Commission lawsuit settlement could reshape real estate landscape … or not

In a landmark development, the National Association of Realtors (NAR) recently settled a series of commission lawsuits, agreeing to pay $418 million USD in damages and pledging to overhaul its rules regarding real estate agent commissions.

This settlement, prompted by legal claims alleging artificially inflated commissions, has sparked widespread speculation about its potential impact on housing affordability and market dynamics.

While proponents hail it as a game-changer that could lead to substantial cost savings for homebuyers and sellers, skeptics remain cautious, questioning whether it will truly translate into lower housing prices. As the real estate industry braces for change, examining the nuances of the settlement and its implications becomes paramount.

High-profile endorsers

The settlement has drawn enthusiastic endorsements from high-profile figures like President Joe Biden and former Treasury Secretary Larry Summers, who suggest it could lead to significant savings for homebuyers and sellers, potentially up to $10,000 per transaction.

We’ve seen similarly themed claims made even in Canadian media. Advocates in the United States and Canada argue that the elimination of standard commission structures could result in more competitive pricing among real estate agents, leading to lower transaction costs for consumers. Summers even suggests that breaking the “realtor cartel” could save U.S. households $100 billion over time, implying substantial long-term benefits for affordability.

Gradual commission reductions “unlikely to happen”

Getting rid of the decades-old commission system, which is criticized for inflating costs, by eliminating compensation details on MLS platforms could lead to more negotiation power for sellers, potentially driving down commissions.

Economists predict gradual reductions in commissions, potentially down to 4-5 per cent over time, with the majority of savings captured by sellers. This, however, is unlikely to happen according to NAR and those with years of experience understanding how sellers and buyers determine the value of a home.

Lower housing prices not certain — here’s why

Despite the optimism, experts caution that the settlement may not immediately translate into lower housing prices. Critics argue that sellers are unlikely to lower prices simply because transaction costs decrease. NAR’s response suggests that commissions were already negotiable, indicating that lower commissions may not necessarily lead to reduced housing prices.

In Canada, for instance, buyer agents and seller agents already offer a range of commission and compensation structures and, notwithstanding this reality, prices continue to rise across the country. Additionally, uncertainty remains about how the changes will ripple through the market and who will ultimately benefit from lower commissions.

NAR’s assertion that commissions are driven by the market and not the cause of the affordability crisis raises doubts about the direct impact on housing prices. Economists highlight the complexity of determining who benefits from lower commissions, particularly in different market conditions such as seller’s markets. For example, as many real estate agents can attest to, a seller wants their home to sell for a specified amount not because of a cold rational calculation, but because their house is the best house in the neighbourhood!  

Gradual adjustment to settlement ramifications, not quick seismic shifts

While the settlement sparks discussions about potential changes in Canada, it’s crucial to manage expectations. Real estate professionals have long since offered reduced commissions or flat fee services, with little impact on housing prices, suggesting a gradual adjustment process to ramifications of the NAR settlement (if any at all in the near term) rather than immediate seismic shifts.

The settlement may encourage broader adoption of innovative pricing models and increased transparency in services provided by real estate agents. However, overblown expectations about the immediate impact on housing prices should be tempered, as broader challenges such as housing supply shortages and regulatory barriers remain significant factors in housing affordability.

Fear and uncertainty drive varying interpretations of the settlement’s implications, highlighting the complexity of its effects on the real estate market. It’s this very complexity that makes me believe that those claiming significant changes or no changes at all will both be wrong; rather, we’ll see a slow evolution in how we do business with likely little impact on housing prices. 

Nonetheless, the prudent real estate agent won’t wait around for these changes. Exploring alternative pricing models and emphasizing the value they provide to clients is the best way to be part of the future.