How will the NAR settlement impact home prices?

The $418 million proposed settlement against the National Association of REALTORS (NAR) is set to upend the way homes are bought and sold in the U.S. Sweeping changes to what essentially was a 6% default commission structure should make the buying and selling process more transparent and ultimately drive down costs for sellers and buyers alike.

However, there may be some unintended consequences that largely impact first-time homebuyers.

General implications

The 6% commission, paid by the buyer and split between the buyer’s and the seller’s brokers, has been the traditional way both agents get paid. But that may no longer be the case. Pending court approval, broker commissions will be prohibited from being advertised on the multiple listing service (MLS). The new rule would go into effect mid-July. This simple change means:

• Real estate commissions will no longer be visible on MLS listings: In other words, buyer agent commissions may no longer be “guaranteed” (or known) unless negotiated with the buyer up front or until negotiated with a willing seller. This could put both buyers and sellers in a better position to set the terms for agent compensation.
• A seller may choose not to pay any commission or fees to the buyer’s agent: This means buyers may need to pay up front for agent fees instead of, effectively, rolling them into the cost of a mortgage.
• Flat-fee pricing could replace or supplement the cooperative compensation structure: As the de facto 6% commission model is effectively phased out, real estate professionals may find ways to appeal to value-oriented consumers.
• Buyers may be more likely to use a real estate lawyer, a la carte services, or go it alone: When faced with potentially steep up-front agent costs, buyers may choose lower-cost options, especially if they provide equal or greater value.
• Agents may need to make stronger cases for value: Sellers with more room to negotiate and buyers newly on the hook for up-front costs are more likely to demand transparency and value — what services do agents provide and at what rates?
• Less-qualified agents may be pushed out of the industry: Sellers’ agents were essentially guaranteed a commission regardless of the individual level or service quality. Those who can’t acclimate to a more competitive environment may be unable to recruit new business.
• Removing the sales price as an incentive may improve value: If compensation is unattached to the sales price, agents may be less tempted to let their interests influence where a buyer or seller makes or accepts an offer.
• Lower transaction costs overall: If buyers and sellers negotiate with their agents for services rendered, they may choose fewer services in exchange for lower costs, or increased competition will reduce the cost of agent services (or both).
• Lower home prices: Lower transaction costs, less focus on agent commissions, and increased up-front buyer costs are some factors that could lead to lower home prices, but likely not overnight.

Short-term implications

The new rules could impact buyers and sellers far ahead of the anticipated mid-July start date, potentially impacting the busy summer selling season. However, how buyers and sellers, as well as potential buyers and sellers, respond may depend more on their perception of what the NAR settlement means for the real estate industry over substantial short-term changes in the real estate market.

Prospective sellers may wait

Some prospective sellers may wait until the new rules take effect before listing. Once commissions are no longer advertised on the MLS, sellers may perceive that they stand to “save” at least 3% and be in a better position to negotiate fees. It’s also possible that some sellers with active listings may pull them or attempt to renegotiate based on the imminent rule changes.

More sellers may list post-rule changes

Once the new rules take effect, more sellers may list to capitalize on potential savings while property values are high. The NAR ruling has been touted to bring about major change and lower home prices, which could frighten some into listing sooner rather than later in anticipation of a possible market correction. However, it should be noted that price changes due to the settlement agreement alone are unlikely to happen overnight.

This is partly related to the industry’s use of “comps,” or comparables, by which they appraise real estate. Comparables are recently sold homes — ideally within the last few months and in the same area. Since most comparables won’t have been affected by the rule changes, appraisal values in the summer and early fall are also less likely to be impacted.

Buyers may wait

Some buyers may wait to buy a home in anticipation of potential price drops. But, as noted above, based on changes to agent compensation alone, home prices seem unlikely to dive overnight.

Rule changes could motivate buyers

On the flip side, some buyers may want to buy now. These buyers may be concerned about how they will pay their agent’s commission or fee if the seller no longer pays it. In the short term, buyers may benefit less from the rule changes — until home prices adjust to reflect lower commissions.

Another change for buyers is that they must sign a written representation agreement before viewing a house with an agent. While written agreements were encouraged previously, they were not required. Under the new model, this could increase up-front costs for borrowers — if, for example, agents charge by the hour or per showing.

First-time homebuyers

The general consensus is that increased transparency and opportunities to negotiate with REALTORS is a win for consumer choice that will bring much-needed change to the U.S. real estate market. However, in the short term, one group may struggle, and it’s not real estate agents.

Thirty-two percent of homes sold last year were bought by first-time buyers, according to the NAR’s 2023 Profile of Home Buyers and Sellers. First-time homebuyers struggle most with saving for a down payment and closing costs; many states, as a result, have set up first-time homebuyer downpayment assistance programs to help. But what the market may not be ready for — or first-time buyers — is the additional burden of paying agent fees out of pocket.

Depending on how the market responds, many first-time homebuyers could see their buying power limited or be pushed out of the market entirely. Given their large numbers, this could significantly affect the real estate market as a whole.

Economic factors

How homes are bought and sold in the United States may be changing amid a potentially volatile economic backdrop. Credit card balances increased to an all-time high of $1.13 trillion in the fourth quarter of 2023, and about 8.5% of those balances transitioned into delinquency, according to the Quarterly Report on Household Debt and Credit by the Federal Reserve Bank of New York.

This suggests that homeowners might be inclined to tap their equity, even more so if they think NAR rule changes could benefit them in the short term or hurt them in the long run.