Overreactions from the NAR Settlement, Part 1:

IS A MAJOR SHAKEUP IN THE REAL ESTATE INDUSTRY REALLY COMING?

If you have not been following our blog or any real estate related blog for that matter, you may not be aware of a Settlement between the National Association of Realtors and the potential plaintiffs following the Sitzer/Burnett judgment. Do not worry, only every major news outlet has written an opinion already and most have been glowing opinions of optimism for consumers about the NAR rule changes that come with the settlement. 

Forget the hypocrisy of the plaintiff homeowners of these lawsuits who purchased their homes without having to pay their buyer agents fees. This blog is going to break down what the settlement is about, areas of misunderstanding that it appears lots of authors are making, what is not covered in the settlement, and the expected outcome from the settlement if approved. Just a quick note, this is a proposed settlement agreement that the court has yet to approve the settlement agreement. It could be several months or longer before we see major changes across the industry.   

Settlement Terms 

• Change in NAR rules: NAR has agreed to put in place a new rule prohibiting offers of cooperative compensation on the MLS.  NAR has also agreed to make MLS participants representing buyers sign buyer representation agreements prior to showing a property.  These changes will ultimately lead to more transparency in negotiating agent fees and more discussions about agent fees between client and agent. 

• NAR Payment: NAR will pay $418 million over the next 4 years.  2024 membership dues will not change.

• Release of Liability: The NAR got the opposing side to agree to release the NAR and over 1 million NAR members from this lawsuit, currently filed copycat lawsuits, and potential future lawsuits of the same legal claims.  The NAR members include local Realtor Associations, all association-owned MLSs, and any brokerage that has NAR member principal broker and a residential transaction volume of less than $2 billion as of 2022. 
  

Misconceptions About the Settlement 

Much like the announcement of the original jury verdict in the Sitzer/Burnett case, media outlets jumped all over the NAR Settlement like vultures. Most are touting this settlement as a major victory for consumers writing that this is the end of the 6% commission and even home prices will fall. These are all just theories at this point but considering what rule changes are coming at the NAR let’s examine some of these reactions.   

“The End of 6% Commission” or “Commissions will be Slashed.”

Many articles claims that commissions will be majorly cut and this will be the end of the 6% Realtor Commission. While the commission average may lower a bit, the major news outlets are spewing nonsense and do not appear to understand how a real estate transactions work. Let’s address the nonsense. 

CNN wrote, “The 6% commission, a standard in home purchase transactions, is no more.” The New York Times wrote the NAR will “slash commissions” in the settlement. CBS News wrote, “the landmark deal will “slash realtors' standard 6% sales commission fee.” 

Have you ever signed a listing agreement where the NAR was writing in the commission rate? (Hint, the NAR is not a licensed brokerage company.) Do the rule changes proposed by the settlement prohibit a 6% commission rate? Do the rule changes proposed by the settlement prohibit a seller from offering to pay a buyer’s agent fees? 

The answers to these questions are all NO. Listing agents will still be permitted to ask a seller to offer to pay the buyer’s agent fees. There was never a rule set by NAR which required a seller to pay a 6% commission.

The only way we are going to see a major shift in commission fees is if the public consumer no longer wants to use real estate agents in a real estate transaction. As an attorney who has worked real estate transactions and just purchased his first home, this idea is silly and almost ridiculous. Very few individuals are prepared to buy or sell their home without consulting a professional.

But let’s acknowledge the arguably ridiculous for a moment and assume the majority of consumers want to buy or sell without an agent. Zillow and Redfin (the 1% commission fee listing service) have been around since before the ’08 real estate market crash. Flat fee MLS services did not pop up yesterday. And no one is stopping anyone from using an attorney to advise them in a real estate transaction instead of a real estate agent. Yet in 2023, 89% of buyers and sellers used a real estate agent in a transaction. The idea that in the next few years we are going to see a shift in consumer habits strong enough to gut real estate commissions is unrealistic. 

“Home Prices will Fall” or “Costs to Purchase will Fall.” 

Another major claim of most news outlets has been that home prices and buying costs will fall. CBS News, The New York Times, Fortune.com, and The Washington Post have all assumed that these changes could result in lower purchase prices. CNN and Thomson Reuters both said that this settlement could lower the buying costs. 

However, none of these articles elaborate on how prices or costs are going to fall. First, sellers are still allowed to pay a buyer’s agent fees. Unless the Department of Justice is successful in completely de-coupling buyers' agents fees from sellers' costs or seller's pushback hard against covering those fees, there will still be sellers offering to pay a buyer’s agent fees. Furthermore, buyers can still ask a seller to cover those costs even if a seller does not initially offer that concession at the time the listing hits the market. 

Second, homeowners will not want to adjust the listing price since there is nothing that requires them to adjust their listing prices to account for their lower agent fees. Home prices will take a long time to adjust since CMAs are based on recent home sales, which will include recent sales prices that cover the buyers' agent fees. A comparative market analysis is part of the pricing process when you obtain a listing agreement. Sellers must sign off on the listing price and when they see the inflated prices on a CMA, they are going to assume they can get similar pricing regardless of agent fees. Listing agents are going to have a tough time convincing a homeowner that the comparable house down the street that sold on January 1, 2024, for $400,000 was really worth 3% less because the sale included a 3% buyers' agent fee paid by the seller. They are still going to want list their house for $400,000 and pocket the 3% for themselves.

Lastly, appraisals are not going to automatically adjust sales prices because appraisals already take into consideration seller concessions. Part of the appraisal process includes accounting for seller concessions including agent fees. None of these articles indicate that this will be the reason for lower prices. However, appraisal values will likely adjust if sellers are no longer paying buyer's agent fees, and appraisal values will affect sales prices. 

What these articles seem to suggest is that home prices are going to be pressured to drop but they do not explain why. That is because IF sellers start refusing to pay buyer's agent fees, many first-time home buyers and FHA buyers will be forced out of the market because they cannot afford adequate representation in their home purchase on top of everything else, they have to account for in the home purchase. What this settlement is likely going to do is squeeze potential home buyers even further away from buying a home as interest rates will continue to stay where they are at in 2024. If home prices fall because of the settlement, it is because these rules will knock even more buyers out of the market. 

“These changes are a win for consumers and the Real Estate industry.” 

Despite the overwhelming optimism from these articles, I don’t see how this is going to change the industry as drastically as the media thinks. The New York Times expects agents' fees to drop to European levels, which agents in UK and other European countries have significantly different roles than U.S. agents. The Washington Post cited a report that commissions could drop 30% (that’s going from a 5.4% national average to a 3.78% national average) and Reuters cites to a report that predicts a reduction up to 50% (5.4% to 2.7%). At those numbers, they are essentially telling the public that buyers' agents to be a thing of the past, which is just not going to happen. 

In my eyes, there are only two ways the residential real estate industry is going to drastically change from these lawsuits: 1) the Department of Justice creates a federal law prohibiting sellers from paying buyer's agent fees, which is then adopted by every state; or 2) a majority of home sellers going forward simply refuse to pay buyer's agent fees reversing decades of the common practice and adding another barrier to home ownership. Even then, buyers are still going to need representation, and sellers are still going to offer to pay that cost because it helps sell the property. Agents that work hard and set proper expectations with clients will still get paid and see satisfied clients.