Settlement Will Change How We Buy & Sell Homes
Look for lower commission rates, unbundled services, and a smaller real estate sales industry
With housing prices hovering near all time highs, Americans have been shelling out more than $100 billion a year in commissions to sell real estate. This enormous sum is the result of a standard commission rate while housing prices have risen a fair amount over the past few decades.
I’ve personally been involved in more than a dozen real estate transactions, most of which involved a real estate sales person or two. I have always — and I mean ALWAYS — been confused by why the real estate brokerage fees were so high. I still recall thinking it was highway robbery for a sales agent to take 6% of the transaction as a fee for facilitating a sale. Many of my friends outside the United States agreed with me, noting American commission rates were way above levels in their countries. In fact, The Wall Street Journal even ran a story last fall with the headline of “Almost No One Pays a 6% Real-Estate Commission—Except Americans” that highlighted how American real estate sales commissions were among the highest in the world. The New York Times, citing a study by investment firm Keefe, Brunette, & Woods, elaborated on this dynamic, noting “Commision rates are significantly lower in many other countries. In Britain, they are just above 1 percent, while in Singapore, the Netherlands, and Denmark, they hover between 2 and 3 percent.”
This is all about to change. Last week, the National Association of Realtors (NAR), the nation’s largest association of real estate professionals, agreed in principle to settle lawsuits that had argued that NAR had de facto set a standard commission rate, violating antitrust laws. Without a standard rate (around 6% in most of America), real estate sales professionals would have had to lower their commission rates to secure business. The settlement involved a large fine, but more importantly, an agreement that NAR would eliminate its rules on commissions.
Historically, NAR had a rule that required seller agents to clearly advertise the percentage of the transaction value that would be paid to a buyer’s agent. According to the lawsuits, this rule basically set compensation for agents representing buyers, stifled competition, and “led to a practice called ‘steering’ in which buyer agents direct their clients to more expensive homes where the agents stand to earn a large commission.” The settlement, which still needs to be approved by a court, stops realtors from advertising commission rates to buyers’ agents. While this may not seem like a big deal, housing experts are already describing the settlement as ”one of the most significant jolts in the U.S. housing market in 100 years.”
Forthcoming Changes in How We’ll Buy and Sell Homes
I think there are three primary ways the way we buy and sells homes will change. First, real estate commissions are likely to fall as the settlement allows for more fee negotiation by both buyers and sellers. Second, the change will also create an opportunity for business model innovation as those involved in the real estate transaction industry might unbundle services and price each separately. Lastly, I believe the number of salespeople in the real estate industry could shrink.
Because buyer agents would no longer be compensated by the seller (even if the value was de facto embedded in the sales price), buyers might be left with less representation or might have to pay for representation directly. Previously, the sale of a $500,000 home might result in $30,000 of commissions, often split $15,000 for the seller’s agent and $15,000 for the buyer’s agent. The seller would receive a net $470,000 (before fees). Let’s assume competition drives the seller agent standard fee down from 3% to 2% as more and more agents seek to represent sellers rather than buyers. Let’s further assume that buyers will have to pay directly for representation.
If this hypothetical scenario were to unfold, the seller would receive $490,000 and the buyer might end up paying $500,000 plus whatever they might have committed to paying a buyers agent. But with online databases with complete real estate listings, how much would a buyer be willing to pay for someone to drive them to tour homes, negotiate documents, or provide market intelligence? My suspicion is that it may prove to be less than the amount of commission paid by the seller, implying total commission for the sale would be less than $20,000, a meaningful drop from the previous $30,000.
In late February 2024, the Federal Reserve Bank of Richmond published a paper written by two of its economists entitled “Real Estate Commissions and Homebuying.” Although the paper is filled with equations and greek characters, it has some noteworthy findings. Specifically, the economists conclude that a system that allows homebuyers to pay “a la carte” for services would likely lead to buyers touring fewer homes and negotiating lower purchase prices. The net reduction in commissions paid could be, according to their findings, as high as $30 billion.
Further, given other countries that don’t have anti-competitive price setting have significantly lower rates, it’s highly likely that commission rates will fall. As mentioned above, other developed nations have real estate commission rates meaningfully below America’s current rates. Another oft-cited example is the plunge in travel agent commission upon the introduction of online travel agencies such as Kayak and Expedia that empowered customers with more information.
Greater transparency in real estate commissions will probably also drive an unbundling of real estate services. Will real estate agents representing buyers start charging per home tour? Might agents representing sellers charge per showing? Or could some agents start charging an hourly rate to compensate for time spent negotiating terms or accompanying home inspectors? Or perhaps real estate agents will price their services for a fixed fee? Will sellers be asked to pay for professional pictures, marketing brochures, or a promotional website? And of course, let’s not forget about the increasing role of technologies to provide both buyers and sellers information and the ability to research and market directly.
It’s also likely services offered will vary according to the transaction value. A flat $15,000 listing fee might be unacceptably high for a seller expecting to sell her home for $300,000, but might be seen as a bargain for someone expecting to sell her home for $1,000,000. Some buyers might be willing to pay for services such as research on community services, school offerings, or even the proximity of golf courses. Under certain scenarios, commissions paid might actually rise.
In aggregate, the disruption to the commission model is likely to lead to less revenues for professionals engaged in real estate transactions, a development that likely points to less employment in the industry going forward. If commissions were to fall by 33% (as per the example above), might industry employment fall by a similar amount? In early 2024, the National Association of Realtors website indicated that it represented more than 1.5 million real estate professionals. Could membership fall to under 1 million? How will a smaller real estate transaction industry impact the economy?
Will Home Prices Rise or Fall?
Perhaps the most interesting and important topic to ask about the impact of this settlement is how it might affect home prices. How will a change in the real estate commission rates impact values? While it’s too early to tell, several scenarios can help us navigate the inevitable uncertainty.
One possibility is that home prices fall as sellers share the benefits of lower fees with buyers. Using the example above, let’s assume that our seller wanted to get $470,000 net of commissions and therefore listed his house for $500,000. But if the listing agent only charged a 2% commission, that would lead to a listing price of slightly less than $480,000, implying a 4% drop from the original $500,000 listing price.
There is, however, another scenario worth thinking about, one in which home prices rise as a result of more demand. If our seller listed his house for $500,000 and realized the $490,000 as described above, he would have an additional $20,000 to put toward the downpayment of his next home, implying he could afford to pay more. Might that lead to higher real estate prices?
Of course, it would be naive to think that transaction costs are the only driver of real estate values. As I’ve written about elsewhere, consumer confidence and interest rates are important factors that impact real estate values. As does supply of available homes and the demand for those homes. And of course, every geography is different and faces different demographic considerations. Amidst this uncertainty, one development seems certain: greater transparency in real estate commissions will empower both sellers and buyers and should lead to a more efficient market.
VIKRAM MANSHARAMANI is an entrepreneur, consultant, scholar, neighbor, husband, father, volunteer, and professional generalist who thinks in multiple-dimensions and looks beyond the short-term. Self-taught to think around corners and connect original dots, he spends his time speaking with global leaders in business, government, academia, and journalism. LinkedIn has twice listed him as its #1 Top Voice in Money & Finance, and Worth profiled him as one of the 100 Most Powerful People in Global Finance. Vikram earned a PhD From MIT, has taught at Yale and Harvard, and is the author of three books, The Making of a Generalist: An Independent Thinker Finds Unconventional Success in an Uncertain World, Think for Yourself: Restoring Common Sense in an Age of Experts and Artificial Intelligence and Boombustology: Spotting Financial Bubbles Before They Burst. Vikram lives in Lincoln, New Hampshire with his wife and two children, where they can usually be found hiking or skiing.