The Decline of Traditional 6% Real Estate Fees

Real Estate
Image Commercially Licensed from: Depositphotos

The Impact of the NAR Lawsuit on Real Estate Commissions

Stephen Brobeck, a senior fellow at the Consumer Federation of America, shares his perspective on a recent legal decision that could significantly alter the real estate industry’s commission structure. On October 31, a jury in Kansas City, Missouri, found the National Association of Realtors (NAR) and several residential brokerages guilty of illegal price-fixing. This verdict could lead to damages exceeding $5 billion for Missouri home sellers. The ruling suggests a future where the industry may not uniformly charge commission rates of 5% to 6%.

The lawsuit challenged the industry’s requirement that sellers must offer compensation to buyer agents to list homes on local multiple listing services. This practice enabled agents and brokers to collude in setting commission rates. Homes listed below the typical rate of 2.5% to 3% often get overlooked by buyer agents. Buyers, misled by agents, rarely negotiate these rates, believing them to be standard seller expenses. NAR plans to appeal the verdict.

Historically, explicit price-setting was common in the 1940s, with the industry using price schedules. However, after challenges from the Justice Department, these near-uniform commissions persisted through collusion. Industry members agreed to maintain high commission levels, significantly more than in other countries, where rates vary between 1% and 3%. This led consumers to question the justification for high commissions, often $25,000 to $30,000 on a $500,000 home sale, regardless of the agent’s experience or effort.

Efforts by litigators and the Justice Department aim to abolish this mandatory offer, allowing for more negotiation and search for lower commission rates. The judge in the Kansas City case and a similar, larger Chicago case set for trial next year are likely to mandate the separation of buyer and listing agent commissions. This change, along with increasing lawsuits and Justice Department involvement, suggests a shift towards more competitive commission rates.

The Consumer Federation of America anticipates this competition will lower average commission rates to 3% to 4%, potentially saving $20 billion to $30 billion annually in commissions. The industry argues that making homebuyers pay commissions could hinder homeownership affordability. However, effective rate competition is expected to reduce home buying costs. Currently, buyer agent commissions are included in home sale prices, preventing buyers from negotiating or comparison shopping. If buyers were aware of these commissions, they would likely seek lower rates and negotiate more actively with agents.

The transition from fixed pricing to competitive pricing remains uncertain. The Consumer Federation of America envisions a scenario where buyers could finance buyer agent commissions through their mortgages. The strong jury decision, upcoming class action lawsuits, and federal regulatory actions almost guarantee this transition, leading to a more competitive residential real estate brokerage market, benefiting consumers.