National Association of Realtors to cut commissions to settle lawsuits. Here's the financial impact.
It could soon cost homeowners a lot less to sell their homes after a real estate trade group agreed to slash commissions to settle lawsuits against it.
The National Association of Realtors (NAR) agreed in March to pay $418 million over roughly four years to resolve all claims against the group by home sellers related to broker commissions. The agreement goes into effect on August 17, and is expected to bring sweeping changes to how real estate agents across the nation carry out transactions. Experts even expect home prices to fall, given that sale prices won't include the steep commissions that have been the industry norm for decades.
Almost 9 in 10 home sales are handled by real estate agents affiliated with NAR. The organization, the country's largest trade association, requires home sellers to determine a commission rate, typically 6%, before listing homes on its property database, known as the Multiple Listing Service, or MLS.
The lawsuits argued that the structure harms competition and leads to higher prices.
"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," NAR interim CEO Nykia Wright said in a statement Friday. "This settlement achieves both of those goals,"
How will this impact real estate commissions?
Notably, the landmark deal will slash realtors' standard 6% sales commission fee, potentially leading to significant savings for homeowners. The group had been found liable for inflating agent compensation.
Fees could be slashed by up to 30%, the New York Times reported, citing economists.
That could impact earnings for 1.6 million real estate agents, who could see their $100 billion annual commission pool shrink by about one-third, analysts with Keefe, Bruyette & Woods wrote in a report last year about the pending litigation.
Standard commission rates in the U.S. are among the highest in the world. Real estate agents make money by pocketing a percentage of a home's sale price.
Could homeowners save money?
Most likely, because homeowners are generally on the hook to pay the 6% commission when they sell their property, although sometimes the fee is split between the buyer and seller.
For instance, a homeowner selling a $1 million property would spend up to $60,000 on agent fees. If commissions are reduced by 30%, that same homeowner would pay a commission of about $42,000.
How will it impact the housing market?
Housing experts expect the deal to shake up the housing market and even drive down home prices across the board.
Residential brokerage analyst Steve Murray, however, is skeptical that home prices will see a meaningful decrease as a result of the deal.
"It will have the impact of reducing commission costs for sellers; it will save money for sellers to the detriment of buyers," he said, adding, "Sellers don't set home prices based on what their closing costs will be," Murray said. "The market sets home prices."
While lower or more negotiable commission fees could incentivize some new homebuyers, LendingTree senior economist Jacob Channel doesn't expect the market to roar "back to life in the wake of this settlement," while mortgage rates remain high.
"Home prices and [mortgage] rates almost certainly play a much bigger role in someone's homebuying choices than how much they'll need to pay their real estate agent does," he said.