TL;DR
A jury ruled against the National Association of Realtors in a lawsuit over commissions, ordering a large payout. While appeals will delay change, the verdict spotlights calls for more negotiable, competitive fees. Potential longer-term impacts include lower commissions and buyers contributing more. However, the real estate industry points out the current system provides consumer protections and that drastic changes risk unintended consequences.
The way homes are bought and sold in America may be on the cusp of major changes after a notable verdict was reached in Missouri. In November of 2023, a federal jury found the National Association of Realtors (NAR) and two major real estate brokerages liable for price fixing and ordered them to pay $1.8 billion in damages.
While the case is likely to be tied up in appeals for years, the verdict marks the first major change in the longstanding system that has enabled real estate agents to maintain uniform commissions of around 6% on home sales. The plaintiffs argued this system harms homeowners by keeping commissions artificially high.
This issue has major implications for homebuyers and sellers here in the San Francisco East Bay. Commissions make up a significant portion of sale prices in Bay Area cities like Oakland, San Leandro and Alameda. If legal pressures bring down commissions, it could provide relief to buyers strained by high prices and potentially open doors for more first-time homebuyers.
The case specifically took aim at a NAR policy that requires listing brokers to make blanket offers of compensation to buyer’s brokers. This effectively necessitates that seller’s brokers bake the buyer’s agent commissions into their listing agreements. The plaintiffs allege this allows brokers to charge higher fees and restricts competition.
NAR has long stated commissions are negotiable, but the lack of variation in commission rates across the industry was a contributing factor in this case. The commissions have been stable at around 6% for decades, with some saying new technology has made it easier than ever for buyers and sellers to connect directly, thus the argument that commissions could be reduced.
The plaintiffs have asked the judge to ban NAR’s rules around commission sharing as part of the verdict. If granted, this could pave the way for an overhaul of how real estate fees are set in California and nationwide. Rather than the seller bearing the full brunt of commissions, buyers may start contributing more. This could potentially lower costs for sellers.
According to analysts at Keefe, Bruyette & Woods, changes to commission structures could also exert downward pressure on home prices. With commissions making up a significant chunk of sale prices, reductions could translate into more affordable housing options for East Bay buyers as well.
However, agents warn interfering with current norms could backfire. They point out making buyers pay their agent directly could shut some out of the market entirely. This is because buyers are already strained covering expenses like the down payment and closing costs.
The verdict comes at a challenging time for real estate overall. The sector faces slowing sales and falling prices as higher mortgage rates sideline buyers. Markets throughout the Bay Area have been especially hard hit, with double-digit price declines since the peak.
This adds uncertainty into the mix as the industry grapples with major legal challenges. NAR has vowed to appeal the Missouri verdict, meaning any changes are still a long way off. But the trial loss is a blow to the traditional handling of real estate commissions. Further antitrust lawsuits are moving forward, so added scrutiny is ahead.
While transformational reforms may take time, the era of uniform 6% commissions appears to be on shaky ground. The industry states fees are negotiable, but legal pressures could force more transparency and competition around rates. This would likely stimulate overdue modernization in how real estate transactions are facilitated and paid for in today’s digital era.
More Background on the Real Estate Commission Structure
For decades, real estate agents in the San Francisco Bay Area and nationally have charged a simple commission of around 6% on home sales, which gets split between the seller’s agent and buyer’s agent. Critics argue the lack of variation suggests anti-competitive practices are in play. They contend commissions should be falling as agents have to do less legwork to match buyers and sellers in the digital age.
The NAR adoption of a blanket commission policy in the 1990’s reinforced this uniformity. By requiring listing brokers to offer set compensation to buyers’ brokers, it solidified the standard split. Seller’s brokers then began baking the buyer agent commissions into their listing agreements.
This effectively meant sellers were on the hook for the full real estate commission. The plaintiffs allege this system harms homeowners by forcing them to pay inflated costs, while shielding brokers from competition that could lower rates.
NAR defends commissions as being negotiable and says the current structure allows buyers to avoid extra costs. The trade group makes it clear it has done nothing illegal and notes commissions pay for important services. But the verdict indicates the courts may be siding with arguments this amounts to anti-competitive price fixing.
What Could Change with Commissions and Pricing?
If the verdict leads to reforms of commission policies, several changes to the San Francisco Bay Area market could occur:
- Commission rates in the Bay Area could become more flexible and transparent. This may finally pressure brokers to compete more aggressively on fees.
- Local home buyers may start chipping in more toward their agent commissions, rather than sellers bearing the full cost.
- Home prices in places like Oakland and Berkeley could face downward pressure if commissions decline. Fees make up a substantial chunk of sale prices.
- Lower commissions may allow more room for innovation and flat-fee services to take hold in the region. New models like Redfin could gain share.
However, the industry warns interfering with prevailing practices could cause unintended harm:
- Asking East Bay buyers to pay their agent directly could make real estate even less affordable. Buyers already face stresses covering the down payment, inspections, etc.
- Inexperienced buyers may struggle if they lose their agents’ guidance. First-time homebuyers could be especially affected.
- Good agents may leave the industry if commissions drop sharply. Experience and quality of service could suffer.
The Path Ahead for the Lawsuits and Appeals
While this verdict represented a major win for the plaintiffs, NAR and the brokerages found liable have vowed to appeal. With arguments likely to reach higher courts, changes to commission structures could take many years to play out.
Even if specific policy changes take time, the publicity around the lawsuits may spur more Bay Area sellers to negotiate commissions. Local buyers may also push to take on some agent costs directly. While fast reforms are unlikely, the spotlight on issues could gradually move the needle on fees.
But for an industry long used to uniform commissions, the legal storm clouds create uncertainty. The verdict undercuts NAR and brokers position that nothing improper is at play. At minimum, it deals a reputational blow showing courts concur commissions might merit closer scrutiny.
For consumers, the wave of lawsuits hold out the promise of making real estate transactions more transparent and competitive. While progress through courts will be lengthy, the cases have prompted a reexamination of practices that have long been questioned. For an industry facing digital disruption, this may spur modernization of its commission model and practices.
What lies ahead for 2024 and Beyond
For those of us serving the San Francisco East Bay area, this landmark verdict prompts uncertainty and questions about what may lie ahead in 2024 for real estate commissions. If the legal outcome ultimately leads to changes in commission policies and structures, SLPM Property Management expects greater flexibility and transparency around local real estate fees could emerge. There is potential for buyers and sellers to gain more options to negotiate commissions below the prevailing rates. We foresee buyers possibly contributing more to cover agent costs as well. However, sweeping changes will likely take time given the appeals process. While the verdict represents a milestone, our team understands change is not immediately imminent. As your local Oakland and Eastbay Property Management company, SLPM aims to work with our realtor partners to help our owners navigate any commission shifts down the line. We remain committed to providing the best value for our clients, while being mindful of the vital services trusted real estate professionals continue to provide.