Real estate agent

PHOTO: Real estate agent. FILE

A groundbreaking federal jury decision has the potential to disrupt the traditional process of buying and selling homes for Americans.

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This week’s legal ruling, which found that the influential National Association of Realtors (NAR) and several major brokerages had conspired to inflate home commissions, is anticipated to lead to a reduction in real estate agent fees and, importantly, a decrease in costs for both home buyers and sellers. At the very least, this jury verdict is expected to result in increased transparency, addressing a long-standing source of confusion and frustration for consumers regarding the allocation of their funds in real estate transactions.

Nearly 90% of homes in the United States are bought and sold through real estate agents affiliated with the NAR, the largest trade association in the country. The NAR mandates that home sellers offer a non-negotiable commission before listing their homes on the Multiple Listing Service (MLS), which is used by real estate websites like Zillow. These commissions, paid by both the home seller and the buyer’s agent, currently hover around 5% to 6% of the home’s sale price. Plaintiffs in the recent Kansas City case successfully argued that the NAR’s rule restricts competition and results in higher prices. They contend that without the MLS, buyers and sellers would directly compensate their respective agents.

The verdict on Tuesday may potentially bring about this change, particularly if the judge overseeing the Missouri case issues an injunction to prohibit preset commission rates and shared commissions between buyers and sellers.

“The most impactful injunction would be one that bans cooperative compensation in the Multiple Listing Service on a national level, which the court has the authority to do,” analysts at Keefe, Bruyette & Woods stated. The Department of Justice is also investigating real estate agent compensation practices to determine whether they harm competition, possibly triggering a broader transformation of how real estate agents are remunerated.

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Changes in the payment structure for agents could result in a 30% reduction in the annual $100 billion commission pool for the 1.6 million realtors, as estimated by KBW. “A court-ordered injunction could ‘unbundle’ commissions nationally by early 2024, eliminating the longstanding practice of listing agents and sellers setting and paying buyer agent commissions,” the analysts noted.

NAR and other defendants in the Missouri case have vowed to appeal the ruling, which requires them to pay at least $1.8 billion to hundreds of thousands of homeowners who were obliged to pay what they considered excessive fees to agents. Home sellers have long voiced dissatisfaction about having to pay commissions to buyer’s brokers.

“The extent of injunctive relief decided by the court will strongly influence whether a price competitive system develops that lowers consumer costs and increases the quality of service,” stated Stephen Brobeck, a senior fellow at the Consumer Federation of America. “We hope the court will sever the ties between the listing agent and buyer agent compensation, freeing sellers from the obligation and need to compensate buyer agents.”

Nonetheless, one industry veteran advises against drawing firm conclusions from the ruling for now, noting that the judge presiding over the Missouri case has yet to issue a final judgment.

“Depending on what he does, it could require more disclosures by agents to both sellers and buyers about options they have — that could happen and probably will happen,” said Steve Murray, a partner at Real Trends Consulting.

Although the case has put a significant spotlight on the industry, Murray added, “Consumers use the system because it works for them.” Buyers and sellers are not legally obligated to use an agent to buy or sell a home, a choice exercised in roughly 10% of home sales and purchases, he noted.

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Other industry participants caution that relieving home sellers from the requirement to compensate buyer-side brokers might transfer these costs to those in the market for a home, potentially raising the barrier to homeownership further, especially during a period of rising mortgage rates and a shortage of affordable properties.