A landmark settlement with the National Association of Realtors rattled the real estate industry earlier this month. If approved by a federal court, it could alter how homes are bought and sold in one of the most unaffordable housing markets in decades.
Will the NAR settlement significantly impact consumers’ pocketbooks? Although the decision has been widely touted as a game-changer for home costs, it’s sparked more confusion than clarity.
“It’s too early to tell how this might affect the housing market in the long term, but we don’t expect any immediate impact on home prices,” said a spokesperson for Zillow.
In the settlement, NAR will pay $418 million to resolve a class-action lawsuit accusing the real estate giant of inflating sales commissions and fees. New rules could alter a longstanding business model in which the home seller pays a commission to their agent as well as the buyer’s agent.
The high sales commission customarily paid to agents — often 5% to 6%– isn’t what drives expensive home prices today. Market forces like limited inventory and steep mortgage rates continue to be the biggest obstacles for prospective homebuyers, and those won’t magically disappear overnight.
Still, experts say the agreement should increase price competition and shine a light on the lack of transparency in the real estate industry.
“Hopefully, it will bring consumers more bargaining power in possibly the largest financial transaction of their lives,” said Shang Saavedra, founder of Save My Cents and a personal finance expert on CNET’s review board.
If you’re planning on selling or buying a home in 2024, here’s what you need to know.
What is the NAR settlement really about?
Litigation by groups of homeowners accused the NAR of forcing them to pay inflated realtor commissions when selling their homes. The lawsuit alleged that agents were incentivized to steer buyers away from home listings offering lower commissions.
Under the proposed settlement, a seller’s agent would no longer be permitted to advertise commission fees when listing homes on NAR-affiliated Multiple Listing Services. The MLS portal includes private databases of for-sale property listings where brokers share information.
While the NAR settlement prevents the practice of agents pushing clients toward listings that offer higher commissions, it doesn’t ban commissions entirely.
The NAR insists that commissions were always negotiable and never set in stone. However, critics say the 6% commission (around 3% to the seller’s agent and 3% to the buyer’s agent) became somewhat customary over the decades.
Lack of competition is what kept commissions high, said Saavedra.
A week after the settlement was announced, the NAR addressed what it called pervasive media misinformation about the facts of the agreement, noting that “many headlines aren’t separating fact from fiction.”
Will the NAR decision bring down home prices?
Pressure to bring down housing costs and relieve the financial burden on consumers is high. The NAR settlement, scheduled to go into effect in July, could result in sellers paying cheaper commissions, which might compel more homeowners to list their homes.
It will take time for the market to adapt to new norms, and nothing in the housing market exists in a vacuum, so don’t expect an immediate downward pressure on home prices.
“Changes will be influenced by broader market conditions, including supply and demand, rather than the lawsuit’s outcomes alone,” said Jeb Smith, realtor and CNET Money Expert Review Board member.
Moreover, homebuyers likely won’t be saving money if they have to prepare to pay upfront fees to their agents.
“Even if home prices were to fall in the future, buyers’ costs are likely to rise by a similar amount if they are having to compensate agents directly,” said Danielle Hale, chief economist at Realtor.com.
“It remains to be seen what the impact might be,” Hale said.
How will the NAR settlement impact homebuyers?
“Buyers will now have a clearer understanding of their agent’s compensation and may need to negotiate or directly pay for their representation,” said Smith.
While this could make the process more expensive for buyers, it also empowers them to choose an agent based on merit rather than on hidden commission structures, according to Smith.
Plus, buyers may have more options to forgo real estate agents entirely.
“New business models, mortgage financing options and more could give home shoppers additional options in the future,” said Hale.
How will the NAR settlement affect home sellers?
Tens of millions of home sellers may qualify for a piece of the $418 million class-action payout, an amount that the NAR is set to pay out over the next four years.
If the decision goes into effect this summer, sellers who previously had to shell out thousands of dollars in commissions to both their agent and the buyer’s agent will now have more flexibility to negotiate those fees. Sellers will still need to adapt their strategies based on specific market conditions, said Smith.
“In competitive markets or buyer’s markets, offering to cover buyer agent commissions could become a strategic move to make their listings more attractive,” Smith said.
How will the NAR settlement affect the housing market overall?
The NAR settlement could decrease the roughly $100 billion in real estate sales commissions paid out each year, potentially sparking greater reforms in the US real estate industry.
Realistically, we won’t see how this plays out for months, and it’s not likely to immediately reverse the steady increase in home prices over the past several years. Plus, there could be pushback.
“All the lobbyists for the real estate industry are going to be fighting this verdict tooth and nail,” Saavedra said.
