A settlement between the National Association of Realtors, or NAR, and plaintiffs in several lawsuits challenging the practice of commission-sharing went into effect Saturday. And while the agreement aims to reduce the fee percentage paid to real estate agents, there could be an additional consequence.
A working paper published Monday by the National Bureau of Economic Research (NBER) analyzed the potential impact of reduced commissions on home prices and looked at who may benefit the most.
Its conclusion? “A reduction in agent fees generally leads to an increase in home prices.”
What is the NAR settlement?
Until now, when a homeowner hired a listing agent to sell their home, they would pay that agent a commission, typically between 5% and 6% of the home’s sales price. The seller’s agent would then split the fee with the buyer’s agent. In many cases, this allowed buyer agents to advertise their services for free, even though the seller was paying them.
This commission sharing, also known as cooperative compensation, was a standard practice included in the NAR’s regulations and followed by most real estate agents.
However, starting in 2019, home sellers in several states brought a series of class action lawsuits against the NAR and several major brokerage firms. They alleged that the practice unfairly increased the cost of home selling because the owner was paying for both agents — and those fees were paid out of the profits of the home sale. The plaintiffs asked the courts to do away with the commission-sharing practice.
The NAR settlement resulted from a specific class action lawsuit brought by home sellers in Missouri. It covers a significant portion of the country’s real estate agents and affiliated brokerages that decided to opt into the agreement.
As a result of the settlement, listing agents are no longer required to share their commission and are banned from advertising an offer of compensation to a buyer’s agent on listing sites. Buyers who hire an agent to help purchase a home must sign an agreement with that agent before going on home tours. The agreement should include a provision where the buyer agrees to pay their agent’s commission and the percentage to pay.
All of this aims to foster competition among agents and reduce the costs of hiring an agent. But questions linger about the settlement’s potentially negative effects on less affluent and first-time homebuyers.
How agent fees could affect home prices
The paper published by the NBER posits that lower agent fees also reduce the future costs of selling a home, leading to a lower cost of ownership overall. And, when that property sells again in the future, those lower selling costs — because of the lower agent fees — will translate into an expectation of higher home prices due to property appreciation.
“Lowering agent fees has a similar impact to reducing real estate taxes, as both reduce the cost of ownership and generally result in higher home values,” the report says.
Just how much home prices increase will depend on how low the agent fee goes. Assuming the seller continues to pay both agents, the researchers estimated that a reduction in commission from 6% to 5% would result in a 2.3% price increase. A 4% commission would result in a 4.8% increase, and a 3% commission would increase prices by 7.3%.
A similar trend of higher prices could happen if the buyer pays their agent: They would face the possibility of paying their agent’s commission and paying more for a home, as well. Reducing the buyer agent commission from 3% to 2% would lead to a 0.6% increase in price. A 1% commission would increase prices by 3.8%, and a 0% fee would result in a 7.3% increase.
Take this with a grain of salt, though. The report is a hypothetical scenario that looks at the potential outcome of home prices under very specific conditions. It’s not a forecast of what will happen.
How soon could the new rules impact the housing market?
The full impact of the new rules is still to be determined. But according to a report from brokerage Redfin, buyer agent commissions have decreased from an average of 2.66% in January to 2.55% in mid-July (after the agreement announcement).
Whether agent commissions do, in fact, see a more significant decline will depend on the actions of both sellers and buyers. While the new rules don’t require a listing agent to share their fee, they don’t prohibit the practice.
According to Marty Green, principal at Texas-based law firm Polunsky Beitel Green, many brokers and agents implemented the new rules before the official effective date.
“What we’ve seen so far is more modest changes rather than dramatic changes,” he says. “I think that’s probably the way this is going to impact [the market].”
Green says he does predict more transparency about how agents are paid, leading to more conversations between realtors and their clients, specifically home sellers, about whether to help potential buyers by continuing to split commissions. Some sellers may continue to share commissions (or fees) to attract more buyers.
With some listings lingering on the market because of the lack of affordability caused by high mortgage rates and home prices, some motivated sellers, says Green, may decide to be conservative and offer the same commission as in the past because they don’t want to “put their home at a disadvantage.”
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