The cost of home sales could drop after real estate agents’ proposed lawsuit settlement

The National Association of Realtors has agreed to settle litigation that accused the real estate group of artificially inflating real estate commissions, a move that could dramatically change how much consumers pay during real estate transactions.

Under the proposed deal, which was announced Friday, the group representing 1.5 million real estate agents would pay $418 million over four years to settle several cases and change rules that plaintiffs alleged supported 5% to 6% commissions paid by home sellers. The association said it continues to deny wrongdoing.

“Ultimately, continuing to litigate would have hurt members and their small businesses,” Nykia Wright, interim chief executive officer of NAR, said in a statement. “While there could be no perfect outcome, this agreement is the best outcome we could achieve in the circumstances.”

If a federal court approves the settlement, the new rules will take effect in July, according to a person close to the settlement talks who spoke on the condition of anonymity because they were not authorized to discuss it publicly.

Michael Ketchmark, a plaintiff attorney representing Missouri home sellers in one of the cases, said he was confident that the agreement would fundamentally change the real estate market and help lower the cost of housing and home sales.

“There’s no doubt in my mind that this is going to bring about tremendous savings to homeowners,” he said.

The realtor association’s century-old commissions structure provided that sellers’ and buyers’ agents split an amount that typically ranges between 5% and 6% of the home sale price.

Home sellers in Illinois and Missouri alleged in a pair of class-action lawsuits that NAR’s rules artificially inflated commissions by requiring sellers’ agents to make a nonnegotiable compensation offer to list on the Multiple Listing Service, a home-selling database.

In October, a jury ruled in favor of the Missouri plaintiffs, awarding them $1.8 billion. The case in Illinois had been moving toward a trial. The agreement, if approved by a judge, would resolve those cases and end the long-standing commissions structure, Ketchmark said.

Since the October verdict, experts predicted that the commissions system was poised for change. Not only was it threatened by the class-action cases, but the Justice Department had been asking the U.S. Court of Appeals for the District of Columbia Circuit to reopen an antitrust investigation into NAR’s commissions rules that it had settled in 2020.

The proposed settlement does not include real estate agents affiliated with Berkshire Hathaway’s HomeServices of America and its related companies, the NAR said.

Home prices are expected to drop. That’s because the sticker price will no longer come with high commissions automatically accounted for. Overall, economists estimate that commissions could now be reduced by 30%.

Under the agreement, a seller’s agent will no longer be required to make offers of commission to a buyer’s agent. That practice is called decoupling and could ultimately save the nation’s homeowners money when they go to buy and sell.

The deal could also spur more buyers to avoid using agents altogether or become more choosy with how much they pay in commissions. For example, they might decide to hire agents for fewer services, and therefore pay less.

Hundreds of thousands of agents also may decide to leave the industry as a result. Some estimates suggest that 1 million agents could leave the field.

Until now, that cost has been paid for by the seller and gets worked into a home’s final sale price. This 6% commission is the highest of its kind in the world. With the settlement, that rate will no longer be the default.

That means agents will have to accept lower commissions. Agents will still have leverage based on their competition and knowledge about a sale. But more will rely on negotiation.

The housing market is being strained in multiple directions but has remained competitive. The Federal Reserve has made an aggressive push to raise interest rates and slow down the greater economy. And high mortgage rates, in turn, have culled some demand from the market. But even mortgage rates hovering around 6% or 7% haven’t deterred prospective buyers.

Meanwhile, overall home prices have inched up, making it harder for new buyers to gain a foothold in the market, and widening the affordability gap in large parts of the country.

Economists are expecting prices to ease as thousands of new homes finish construction and become available later this year. The idea is for the supply of new homes to catch up with demand, helping prices settle.

This story includes information from Bloomberg News.