Major Impact: NAR Settlement Insights
On March 15, 2024, the National Association of Realtors (NAR) announced an agreement that would end the ongoing class-action litigation brought against NAR, its members, related associations, and the NAR managed MLSs. The NAR's consent to the significant $418 million settlement - which is subject to court approval - over several years foreshadows a profound transformation in the realm of real estate transactions and agent remuneration.
The current system for US agent compensation has long been controversial. Home sellers have generally paid between 5% and 6% to the selling agent who splits the money - usually a pre-determined percentage - with the buyer's agent. Critics have argued that such a system inflates home prices and misaligns the incentive structure for buyer's representatives.
NAR continues to deny any wrongdoing in connection with the Multiple Listing Service (MLS) and the compensation model that has been in use since the 1990s. Nykia Wright, the interim CEO of NAR, commented that “NAR has worked hard for years to resolve this litigation in a manner that benefits our members and American consumers. It has always been our goal to preserve consumer choice and protect our members to the greatest extent possible. This settlement achieves both of those goals.”
How the agreement will change the overall process of residential home buying and selling has yet to be seen. Experts and realtors alike are hotly debating the effects the new rules will have in the near future.
What is the NAR settlement?
The NAR settlement came about as a result of a class-action lawsuit (Burnett v. National Association of Realtors et al.) which was filed in Kansas City, MO last year. In October of 2023, the jury ruled in favor of the plaintiffs, which asserted that NAR and several major brokerages colluded with regards to agent compensation and commission structure. As a result, and in the face of over 20 similar lawsuits, NAR agreed to a groundbreaking $418 million settlement over approximately four years to resolve claims related to broker commissions. In addition, NAR agreed to making changes to some of its regulations. This settlement will bring about substantial changes in how real estate transactions are conducted and how agents are compensated.
Key changes of the NAR agreement:
Formal Representation Agreements: Starting in July 2024, MLS members must enter into contractual representation agreements with potential buyers before the buyer tours a home, which is designed to ensure that homebuyers are aware of their buyer's rates.
Restrictions on Compensation: As part of the settlement, NAR agreed to no longer require upfront compensation to a buyer's agent for broker's advertising a listing. Similarly, NAR may not institute regulations that results in a seller's agent setting the compensation for the buyer's agent.
Lower Costs for Home Buyers and Sellers: The landmark deal could potentially reduce realtors' standard 6% sales commission fee by up to 30%, resulting in significant savings for homeowners.
Impact on Real Estate Agents: The ruling may lead to a restructuring of how agents are compensated, potentially affecting the $100 billion annual commission pool for 1.6 million realtors.
Market Impact: While the deal is expected to shake up the housing market and potentially drive down home prices, experts caution that the impact on home prices may not be substantial as other factors like mortgage rates play a more significant role in homebuying decisions.
Overall, the NAR settlement marks a significant shift in the real estate industry, aiming to enhance competition, transparency, and consumer choice while reshaping how real estate transactions are conducted and how agents are compensated.
How does the NAR settlement affect agents and brokers?
How exactly the settlement will affect agents and brokers nationwide is still being debated. Some argue that the settlement will drastically reduce compensation to buyer's agents, but others argue that the effect will be minimal. Listing agents may still offer a commission to a buyer's agent outside of the MLS and sellers continue to retain the option to include a closing cost credit.
Similarly, there are those who believe that overall home prices will be reduced as a result of the agreement - but critics argue that there are many other factors that affect home prices. Moody's Analytics Chief Economist Mark Zandi was reported by Fortune to have said, “I expect commissions to get bid down to 4% to 5% over time with variation by home price and geography. It's a significant change but will likely be gradual. I expect most of the gain to be captured by the seller, so the impact on home prices will be small.”
Some are already adapting to the new rules of the proposed settlement. One broker, for example, will offer a flat-rate service for the buying process. Buyer's agents, in general, will have to develop and highlight the value they bring to the home buying process.
Closing Thoughts
This settlement, significant in both scope and impact, fundamentally alters the real estate landscape. Previously held notions regarding commission structures are now subject to increased scrutiny and revision, creating an environment where consumer needs and fair competition emerge as paramount considerations.
Adaptation to these rulings signifies an important evolution in industry standards – one where transparency and consumer empowerment take center stage in real estate transactions. These modifications to long-standing practices are certain to shake up the marketplace.
Agents and brokers must recalibrate their business models accordingly, attuning to a climate where merit and client value dictate earnings. As we continue through 2024, the impact of these adjustments will further manifest, signifying a pivotal turning point in how real estate professionals cultivate trust and deliver service excellence within the market.