How will the National Association of Realtors settlement affect the cost of selling or buying a home?

Earlier this month, the National Association of Realtors (NAR) reached a settlement agreement to resolve a series of lawsuits against the organization. The key issue in the lawsuits was the practice of “tying,” whereby NAR members require that commissions paid to buyers’ agents be set by the seller’s agent when a home is listed. These NAR practices dominate the realty market in the United States, as close to 90% of all homes sold are listed through a Multiple Listing Service (MLS). The settlement agreement could upend the entire realty market and 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.

Why is the practice of “tying” buyer and seller commissions harmful?

The practice of tying commissions—whereby MLSs mandate that buyers’ agents be offered a pre-determined commission—has been shown to inhibit competition and drive-up fees. Under tying arrangements, the compensation for a buyer’s agent is established before the buyer can be sure of the quantity or quality of the services their agent will provide. Not only does this make it harder for buyers to negotiate fees, tying also means that sellers may have to offer higher commissions to maximize the chance they sell their home. The pressure to offer high commissions largely occurs through the practice of “steering,” whereby buyers’ agents can tacitly direct their clients to favor those homes which offer the industry standard commission. A study by economists Panle Jia Barwick, Parag A. Pathak, and Maisy Wong found that homes which failed to offer buyers’ agents at least 2.5% commission had a 5% less chance of being sold, and those that did sell would spend an average of eight additional days on the market.

The anticompetitive impact of tying is exacerbated by several factors. First, in ten states, buyers are legally prohibited from receiving rebates on their commissions—meaning that the commission paid to buyers’ agents cannot be negotiated. Second, buyers are generally unaware of the commission levels offered by prospective home sellers, with only one in roughly 600 local MLSs permitting brokers to publish commissions offered to buyers’ agents. This severe lack of transparency means that homebuyers may be unaware of their agents’ incentive to steer them toward high-commission properties.

Public pressure to reform the realty market may be stunted by perceptions about who ultimately pays for realty services. Although the seller directly funds the buyer’s commission out of the proceeds from the sale, economic theory dictates that the buyer ultimately bears a portion the burden (or “incidence”) of the buyer’s commission as the purchase price of the home would be lower in the absence of commissions.

Are there other competition concerns unrelated to tying?

Yes. One concern is around steering by buyers’ agents away from properties offered for sale outside of the MLS—namely “for sale by owner” (FSBO) properties. Here, buyers’ agents—who often represent both buyers and sellers in a local market—have a long-term incentive to discourage home sales that are not listed by an agent. An additional concern is that some state-level policies require sellers’ agents to offer a minimum level of services. This essentially prohibits sellers from offering brokers ultra-low commissions or fees to list their homes with the MLS and discourages consumers from pursuing “a la carte” realty services. Thirteen states and Washington D.C. have effectively banned a la carte services, while in nine states, consumers can only purchase a la carte services after waiving their “right” to full-service representation.

What are the details of the settlement agreement?

On March 15, 2024, NAR offered a settlement to resolve several lawsuits claiming that NAR’s policies drove up commission prices and harmed home sellers. The settlement comes in the wake of the October 2023 verdict to the Sitzer-Burnett case, which directed NAR and some of the nation’s largest real estate brokerages to pay $1.8 billion in damages. The verdict accompanies a series of similar lawsuits with targets that included NAR, regional realtor associations, real estate brokerages, and listing services. The agreement would protect NAR and most of its members from these lawsuits and reduce the damages they must pay.

If the agreement is approved, NAR will pay $418 million in damages. More importantly, tied compensation for sellers’ and buyers’ agents will no longer occur on MLSs. Furthermore, buyers and their agents will have to explicitly agree about what services agents will provide, online MLS databases will no longer display commission rates, and NAR will also be required to permit real estate agents to be paid for their work without subscribing to an MLS.

What is the state of play with various lawsuits?

In addition to protecting NAR and most of its members, the proposed settlement agreement would cover many NAR-affiliated organizations, including regional realtors’ associations. That said, the settlement does not cover all members of NAR; employees of larger brokerages and those working for corporate defendants who have not settled Sitzer-Burnett (or its many follow-ups) are not protected. The agreement does provide these groups with the option to adopt the rules of the settlement and contribute to the settlement payment to be released from liability.

Furthermore, this settlement does not resolve all the legal troubles that NAR and the rest of the real estate industry are facing. Class-action lawsuits brought by home buyers are ongoing. The Department of Justice also continues to pursue NAR commission rules. In February 2024, the Department of Justice asked a judge to deny a settlement agreement for a different class-action suit, arguing that the changes to cooperative compensation proposed by the agreement were insufficient to reduce commissions.

What does this mean for how Americans buy and sell their homes?

The outcome is unclear and will likely depend on whether the settlement is approved in a federal court. If the settlement is approved, the practice of tying and steering 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.

These alternative models and practices will almost certainly mean lower costs of housing transactions, although the magnitude is unclear. 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.

How will this impact the U.S. economy?

This windfall would likely be treated as a gain in wealth—similar to a rise in stock prices—and would disproportionately benefit middle-class families who have an outsized 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.

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 makes it difficult for people to relocate to areas with better jobs, limiting their lifetime earnings. Research has shown a negative association between transaction taxes and housing turnover, indicating that lower commissions might lead to a reversal in the long-term decline in mobility.

The impact on the labor market is unclear, especially for the nation’s roughly 2 million real estate agents. One plausible outcome might be the number of agents declining over time, with those remaining in the realty market taking on a higher number of home transactions each year. Another plausible outcome is that the market experiences a boom in innovation and entrepreneurship, with new business entrants experimenting with various models of home buying and selling.