PHOTO: National Association of Realtors (NAR). FILE
On October 31, a jury in Kansas City, Missouri, concluded that the National Association of Realtors (NAR) and several residential brokerages had engaged in illegal price-fixing. Damages awarded to Missouri home sellers could exceed $5 billion, signaling a potential shift in the industry’s standard 5% to 6% commission rates.
The successful challenge by the plaintiffs targeted the industry requirement that compelled sellers to offer compensation to buyer agents for a home to be listed on a local multiple listing service. This mandatory offer facilitated collusion among industry agents and brokers in setting rates.
Homes listed below the prevailing rate of 2.5% to 3% risked not being shown by buyer agents. Buyers, unaware of the possibility to negotiate rates down, were led to believe by their agents that sellers typically covered these expenses. NAR plans to appeal the verdict.
While explicit price-setting with industry price schedules occurred in the 1940s, subsequent challenges from the Justice Department maintained near-uniform commissions through collusion.
The industry’s self-imposed higher commission levels, significantly exceeding those in many other countries, faced scrutiny. Consumers questioned the justification for charging $25,000 to $30,000 in commissions for a $500,000 home, regardless of an agent’s experience or effort in an individual sale.
Litigators and the Justice Department aim to end the mandatory compensation requirement, allowing homebuyers to seek and negotiate lower commission rates. Judges in both the Kansas City and a larger Chicago case are likely to mandate the separation of buyer and listing agent commissions.
Copycat lawsuits have emerged, and their numbers are expected to rise. The Justice Department, already in litigation with NAR, has joined discussions about a final settlement in the Kansas City case.
These efforts are anticipated to empower buyers and encourage sellers to compare and negotiate commission rates. The Consumer Federation of America predicts that increased competition could lower rates from 5% to 6% to an average of 3% to 4%, with more significant variation based on agent competence and experience. This reduction could decrease annual commissions by $20 billion to $30 billion.
The industry argues that requiring homebuyers to pay commissions could hinder homeownership affordability. However, proponents assert that effective rate competition would lower, not raise, the cost of buying a home. The current practice of baking buyer agent commissions into home sale prices would be transformed, allowing buyers to comparison shop and negotiate.
The precise transition from price-setting to price competition remains to be determined. The Consumer Federation of America envisions a scenario where buyers can finance buyer agent commissions as part of their mortgage. The decisive jury decision, potential class action lawsuits, and determined federal regulators suggest an inevitable transition towards a residential real estate brokerage marketplace resembling competitive markets for other goods and services, benefiting consumers significantly.