The Retired Investor: Real Estate Agents Face Bleak Future

It has been a month since the National Association of Realtors (NAR) was forced to scrap a system of broker fees that has been in place for a generation. A federal court still must approve the change in June or July, but if it does, it could alter the way Americans buy and sell homes for decades into the future.

 

The change was precipitated by a series of class action lawsuits from home sellers that accused Realtors and the Realtors Association of keeping agent compensation artificially high. In October 2023, a federal jury in Kansas City found the NAR and some of the largest brokers in the country guilty of colluding to inflate real estate commissions.

 

The damages of that suit were $1.78 billion, which will be paid to more than 260,000 homeowners in three states. More class action suits followed. Last month, the association settled the mounting lawsuits by agreeing to pay $418 million without admitting to any wrongdoing regarding compensation.

 

For those of us who have bought or sold a home through an agent who may have worked tirelessly in closing a deal, don't feel bad. That agent was paid handsomely for the effort. It is why there are 1,162,364 real estate sales and brokerages businesses in the U.S. This has been a great business for a long time. Until now, the home real estate market has been a tightly controlled market of fixed fees with no genuine competition.

 

Traditionally, the home seller pays a 5 percent to 6 percent commission on the sale price of the home. Typically, the seller's agent and the buyer's agent split that commission. In effect, the buyer's agent is working for the seller, which is a clear conflict of interest. Many home buyers are unaware of this fact.

 

Under NAR rules, sellers are required to advertise the buyer agent commission on the Multiple Listing Service, which is the database where real estate agents put homes for sale. There is even a specific box just for that number, but many homebuyers can't see that number, only their agents can.

 

Could an enterprising agent be tempted to focus their clients on houses with higher fee deals at the expense of lower fee homes that may be just as suitable? Raise your hand if that has happened to you. Sure, not all agents do this, but some certainly do. All this goes away if the courts approve this NAR settlement. Sellers could no longer promise a commission to buyers' agents and that little box would disappear.

 

We are talking big money here. Today, Americans pay out $100 billion in real estate commissions. The present commission structure could be reduced by between 20 percent and 50 percent if fixed fees go by the wayside, according to Keefe, Bruyette & Woods. The new agreement is expected to cut fees on the average home by $5,000 to $13,000.

 

For the 1.6 million Americans who are registered as real estate agents and for those companies that employ them, this is bad news. Commission rates would drop. Negotiated fees could be a viable alternative to fixed-rate fees. Online real estate companies that rely on partnerships with real estate agents, would also feel the heat and may pull back on their marketing efforts. Broker's commissions could fall to as low as 1 percent-1.5 percent per agent on each side, according to the Consumer Federation of America. The result, by some estimates, is that the number of real estate agents and companies could be reduced by half.

 

If the courts rule in favor of dismantling fixed commissions, existing homeowners would benefit immediately. They would no longer be faced with paying both their agent and the buyer's representative out of the sale proceeds. Sellers may get lower prices for their homes but keep more of the proceeds through reduced commissions. Buyers can save money by choosing a cut-rate broker, or none.

 

There will be a downside as well. Surviving agents and brokers might have to charge home buyers hourly rates. Sellers may have to pay higher fees to unload their homes. Agent services that are for now taken for granted could be drastically reduced. New ways of providing value will be a challenge for many brokers.

 

I know that most real estate agents bend over backward to satisfy their clients. Many provide weeks, months, and sometimes years of time, effort, and expense to move a home for you. Remember too that there is also a perk in paying the traditional fixed commission. Since the fees are baked into the higher home price, buyers can finance the fees with a mortgage.

 

Plenty of prospective home buyers may not be able to pay agents out of pocket. First-time home buyers and lower-income households, including minorities, have traditionally relied more heavily on agent services. In addition, the "let's go see what's out there" crowd will disappear once an agent begins charging for that privilege.

 

The end of fixed commissions is not rocket science. In so many industries, the practice of charging fixed fees for services is a thing of the past. In the financial services industry, for example, discount brokers and other new forms of competition effectively reduced commissions to zero. The industry did not disappear. It got bigger as participants figured out more and better ways to service their clients. Overall, economists expect the result in the real estate industry will be more homes bought and sold, and more liquidity in the real estate markets while making housing more affordable in the U.S.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.