Things are about to get weird for homebuyers and sellers.
I wrote late last year that 2024 would mark the beginning of a great experiment in real estate that would upend the way homebuyers and sellers pay their agents. Well, the experiment officially got underway Friday when the National Association of Realtors agreed to a $418 million settlement to bring to an end a series of class-action lawsuits over agent commissions.
The settlement came after a yearslong battle in which hundreds of thousands of sellers
claimed that they were forced into paying unfairly high commissions to real-estate agents. In addition to the monetary penalties, the agreement could enable more buyers and sellers to start negotiating those commissions, which for decades have hovered between 5% and 6% of the sale price. The deal could also push more buyers to forgo hiring an agent or work out an alternate payment structure.
These changes, spread out over millions of transactions a year, have the chance to reshape the housing market. Some industry observers have predicted that the new commission rules could lead to a drop in both home prices and commissions. Buyers could even save as much as $30 billion every year, a recent working paper from the Federal Reserve Bank of Richmond estimated. But there's also the possibility that the Department of Justice decides this settlement doesn't go far enough, which could set up a showdown between the NAR and the DOJ. In other words, while the real-estate revolution is underway, this thing is far from over.
To grasp the scope of the settlement, it helps to understand how agents are paid. In most home sales, the seller uses a chunk of the final sale price to pay out the agents on both sides of the transaction. When a seller lists their home on the multiple-listings service — a database of local homes for sale where agents go to find homes to show clients — they advertise how much they're willing to pay the buyer's agent. For decades, sellers have generally offered buyers' agents 2% to 3% of the final sale price, even though they can technically offer as little as $0. That's because sellers fear that if they offer less than the industry standard, buyers' agents will direct their clients away from their homes, a practice called "steering." Don't offer the standard rate; don't get seen. To fix this issue, the plaintiffs in the lawsuits and the Department of Justice have pushed for a practice called "decoupling," in which buyers and sellers just pay their agents separately. They argue that this would eliminate steering and push down commissions, saving people money and perhaps forcing many subpar agents out of the industry. A lot of agents are already barely scraping by — if their earnings fall, they might decide to exit the business altogether.
