EXPLAINER: How will the National Association of Realtors settlement change homebuying?

When it comes to residential real estate in 2024, two things are true: Houses have never been more expensive, and they’ve never been easier to find.

And as a result, both buyers and sellers are frustrated. Buyers believe that they’re doing a lot of the legwork combing listings on Zillow and Redfin, and then their agents end up getting compensated for it. Sellers have to cut a huge chunk of the proceeds on their home to agents. When the average home costs over $400,000, percentage-driven transaction fees start to smart a lot more.

All that frustration gave way to a historic lawsuit against the National Association of Realtors, which resulted in a change of rules that has the potential to totally transform the way homes get bought and sold in the United States. Let’s get into it.

What happened?

The standard practice for real estate transactions has been that the seller used to pay all agent fees, which would be split between the buyer’s and seller’s agents, usually amounting to six percent of the total sale price of the house. (One complicated detail: home prices are set with those high commissions in mind, meaning they’re essentially “baked in.”) 

And compared to many other industrialized economies, six percent commission fees are quite high. Seller’s agents rarely charge more than two percent, and in many countries — Australia, Canada, and Denmark, for example — buyers rarely use agents at all. 

What agents have brought to the table, and how they’re being compensated for it, has now come under scrutiny.

‍Theoretically, agents give clients access to exclusive listings. A buyer’s agent has access to a database of available homes for sale called a multiple listing service (MLS), available only to realtors. Listings on that database also show how much the buyer’s agent could expect to be paid — which some homebuyers argued creates an incentive for agents to only show them homes that would pay them a higher commission. 

‍But then those listings became available to anyone with an internet connection. At least half of buyers now find their homes online without the help of an agent. 

‍Property prices went way up, but that doesn’t really change the work involved in a sale.  Say you purchase a million dollar home, where your agent would make $30,000. Ten years ago, that same home might have been $300,000, which means that the agent got a 333% raise for the same amount of work. That’s why some real estate experts are arguing that agents have been overcompensated, distorting the market and what people are paying for houses. 

In 2023, several coalitions of homeowners across the country sued the National Association of Realtors, essentially claiming that the organization has been colluding against anyone trying to buy or sell a home and driving overpriced services. In April 2024, a $418 million settlement against the NAR dictated that the organization would have to change the rules of how it’s done business for years, ostensibly to return some market power to homeowners and -buyers.

What does this change for buyers?

One motive of the NAR ruling is to gain more transparency in buyers’ obligations to their agents, and vice versa. 

• Buyers and their agents will have to have explicit contracts before viewing any properties. 
• Buyers also have to decide how they’re going to pay their agents — in addition to the sale price of the house, out of any commission the seller provides, on an hourly basis, or only for a selection of services. They might decide to enter the market with only the help of a real estate attorney, or completely solo.
• In the case of flat-fee buyer agent commissions, there’s no longer an incentive for the agent to get the client to pay a higher price for a home.

For sellers?

Sellers can still decide to pay a buyer’s agent commission to sweeten the deal on their house. In that case, not much will change. 

Some experts are arguing that if they don’t, and leave payment of an agent up to the buyer, that’s going to drive a lot of potential buyers out of the market, especially those with less cash to spend. Most are already struggling to afford a down payment, and would see the additional cost of an agent commission as an insurmountable expense.

If sellers largely decide to stop paying commissions, the greater economic consequences could be a slowdown in the housing market and a slight reduction of home prices across the board.

And for agents?

There’s no question that there’s now a lot more pressure on agents to prove their worth. 

• One estimate suggests that as much as a third of working realtors today will drop out of the market due to these new rules. 
• Some experts predict that the new rules will simply increase already stark disparities among realtors, where the most desirable, highest-earning agents feel no pressure to drop their commission, while the majority of lesser-earning agents will be forced to lower their rates to compete for clients. 
• Meanwhile, seller’s agents may have to take on more work with contracts and other tasks as buyers attempt to enter the market sans representation.

So what’s the big picture shift?

It really depends on how sellers decide to treat their obligation to buyers’ representation. We predict that commissions will come down all around, there will be fewer real estate agents in the market, and home prices will drop a little bit in the long term.