How Will Real Estate Settlement Impact Home Prices?

There has been seismic action in the real estate market – and it has nothing to do with bidding wars. The National Association of Realtors (NAR) announced a settlement to end an antitrust lawsuit by paying $418 million in damages, and agreeing to blow up its decades-long practice on commissions paid to brokers.

The settlement came five months after a Missouri court ruled that the NAR and other large real estate brokerage firms had conspired to keep home sale commissions artificially high. The penalty for doing so was steep: $1.78 billion to more than 260,000 Missouri sellers of residential homes in Missouri, Kansas, and Illinois from 2015 through 2022.

At the time, the defendants said that they would appeal the verdict, but that process would have been a huge risk. The reason is that under U.S. antitrust law, the damages could have been tripled to more than $5.3 billion. Losing an appeal would effectively have put the NAR out of commission (pun intended!)

Real estate agents have long been compensated on a model that was skewed. When a home was sold, the brokers would be paid 5-6 percent of a home’s sale price, with half of the amount paid to the seller’s representative (the listing agent) and half paid to the buyer’s rep. (For context, commission rates in other developed economies range between 1 and 3 percent.) Both sellers and buyers have complained that the existing model was out of date with the marketplace and squashed competition.

Under the old arrangement, sellers were forced to agree to the organization’s pricing model in order to access the Multiple Listing Service (MLS) – that’s the portal where homes are available for all would-be buyers to view. According to the NAR, MLS “is a private offer of cooperation and compensation by listing brokers to other real estate brokers.” In other words, if you want everyone to see your house that’s for sale, you must comply with the commission structure where both agents are paid by the seller.

The model also frustrated buyers, who have complained that they are held to a structure that allows the best and worst agents to be compensated equally, and that the price of the house was always a bit higher, because both sides had to be paid equally from only the purchase price.

Presuming that the settlement is approved by a federal court, starting in July, sellers will no longer have to pay the entire freight for the transaction and buyers will be able to directly negotiate fees with their agents and that agreement will have to be put in writing. This is a win for consumers, but a big loss for agents and their companies. Last October, Analysts at Keefe, Bruyette & Woods predicted that a change in the real estate compensation model could reduce the $100 billion consumers pay in commissions by 30 percent.

The big question is whether the settlement will lead to lower home prices? Currently, the median price of a home sold is $417,700, which means that the total commission paid would be about $25,000. If that fee were to fall by 30 percent, would median home prices drop by $8,000? In a real estate market that remains dislocated due to low levels of inventory, the answer is probably not any time soon.

The near-term aftershock of the NAR settlement is more likely to impact the amount of money that real estate agents earn, and thereby potentially reduce the number of the more than 1.5 million brokers by half. The culling could help those superstar agents earn more, but may mean that many others will need to find another profession.