A recent federal jury ruling in Missouri has sent shockwaves through the real estate industry, as it concluded that the National Association of Realtors (NAR), along with two major brokerages, conspired to set and maintain high commission rates for agents. This landmark case is believed to have far-reaching implications for homebuyers, sellers, and real estate agents alike. To gain a deeper understanding of the situation, we turn to John Kwoka, a distinguished professor of economics and an expert in antitrust research. But first, let's delve into the details of the lawsuit.
What is the basis of the lawsuit?
When selling a home, the seller typically pays a commission to both their agent and the buyer's agent. This commission is typically in the range of 5% to 6% and is often pre-determined when the property is listed for sale, leaving little room for negotiation. The plaintiffs in the case argued that buyers should pay their own agent, and the commission fee should be open to negotiation. On the other hand, the NAR claimed that commissions are indeed negotiable. However, the U.S. Department of Justice contended that the NAR lacks transparency regarding these commissions. This lack of transparency enables agents to steer buyers towards properties with high commission offers, creates a perception that broker services are free, and leaves minimal room for negotiation.
The jury ruling mandates that the NAR must change its rules to ensure greater transparency about commission rates, allowing for more negotiation.
John Kwoka, Neal F. Finnegan Distinguished Professor of Economics. Photo by Matthew Modoono/Northeastern University
What is the National Association of Realtors?
The National Association of Realtors is a trade association comprised of millions of real estate agents and over 1,200 local associations. Being part of NAR is highly influential within the industry, and it is challenging to establish a successful career in real estate without joining this organization. Kwoka highlights that the lack of choice in what buyers pay is a significant competitive concern arising from the contractual agreement between agents and the NAR.
NAR President Tracy Kasper released a statement in response to the verdict, stating that the association would appeal the ruling and request a reduction in the $1.8 billion damages. The statement emphasized the positive impact that NAR rules and local MLS broker marketplaces have on consumers and business competition, ensuring efficient, transparent, and equitable marketplaces for both buyers and sellers.
What does this mean for real estate agents?
The ruling carries both potential benefits and drawbacks for real estate agents. On one hand, it allows agents to be more competitive when setting their commission rates. The traditional practice of specifying rates has long been suspected of preventing buyer competition and hindering alternative sales and pricing approaches. However, the flip side is that Realtors may now earn less from transactions compared to before. This reduction in income may prompt some agents to leave the industry, particularly after a prosperous year in 2020 when homes sold quickly and Realtors made substantial profits.
What does this mean for homebuyers and sellers?
Despite the possibility of an appeal from the NAR, some agencies may respond promptly to the ruling out of fear that continuing with existing practices could expose them to liabilities. As a result, consumers may witness changes in agent contracts regarding commission rates. In the long run, the market may become more competitive.
Kwoka suggests that entrepreneurial agents may come up with alternative ways of providing their services, potentially resulting in a wider variety of commission rates. This shift would require consumers to invest more time and effort into researching and comparing options. However, for those who prefer the convenience of the traditional system, the NAR will still be available.
Another potential consequence of the ruling is the potential for lower home prices. Commission fees are often factored into the pricing of properties, and a change in commission rates could alleviate some of the financial burden for buyers in a highly competitive and costly market.
What does this mean for the industry as a whole?
According to Kwoka, antitrust agents, the trust division of the Justice Department, and the Federal Trade Commission have long been focused on addressing trust issues within the real estate industry, particularly those stemming from the NAR. Although this specific case was decided in a state court, it represents a step in the right direction when it comes to reevaluating the role of brokers in real estate transactions.
For years, the real estate business has been viewed as archaic and burdened by overpayment and inefficiencies. Thus, this ruling is seen as a significant victory for homebuyers, who may ultimately benefit from a more transparent, competitive, and fair marketplace.
Erin Kayata is a Northeastern Global News reporter. Email her at [email protected]. Follow her on Twitter @erin_kayata.
