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Realtor Settlement Facts, Myths, Winners & Losers

Performance Property Real Estate Question

Q: Who do you think are the winners and losers from the recent class action realtor settlement that everyone is talking about now? Doug, Westfield, NJ

A: The National Association of REALTORS® (NAR) recently announced an agreement that would end litigation of claims brought on behalf of home sellers related to broker commissions. However, the only thing on the table right now is a proposal and the proposed settlement may not be finalized until the end of this year or next year so it’s too early to know for sure what the final result will be. Most of the articles I’ve read regarding the proposed settlement are inaccurate or misleading. For example, I’ve read many articles that state that the settlement will drive some agents into other lines of work. Half of all licensed realtors do no transactions, so those agents whether they remain licensed or not are not playing a role in local real estate markets anyway. I’ve also read headlines like “the standard 6% realtor commission is done”. Realtor commissions and the length and terms of listing agreements were already and will continue to be negotiable.

The 3 biggest losers of the proposed settlement appear to be 1) first time home buyers, 2) buyer’s agents (realtors who represent buyers) and 3) multiple listing services (MLSs). The winners may be real estate platforms like Zillo & Trulia. The National Association of Realtors was founded over 100 years ago and for most of its history, realtors only represented home sellers. The Multiple Listing Service (MLS) cooperative compensation model rule (MLS Model Rule) that was central to the class action lawsuit was introduced in the 1990s in response to calls from consumer protection advocates for home buyers to be represented in real estate transactions. At the heart of the proposed rule changes is commission decoupling in which home buyers and sellers would now each be responsible for paying their own agents rather than making sellers cover both fees–this change clearly hurts first-time home buyers and buyer’s agents who represent home buyers. The price of housing is already at an all time high (on average 50% of median income versus 25-30% of median income 30-40 years ago). Mortgage interest rates are also relatively high, so it will be very difficult for first-time buyers who have the greatest need for professional guidance and who can barely scrape up enough money to buy a home at current prices anyway to find thousands of extra dollars to pay a buyer’s agent rather than have that cost be baked into the price they would pay for their first home. The proposed settlement also appears to undermine the power of multiple listing services (MLSs). There are other lawsuits pending, so it’s too early to know for sure how things will ultimately shake out, but ultimately, what matters is what actually happens in local real estate markets. 30 years ago, 80% of home sellers chose to use a realtor, now 90% of home sellers choose to employ licensed realtors and I don’t believe that will change much going forward, but we’ll see. Thanks for your question, Doug.

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