Experts suggest that new rules in real estate transactions will provide buyers and sellers with increased flexibility to negotiate fees with their representing agents, potentially leading to heightened competition and a decrease in the standard 5% to 6% commission charged by seller’s agents. These rules stem from a lawsuit filed by a coalition of home sellers. While the anticipated outcome may benefit consumers by offering more competitive pricing, there are concerns about unintended consequences, particularly the potential difficulty for first-time homebuyers to afford fees under the new regulations.
Starting in mid-July, prospective homebuyers will encounter an additional step when touring houses listed on a multiple listing service (MLS): signing an agreement with their real estate agent. This agreement presents an opportunity for buyers to negotiate the services provided by their agent and the associated fees. This requirement is part of a settlement reached in a class action lawsuit filed by home sellers against the National Association of Realtors (NAR). Along with the buyer’s agent agreement, the settlement eliminates a section of MLS listings that previously displayed the percentage commission offered to buyer’s agents.
While this change may seem minor, it has the potential to significantly alter the landscape of the real estate industry in the United States. Experts believe that it could lead to changes in real estate agent practices and compensation structures, ultimately resulting in lower fees for buyers and sellers during the homebuying process.
Sophia Gilbukh, a professor of real estate at City University of New York, anticipates that the industry will become more competitive as a result of these changes. She suggests that lower prices may be accompanied by a reduction in the number of inexperienced agents who contribute little value to clients.
Little Change in Commissions Seen in Near Term
In the current real estate market, it’s common for the seller’s agent to receive a commission ranging from 5% to 6% of the sale price, which is then split with the buyer’s agent. While there are no strict rules governing the compensation received by the buyer’s agent, sellers typically offer the standard split to ensure that their properties are shown to potential buyers. Research published in the American Economic Journal in 2017 revealed that houses offering lower commissions were less likely to sell and took longer to sell.
Despite the recent changes mandated by the settlement, industry analysts believe that the standard commission rate of 5% is likely to remain unchanged in the near term. They speculate that agents may negotiate the same split as before, albeit through alternative channels rather than the MLS. Jefferies Equity Research analysts noted that the settlement does not explicitly prohibit brokerages from offering compensation outside of the MLS, suggesting that there may be some ambiguity allowing for communication of buyer agent compensation through other platforms such as brokers’ websites.
Room for Negotiations on Service Costs
Gilbukh envisions that the settlement will open up new opportunities for both clients and real estate agents to innovate and redefine traditional practices. For instance, buyer’s agents could start charging for individual services they provide, such as showing properties, negotiating prices, or assisting with paperwork. This model allows for greater flexibility and customization, catering to the specific needs and preferences of clients.
Moreover, the settlement may pave the way for agents to offer services at varying rates based on their experience level. Seasoned agents with extensive expertise might command the full 2.5% commission, while newer agents could opt for a discounted rate to attract more budget-conscious clients.
According to an analysis by Ben Harris, director of economic studies at the Brookings Institution, and research assistant Liam Marshall, the settlement could signal the demise of the standard 6% commission paid to seller’s agents. They predict that increased competition could drive commissions down to under 2%, a level more commonly seen in countries outside the U.S. Such a reduction would lead to substantial savings for buyers and sellers alike. For example, on a median-priced home, a 6% commission would amount to $23,070, whereas a 2% commission would total just $7,690.
Harris emphasized that these alternative models and practices are likely to result in lower housing transaction costs, although the exact impact remains uncertain. Nevertheless, the potential decrease in commissions to this level could translate into significant financial benefits for American households involved in real estate transactions, potentially amounting to tens of billions in annual savings.
Possible That Some Buyers Could Suffer
David M. Dworkin, CEO of the National Housing Conference, raises concerns that shifting the burden of buyer’s agent fees from sellers to buyers could potentially exacerbate housing affordability issues. In a commentary, Dworkin highlighted that this change may make it more challenging for first-time buyers, already grappling with soaring prices and elevated mortgage rates, to afford experienced brokers to represent them. Consequently, some prospective buyers may be deterred from entering the housing market altogether.
This sentiment echoes the findings of a 2022 research paper authored by economists Ann Schnare, Amy Crews Cutts, and Vanessa Gail Perry. The paper concluded that altering the current compensation structure could restrict homebuying opportunities for significant segments of the market, with minority groups, lower-income households, and first-time buyers bearing the brunt of the impact due to their heavier reliance on agent services.
Experts caution that the full impact of the settlement is unlikely to materialize immediately. “The prices are sticky,” noted Gilbukh, suggesting that the industry may take considerable time to adapt and determine the ultimate outcome of these changes.