previously reached settlements.
Commenting on the settlement, Nykia Wright, interim CEO of NAR, stated: “NAR has worked hard for years to resolve this litigation in a manner that benefits our members and American consumers. 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.”
Previously, NAR had mandated that home sellers include the compensation for agents when listing properties on multiple listing services. While NAR has long maintained that commissions are negotiable and that this structure helped make housing more affordable for buyers, critics have argued that the fees were effectively expected, and home sellers felt compelled to offer them out of concern that refusing to do so would deter potential buyers.
What could be the impact on real estate commissions?
The settlement must still get court approval. If it gets the okay, changes would go into effect in mid July, NAR said.
“This would mean that offers of broker compensation could not be communicated via the MLS, but they could continue to be an option consumers can pursue off-MLS through negotiation and consultation with real estate professionals,” NAR said in a press release.
Sellers still have the option to offer to pay for the buyer’s agent commissions and so that would occur on a case-by-case basis, he said.
