Is NAR’s Settlement Enough to Save the Sinking Real Estate Ship?
On January 2nd, 2024, the Glens Falls Today Business Report published an article I wrote entitled “Is the NAR lawsuit verdict good for the housing market?” Since that time, much has transpired which requires us to revisit this topic.
As predicted, numerous copycat lawsuits were filed in various states against the National Association of Realtors (NAR), mimicking the successful lawsuit in Missouri that claimed the NAR and other national real estate brokerages conspired to create a system that artificially inflated real estate agent commissions. The defense of these numerous lawsuits from all angles was driving NAR to the brink of bankruptcy.
On March 15, 2024, a proposed settlement agreement was announced by NAR to settle all litigation brought by home sellers related to real estate agent commissions. The settlement, which is still pending court approval, would require NAR to pay $418 million over four years, as well as a requirement that NAR not publish offers of real estate agent commission compensation of the multiple listing service (MLS), where almost every home is listed for sale.
In addition, any MLS participants/subscribers working with prospective buyers would be required to enter into written agreements regarding scope of service and compensation/commission expected. Under the terms of the settlement, NAR members would begin implementing these practice changes in July of this year.
NAR continues to deny any wrongdoing. The proposed settlement agreement not only makes that clear, but also seeks to release liability for most of its members and real estate brokerage partners. According to NAR, the “MLS cooperative compensation model rule,” introduced in the 90s, was in response to consumer protection advocate groups’ calls for greater buyer representation.
On April 5, 2024, a federal appeals court in Washington, D.C., sided with the Department of Justice (DOJ) in a separate antitrust investigation, allowing the DOJ to reopen a previously settled investigation that focused on real estate agent commissions and how they received compensation.
With the added wrinkle of a further probe by the DOJ, it may be some time before the proposed settlement agreement above is approved by the court. No doubt, the DOJ will seek to have some say in any final version of settlement reached with the NAR.
Some believe that the proposed settlement does not go far enough to uncouple the current commission compensation structure between a seller’s agent and a buyer’s agent. For example, under the terms of the proposed settlement, a seller’s agent would no longer be able to list any offers of commission compensation to buyers’ agents on the MLS, but there is nothing preventing the agents from communicating outside of the MLS regarding commission compensation.
If the DOJ’s agenda is to truly separate which parties negotiate and pay for their respective agent’s commissions, then more changes in practice may need to be installed into the proposed settlement agreement in order to muster court approval.
However, one of the largest issues with completely uncoupling the commission compensation structure is that it puts a disproportionate amount of strain on a prospective buyer’s ability to come up with the closing costs, in addition to a reasonable down payment needed to purchase a home. The argument is that the seller is in a greater position to absorb the commission since they have control over the asset being sold, and their closing costs are not coming out of their pocket directly the way they would be for the buyer.
Some good news in this area came from Fannie Mae and Freddie Mac on April 15, 2024, where they issued a notice stating that buyer agent compensation will not be treated toward any seller concession limits required by a buyer’s lender. This helps buyers in that any seller concession agreed to can be used toward other closing costs of the buyer, even if the seller agrees to pay buyer’s agent’s commission as part of the sale, without chewing up the entire concession limit with commission compensation.
Unfortunately, not every lender or type of loan will allow for seller concessions to be part of the transaction. In addition, most lenders require the buyer to pay for mortgage insurance (PMI or MIP) in instances where the buyer does not yet have at least 20% equity in the home. This could cost the buyer roughly $75 to $125 more each month, in addition to their mortgage payment. So, if the NAR settlement requires buyers to pay for their own agents as part of their closing costs, will they have enough left as a downpayment to avoid mortgage insurance? Or, will we only see their monthly mortgage payment increase with the addition of PMI?
The thought is to try to curb the rising costs of home purchases. However, it’s not that hard when you look at the bigger picture and break it down. The inventory of homes for sale is at an all-time low. At the same time, demand for homes to purchase remains high. Simple economics of supply and demand would tell us that with low supply and high demand, the costs will continue to rise. And again, not discounting the importance of keeping antitrust actions in check, but is going after the NAR and real estate agent commissions going to solve the problem we currently have? Or, do we need to look at the supply side of things and see what can be done to spur sellers to sell and/or encourage new homes to be built?
Surely, there will be more to come over the next few months as the DOJ continues to probe the NAR while the housing market continues to crawl at a snail’s pace. If owning a new home is to remain part of the American Dream, then we need to ensure that it does not become unattainable or unaffordable and turn into a nightmare.