Earlier this month, the National Association of Realtors (NAR) reached a settlement agreement to resolve a series of lawsuits against the organization that focused on commissions and the long-standing model of the seller paying a 3% commission to both his/her listing agent, and to the buyer’s agent. Untying the tying of commissions at the time of listing could accelerate the changes in the realty markets with cut rate or fixed priced firms and should create meaningfully change how Americans buy and sell homes. Given the size of the market—each year American consumers pay around $100 billion in real estate commissions—the agreement has also the potential to impact the U.S. economy more broadly.
If the settlement is approved, the customary 3% listing agent/3% buyers agent model will likely come to an end—meaning that homebuyers can better negotiate on the level of commission and more easily seek alternative compensation models, such as paying by the hour, flat-fee compensation, or purchasing sharply reduced levels of service. Home sellers, too, will likely be less pressured to list through the MLS and/or with a licensed agent. Although the magnitude is unclear, these alternative models and practices will almost certainly lower housing transaction costs. Analysts often look to comparable countries, where sellers’ commissions are typically below 2%, to project the evolution of the American market. Commissions falling to this level would amount to tens of billions in annual windfalls to American households that engage in real estate transactions.
This windfall would likely be treated as a gain in wealth—similar to a rise in stock prices—and would primarily benefit middle-class families with a significant share of their wealth invested in housing. Because consumers typically spend only a small share of their gains in wealth, such a windfall is unlikely to meaningfully influence consumer demand. However, with sellers no longer obligated to pay for commissions on the buy side, and if alternative, lower-cost representation models develop, homeowners should gain home equity. Likewise, for sellers willing to look to alternative models, realtors and companies may develop new a-la-carte listing options that will lower sales commission costs. The big question is whether a portion of the $100 billion in commissions paid annually translates into equity for homeowners or reduced prices for buyers. We guess it will generally fall to the homeowners and make housing even more expensive.
The decline in the average commission could also improve geographic mobility. The “all-in” costs of buying and selling a home in the United States—including realtor commissions, fees to lenders or mortgage brokers, charges for title services, and transfer taxes—can exceed 10% of a home’s value in many markets. This high transaction cost can effectively serve as a tax on mobility, which has been falling for decades. Reduced mobility reduces demand for step-up housing, which is a key driver of families moving “up” in their housing choices, where hardwood is more prevalent. Mobility also drives remodeling, another market where hardwood use increases at higher price points.
