Is the NAR Lawsuit Good for the Housing Market?

A Missouri jury recently issued a verdict that could transform the way real estate agent commissions are paid, and who pays them.

On Halloween, the jury in a class action suit found the National Association of Realtors (NAR), together with a couple of national real estate brokerages, liable for conspiring to create a system that artificially inflated commissions for home sales under the Sherman Act and Missouri antitrust law. The jury awarded damages to the tune of $1.8 billion, which could be tripled to more than $5.3 billion by the Judge in the case under U.S. antitrust law. NAR has stated that they intend to appeal the verdict.

In a typical real estate transaction, the Seller is responsible for paying anywhere from 5-6% of the sales price as a commission to their listing broker, who then splits that commission with the agent who brought the successful buyer to the table.

The jury agreed with Plaintiffs that requiring payment of buyers’ agents’ commissions from the listing agent created a system that suppresses competition and artificially keeps buyers’ agents’ commissions in the 2 1⁄2 to 3% range, despite the perception that buyers’ agents’ roles have been diminishing due to the online presence of information about homes for sale.

What this verdict suggests is that if buyers were required to pay their own agent’s commission directly,

they would be able to save money by shopping around and potentially negotiating better commission rates. Furthermore, sellers would no longer be absorbing the additional cost of a buyer’s agent’s commission in their sale price. And, since this verdict, there have been several additional class action lawsuits filed throughout the country, including New York State.

While it is important to underscore the importance of antitrust laws in our society, before anyone begins waiving a victory banner, let’s consider for a moment the far-reaching impact this decision could have. Is this actually good for buyers? Is it good for sellers? Is it good for the housing market?

At first glance, this sounds like a good thing for buyers. After all, they would now have the ability to negotiate with agents and save money on their commissions, right? True, until you consider how and when the agent will want to be paid. Are buyers going to be able to come up with an additional $5- 10k as closing costs for commissions?

Many would argue that this would be difficult if not impossible for first-time homebuyers or buyers utilizing FHA loans. Would we thereby be reducing the number of available homebuyers to the market? Also, it is not uncommon for a buyer’s agent to show more than a dozen homes to their buyer before their buyer submits an offer on one of them. And, many buyers lose out in several multiple offer attempts before their offer is finally accepted. So, if buyers now become responsible for paying their own agent directly, will agents begin a practice of requiring a retainer fee to help offset their travel expenses for showing homes?

Bottom line, is this going to create a chilling effect on buyers using agents where more buyers will attempt to represent themselves in their home-buying journey? Caution should be given to anyone seeking to represent themselves in such a large purchase.

What about our sellers? Surely not having to pay an additional 2 1⁄2 to 3% in commissions to the buyer’s agent is good for the seller, right? Maybe, unless you consider the above scenario. With fewer homebuyers being able to afford the additional closing costs or becoming discouraged when they attempt to go it alone, will there be fewer multiple offer situations to help bid up the price of the property, allowing the sellers to achieve the maximum amount for their property?

Will buyers essentially have less buying power with less available money to put towards the purchase price? Will we have more unrepresented buyers pulling out of deals due to not receiving the education they would have received by working with an agent? It costs the Seller both time and money every time they have to prepare and re-list a home for sale.

While more class action suits will continue to roll in, we should not expect to see any final decisions or changes to the current structure for some time, especially in light of anticipated appeals, the usual trope for such large-scale calamities.

While some will claim “change is good,” others will caution “be careful what you wish for.” As the economy continues to sputter in part due to a sluggish real estate market, careful consideration should be given to weakening an already fragile market.