Lower Real Estate Commission Fees Could Increase Home Prices

A settlement between the National Association of Realtors, or NAR, and plaintiffs in several lawsuits difficult the practice of commission-sharing went into effect Saturday. And while the agreement goals to scale back the fee percentage paid to real estate agents, there could possibly be a further consequence.

A working paper published Monday by the National Bureau of Economic Research (NBER) analyzed the potential impact of reduced commissions on home prices and checked out who may profit probably the most.

Its conclusion? “A discount in agent fees generally results in a rise in home prices.”

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What’s the NAR settlement?

Until now, when a home-owner hired an inventory agent to sell their home, they might pay that agent a commission, typically between 5% and 6% of the house’s sales price. The vendor’s agent would then split the fee with the client’s agent. In lots of cases, this allowed buyer agents to advertise their services totally free, despite the fact that the vendor was paying them.

This commission sharing, also referred to as cooperative compensation, was an ordinary practice included within the NAR’s regulations and followed by most real estate agents.

Nevertheless, starting in 2019, home sellers in several states brought a series of sophistication motion lawsuits against the NAR and several other major brokerage firms. They alleged that the practice unfairly increased the associated fee of home selling since the owner was paying for each agents — and people fees were paid out of the profits of the house sale. The plaintiffs asked the courts to put off the commission-sharing practice.

The NAR settlement resulted from a selected class motion lawsuit brought by home sellers in Missouri. It covers a good portion of the country’s real estate agents and affiliated brokerages that decided to opt into the agreement.

Because of this of the settlement, listing agents aren’t any longer required to share their commission and are banned from promoting a proposal of compensation to a buyer’s agent on listing sites. Buyers who hire an agent to assist purchase a house must sign an agreement with that agent before occurring home tours. The agreement should include a provision where the client agrees to pay their agent’s commission and the share to pay.

All of this goals to foster competition amongst agents and reduce the prices of hiring an agent. But questions linger concerning the settlement’s potentially negative effects on less affluent and first-time homebuyers.

How agent fees could affect home prices

The paper published by the NBER posits that lower agent fees also reduce the longer term costs of selling a house, resulting in a lower cost of ownership overall. And, when that property sells again in the longer term, those lower selling costs — due to the lower agent fees — will translate into an expectation of upper home prices as a result of property appreciation.

“Lowering agent fees has the same impact to reducing real estate taxes, as each reduce the associated fee of ownership and usually lead to higher home values,” the report says.

Just how much home prices increase will depend upon how low the agent fee goes. Assuming the vendor continues to pay each agents, the researchers estimated that a discount in commission from 6% to five% would lead to a 2.3% price increase. A 4% commission would lead to a 4.8% increase, and a 3% commission would increase prices by 7.3%.

The same trend of upper prices could occur if the client pays their agent: They might face the opportunity of paying their agent’s commission and paying more for a house, as well. Reducing the client agent commission from 3% to 2% would result in a 0.6% increase in price. A 1% commission would increase prices by 3.8%, and a 0% fee would lead to a 7.3% increase.

Take this with a grain of salt, though. The report is a hypothetical scenario that appears on the potential final result of home prices under very specific conditions. It’s not a forecast of what is going to occur.

How soon could the brand new rules impact the housing market?

The complete impact of the brand new rules remains to be to be determined. But based on a report from brokerage Redfin, buyer agent commissions have decreased from a mean of two.66% in January to 2.55% in mid-July (after the agreement announcement).

Whether agent commissions do, in actual fact, see a more significant decline will depend upon the actions of each sellers and buyers. While the brand new rules don’t require an inventory agent to share their fee, they don’t prohibit the practice.

Based on Marty Green, principal at Texas-based law firm Polunsky Beitel Green, many brokers and agents implemented the brand new rules before the official effective date.

“What we’ve seen to date is more modest changes fairly than dramatic changes,” he says. “I believe that’s probably the best way that is going to affect [the market].”

Green says he does predict more transparency about how agents are paid, resulting in more conversations between realtors and their clients, specifically home sellers, about whether to assist potential buyers by continuing to separate commissions. Some sellers may proceed to share commissions (or fees) to draw more buyers.

With some listings lingering in the marketplace due to the lack of affordability attributable to high mortgage rates and residential prices, some motivated sellers, says Green, may resolve to be conservative and offer the identical commission as prior to now because they don’t need to “put their home at a drawback.”