Residential Real Estate Shaken to Its Core
This past week, real estate firm Compass agreed to pay $57.5 million to settle antitrust claims related to commissions. It’s the first major brokerage to announce a settlement since the National Association of Realtors agreed to pay $418 million as part of a lawsuit alleging the industry conspired to inflate agent fees.
The announcement of the agreement, which effectively ends the standard 6 percent commission for Realtors, serves as an indicator of the potential settlement amounts they might face regarding similar claims. Compass joins three other significant brokerages that have settled similar litigation since the previous year.
Re/Max Holdings and Anywhere Real Estate, the latter owning brands like Corcoran and Century 21, resolved comparable claims last autumn for a combined total of about $140 million. In February, Keller Williams Realty reached a $70 million settlement.
The Amount May Grow
In total, including NAR's $418 million agreement and settlements by other real estate firms, the industry has committed to paying $684 million to resolve antitrust allegations of artificially maintaining high commissions.
This amount may escalate further, as the NAR settlement does not encompass real estate brokerages with annual residential sales volumes exceeding $2 billion. Many of these firms have been cited as defendants in similar lawsuits and have yet to settle.
“The [NAR] settlement appears to give these brokers an ultimatum: pay a substantial sum to settle outstanding home seller claims or battle it out in the courts alone,” said analysts at Capstone in a note to clients this past week.
In recent months, the residential real estate sector has grappled with significant financial strain due to extensive litigation claiming that industry regulations regarding real estate agent compensation inhibited buyers from negotiating for cost savings and maintained artificially inflated commissions.
Historic Verdict Prompts Overhaul
In October, a jury in Kansas City, Missouri, rendered a $1.8 billion verdict against the NAR and two major brokerages, prompting a flurry of similar lawsuits.
The anticipated settlement by NAR this month is poised to overhaul the commission framework for purchasing and selling homes in the United States once these regulations take effect in July. Experts say the NAR settlement is a win for consumers because it will create transparency around how commissions are set and paid and ultimately lower costs.
'A change to the real estate commission structure is shaking the industry — and homebuilders and consumers appear to be the winners,' said KBW analyst Ryan Tomasello told Yahoo Finance.
Traditionally, buyers haven't directly paid agents, with the buyer's agent commission factored into the house price. However, going forward, buyers may need to cover these costs upfront if they wish to enlist agent representation.
Commission Pool Will Shrink
Realtor commissions in the United States have remained steady, ranging from 5 percent to 6 percent since the 1950s, typically divided between the seller’s and buyer’s agents, with the seller bearing the full cost.
With increased transparency, buyers will find it easier to negotiate fees or opt to forego agent assistance altogether.
For those buyers who do engage an agent, proponents suggest that fee expenses are likely to see significant reductions. Commission rates in the U.S. rank among the highest globally. For instance, selling a $500,000 home in the US incurs commissions of about $25,000 to $30,000, whereas in the UK, the figure is roughly $6,500.
Consequently, based on KBW's analysis, the total commission pool, currently standing at $100 billion nationwide, could potentially shrink to $70 billion.
How Will The Industry Evolve?
Over the years, the Department of Justice has consistently advocated for increased competition in the real estate market. The pressure exerted by the DOJ’s antitrust division likely played a role in the recent landmark settlement.
Speaking at a conference in February, NAR President Kevin Sears acknowledged the organization’s enduring scrutiny from the DOJ and emphasized the inevitability of change, citing a barrage of lawsuits and the looming threat of substantial financial damages.
“The way we conduct business is bound to evolve,” he said.
Three predominant perspectives within the residential real estate industry have emerged: some real estate agents deny significant business alterations, others embrace new payment structures to sustain profitability, while a third group contemplates transitioning to entirely different professions.
Belinda Tucker, a Realtor who established her own real estate firm in Moore County, North Carolina, last year, acknowledges the potential for both positive and negative outcomes.
"It could turn out to be a good thing," Tucker told CNN. "Or it could turn out to be the worst thing ever."
Under the proposed settlement terms, sellers' agents will no longer be obligated to offer commissions to buyers' agents, necessitating new negotiation strategies for payment.
"I don’t know how we’re going to negotiate, but we’re going to have to because we have to get paid," said Tucker.
New Payment Models May Emerge
The forthcoming NAR deal, effective this summer, is anticipated to disproportionately affect agents representing home buyers, potentially reducing their commissions and dampening demand for their services, observes Stephen Brobeck, a senior fellow at the Consumer Federation of America.
This shift may spur the emergence of new payment models, such as flat-fee structures or hourly rates for buyers' agents, suggests Brobeck.
Anthony Lamacchia, overseeing a network of over 500 real estate agents, recounts the concern among agents as he briefed them on the changes, including the necessity to negotiate commission splits between listing agents and buyers' agents.
“They were definitely spooked from all of this,” Lamacchia told The Wall Street Journal.
The NAR boasts nearly 1.5 million members, a figure that surged during the pandemic-driven housing boom. However, the market has proven challenging, with more agents than homes available for sale by early 2021. Rising interest rates further compounded the difficulties faced by agents.
Zillow Will Be Impacted
Since its inception almost two decades ago, Zillow has revolutionized how Americans interact with the housing market, encompassing activities such as buying, renting, selling, and even exploring housing fantasies.
However, a recent settlement challenging the dominance of powerful real estate agents could spell trouble for Zillow. This comes amid declining traffic in a fiercely competitive housing market.
The company's stock has dropped nearly 13 percent following a $418 million settlement between the NAR and groups of home sellers.
Zillow itself warned in its recent annual report that if agent commissions are substantially affected, it could lead to reduced marketing budgets for real estate partners or fewer participating partners, negatively impacting its financial performance.
One of Zillow's main revenue streams is lead generation for real estate agents through products like Premier Agent, which connects agents with potential homebuyers. However, if agent fees are slashed as expected, agents may have less to spend on these products
Although some analysts suggest that Zillow has been preparing for these changes, others predict potential disruptions to the industry's commission structure, with estimates of a downside risk of 40% to 60%.
However, the settlement's finalization is pending judicial approval, and there may be attempts within the industry to maintain 5% to 6% commissions, according to Stephen Brobeck, a senior fellow at the Consumer Federation of America.
Zillow expressed uncertainty about the settlement's impact on housing market dynamics in a statement to CNN, indicating that the shift in real estate transaction costs is too new to fully understand.
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