Homebuying and real estate commissions are about to change in big way

A recent jury verdict against the National Association of Realtors and large residential brokerages could upend the residential real estate industry. 

The real estate compensation model is at the heart of the issue. Plaintiffs contend that commission rates are too high, buyer brokers are being overpaid and NAR rules, along with the corporate defendants’ practices, lead to fixed pricing. By contrast, NAR contends the rules promote competition and efficient, transparent and equitable local broker marketplaces. 

NAR, whose CEO left shortly after the landmark court loss, is appealing the $1.8 billion jury verdict, so it could be several years before the case — which covers the Missouri markets of Kansas City, St. Louis, Springfield and Columbia — is resolved. But coupled with similar lawsuits that are in process, the potential for policy changes that could impact realtors’ pocketbooks is palpable.

The impact on the market continues to spread. Shares of Re/Max Holdings, for example, were down over 8% on Tuesday amid fears of litigation, even though it had settled with plaintiffs before the recent NAR case verdict.

Here’s what real estate agents, homebuyers and sellers need to know about potential changes in residential real estate economics.

A bad time for bad news in real estate

The jury verdict comes at a time when many real estate agents are already feeling a pinch.

The rapid rise in interest rates caused by the Federal Reserve’s fight against inflation recently led to the 30-year fixed mortgage average rate topping 8%, exacerbating an existing affordability crisis in the U.S. housing market. Potential sellers don’t want to move if they have to contemplate a mortgage rate as much if not more than double their current one, while millions of potential homebuyers can’t make the monthly payment and are currently shut out of the market.

Existing home sales recently dropped to their lowest level since 2010. According to an October report from University of Colorado Boulder scholar-in-residence Mike DelPrete, existing home sales are on pace for 4.15 million transactions this year, based on NAR data, which would be down from over 6 million in 2021 and 5 million in 2022.

At a time when home sales are already under pressure, “this lawsuit is just another punch in the gut for real estate franchises,” said Bill Gross, a self-employed real estate broker associate in California with eXp Realty.

Thus far, there’s been little-to-no trickle-down effect for individual brokers and agents as a result of the legal proceedings, but that may not be the case forever, depending on how legal battles, taking place on multiple fronts, shape up. An analysis from Keefe, Bruyette & Woods analyst Ryan Tomasello published last month, before the jury verdict was reached, estimated a 30% reduction in the $100 billion paid in real-estate commissions annually and as many as 1.6 million agents losing their source of income.

Pressure on…