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Are first-time homebuyers the big loser in the NAR settlement?

Over the course of my 30 year career in housing policy and mortgage lending, I’ve dealt with a lot of complex issues that have underscored the fact that the law of unintended consequences is never repealed. The new half-billion dollar settlement over a class action lawsuit on the real estate fee structure is a classic example of this. It is also the most opaque and complicated agreement I have ever encountered. The reason is that its premise is so simple and understandable, and its execution is so dependent on a wide range of human behavioral factors and multifaceted outcomes.

It is estimated that there are 10170 possible moves in the ancient Chinese game, Go (that’s a 1 followed by 170 zeros). By comparison, Chess has 10120 possible moves, and scientists believe that there are about 1082 atoms in the observable universe (one-hundred thousand quadrillion vigintillion atoms). I’m guessing that over the course of my lifetime, the number of ways this settlement will impact real estate transactions is something less, but not by much. No wonder so many real estate advocates, reporters, and academics already have so many disparate views on what this settlement means. Here’s mine.

What appears to be clear, is that most of the positive outcomes will be awarded to wealthy, financially sophisticated consumers who are multi-generational homeowners, lawyers involved in the case, and the National Association of REALTORS® (NAR), despite their having to pay over $400 million in damages. The biggest losers, however, will be low- and moderate-income first-time, and especially first-generation, homebuyers already confused by an often byzantine process tied directly to their financial future. Ironically, this lawsuit brought by a small group of Missouri home sellers against the National Association of REALTORS® and several other real estate brokerages, is strongly supported by the Consumer Federation of America and the Biden Administration’s Justice Department.

How much the settlement will change the current system, which for home sellers and buyers is arguably one of the most expensive in the world, is anyone’s guess. According to Gary Acosta, co-founder and CEO of the National Association of Hispanic Real Estate Professionals, “forcing buyers to pay out-of-pocket for an agent to represent them through the process would only exacerbate affordability challenges and put homeownership out of reach for millions of would-be buyers… a ban on broker cooperation would benefit no one but the wealthiest among us.” How much the settlement will confuse and discourage first-time homebuyers, especially people of color who are disproportionally first-time homebuyers, is much easier to understand and predict.

First, let’s look at the case itself, and the conditions upon which it is premised. Several groups of home sellers in Missouri brought a class action suit against the NAR, affiliated companies, and others over the long-held practice of sellers paying a 5-6% fee to the real estate agent who represents them. This fee is usually split with the buyer’s agent. The agreement is worked out between the two agents, ostensibly on behalf of their clients, within the same closed system where the home was listed for other agents to see, known as the Multiple Listing Service (or MLS). MLS’s are often owned and operated by local real estate boards, but not always. So the two primary participants in the transaction, the buyer and seller, are rarely in on a fee structure that ties the interests of the agents, but not the consumers. It’s not hard to see the case for collusion and anti-trust issues, and that’s what the original jury found, issuing a staggering judgement of up to $5.3 billion against the defendants.

That original judgement would have bankrupted the NAR and probably all of the major brokerages in the country as well. Appeal would have cost millions of dollars and may not have resulted in a better outcome than bankruptcy in any case. In fact, filing Chapter 11 bankruptcy was one of the options NAR seriously considered, as described in its detailed fact sheet on the $418 billion settlement. Doing so would have thrown their members under the bus, and likely make it impossible to continue, given the reaction of the members they are supposed to represent. Faced with these options, NAR settled, and since the plaintiff’s lawyers will get the lion’s share of the real financial return, that settlement was ultimately accepted. Consumers are already able to negotiate real estate fees directly with their agent, but since the settlement will make the fees more transparent, negotiations may be more common and probably lead to commissions under 6% when they do.

A seller of a $594,000 dollar home (the median home price in Washington, DC) would save $5,940 for each percent they reduced the fee. Is it fair that a seller agent currently collects nearly a $60,000 commission on that house? Maybe. The agent for many athletes collect 10-20% on their endorsement contracts. Is it fair that the agent who brought the buyer to the open house and advised them on negotiating a deal where the agent’s financial return increases with the price of the house? What about when the buyer found the house on Zillow or other online real estate listings? Or if they were already working with a homebuyer counselor or were familiar with the process? Maybe not. But that same house in Baltimore is only $200,000, less than 40 miles away. Is it fair that an agent who arguably spends more time with a lower-income first time homebuyer makes one-third as much. Definitely not.

To be clear, I’m a big believer in the important role real estate agents play on both sides of the transaction. They are the defacto housing counselor in most real estate transactions, and spend dozens of hours of time with each client, sometimes much more. But it’s hard to argue that the basic structure is fair and balanced.

What’s equally hard to argue is that the alternative devised in the settlement will not harm first-time homebuyers. That’s because the core consumer premise of the suit is that prices are artificially inflated because of the real estate fees. As the Urban Institute’s Alexei Alexandrov and Laurie Goodman made clear in a January 2024 paper, “home prices and rents are primarily determined by the supply and demand for housing units and by changes to that supply and demand,” which they admitted was a “seemingly obvious point.” By comparison, it’s quite a stretch to see the cost of agent fees as a material factor in home prices.

This settlement won’t change the fee structure, just how it is decided in the MLS. It’s possible that fees will come down slightly, but at least for the immediate future, if I want my seller’s agent to get the highest price for my home, I’m going to pay them close to the current price. The best agents may not be interested in listing my home for a 4% fee, especially if it’s below the area median income. And the buyer’s agents who don’t get half may not be interested in showing their clients homes where they make a lot less. Consumers who can’t afford to pay their agent upfront will have a hard time finding an experienced agent. Agents who aren’t well established are likely to quit the business. And NAR will have to survive with fewer members. It’s not clear how many will quit the business, but it could be a lot.

Some consumer advocates suggest that homebuyers who can’t afford to pay their agent upfront may not be ready for homeownership. Under that logic, we will never close the homeownership gap for Black, Latino and Asian and Pacific Islander homebuyers. By that logic, why not require everyone to put 20% down, like many of our parents did? The reason is that downpayment size is only one part of the risk equation when underwriting a mortgage, far outweighed by factors like credit history and other debts, especially when the mortgage payment is less than the current rent a homebuyer is paying. The reality is that homeownership remains the most established path to wealth creation for the majority of Americans. So that’s not much of a progressive argument.

“Buyer-side agents, often sharing their clients’ cultural backgrounds, offer culturally competent representation, language access, and invaluable homebuyer education built on personal relationships,” Acosta said. “With Hispanics projected to contribute to 70% of homeownership growth over the next two decades, any disparities in the market could hinder progress. The vitality of the residential real estate market hinges on robust buyer-side guidance and representation.”

A recent study by economist Ann Schnare, Amy Crews Cutts, and Vanessa Gail Perry found that “changing the current compensation structure would suppress homebuying opportunities for large segments of the potential market, and that minorities, lower income households, and first-time home buyers who rely more heavily on agent services would suffer the most. Survey data on how buyers and sellers select their real estate agent also suggests that requiring buyers to pay their agents’ fee directly would not necessarily produce the large reductions in commission rates that decoupling proponents have envisioned, particularly for first-time home buyers.”

The study concluded that “many potential buyers with small cash savings would be unable to buy a home, and that homeownership rates would fall, particularly among low- and moderate-income households. While many first-time home buyers rely on gifts from their parents to meet some or all of their downpayment requirement, requiring buyers to come up with significant amounts of additional cash at closing would inevitably reduce the demand for starter homes and increase the racial and economic disparities in homeownership rates that currently exist due to systemic differences in family income and wealth. The resulting drop in the demand for starter homes would also put significant downward pressure on property values that could impact the ability of sellers to trade up to larger homes. As a result, the demand reduction that would likely occur at the lower ends of the housing market could easily create ripple effects that spill into other segments of the market. In sum, the potential impact of changing the current compensation structure could be widespread and profound.”

That’s the opposite conclusion of the New York Times article which was the first to cover the settlement. One of the lawyers who represented the plaintiffs in the case, Benjamin Brown, co-chairman of the antitrust practice at Cohen Milstein, predicted. “You’ll see some new pricing models, and some new and creative ways to provide services to home buyers. It’ll be a really exciting time for the industry.” I predict it will be a really exciting time for Mr. Brown and his colleagues. For consumers, it will be confusing and daunting.

When I was at Fannie Mae before the subprime meltdown, we studied the experience a wide range of homebuyers had when navigating the mortgage process. The most surprising finding was that Black homebuyers who got a mortgage were convinced that the system was rigged against them because of their race more often than Black homebuyers who were denied. The longer a Black homebuyer was in the process, the more they felt they were discriminated against, despite actually getting a mortgage. This settlement will do nothing to change this experience, although it may lead more people of color to forgo the process altogether.

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