For those bartenders who became realtors over the past decade, attracted to the fast and easy money during multiple real estate booms fueled by historically low mortgage rates, there's concerning news out on Friday: Commissions are expected to drop following the National Association of Realtors' decision to settle a lawsuit regarding its commission rules.
On Friday, the National Association of Realtors announced an agreement to end litigation of claims brought on behalf of home sellers related to broker commissions. This means the group would pay $418 million in damages and amend the rules that housing experts say will drive down the cost of homeownership. In other words, the standard 6 percent sales commission is gone.
"The settlement, which is subject to court approval, makes clear that NAR continues to deny any wrongdoing in connection with the Multiple Listing Service (MLS) cooperative compensation model rule (MLS Model Rule) that was introduced in the 1990s in response to calls from consumer protection advocates for buyer representation. Under the terms of the agreement, NAR would pay $418 million over approximately four years," NAR wrote in a press release.
"NAR has worked hard for years to resolve this litigation in a manner that benefits our members and American consumers. It has always been our goal to preserve consumer choice and protect our members to the greatest extent possible. This settlement achieves both of those goals," said Nykia Wright, Interim CEO of NAR.
NAR, the trade group that represents real estate agents and has more than 1.5 million members, agreed to introduce a new MLS rule that will prohibit offers of broker compensation on MLS. Another new rule would require MLS users to enter into written agreements with their buyers.
"We believe the potential changes would likely accelerate commission pressure on buyer agents and could support overall commission rates around a home transaction trending lower in the near term," William Blair analyst Stephen Sheldon wrote in a note.
Recently, analysts at Keefe Bruyette & Woods said the change to the compensation structure could result in a 30% reduction in the annual commission pool. Analysts further said this would result in a 60% to 80% reduction in the number of real estate agents.
Here are other analyst commentaries on NAR's deal to resolve litigation:
JPMorgan, Anthony Paolone
- "This is incrementally negative in terms of the potential impact on the residential brokerage names like HOUS and RMAX as it potentially puts top-line pressure on the names, on top of the already muted level of housing activity right now"
William Blair, Stephen Sheldon
- Sees the potential changes raising questions about the role of the MLS system, which primarily serves to broadly distribute listings of homes for sale
- "If agents are no longer required to subscribe to the MLS to distribute listings or accept commissions, then we could see some agents bypassing the system, more brokerages using pocket listings (i.e., listings that are not broadly distributed) to attract consumers, and the need arising over time for a national home listing service"
- This could be an opportunity for CoStar and Zillow, though he notes CoStar has the advantage after its success building out the leading listing distribution in both multifamily and broader commercial real estate
- Overall, he calls the settlement a "modest negative" for the brokerage models he covers, and a positive for CoStar since its Homes.com business caters more to seller agents, "which could become even more important in the home transaction with these changes"
Stephens, John Campbell
- Views CoStar as the biggest beneficiary of the potential changes, though he also sees Zillow as likely to benefit eventually
RBC, Brad Erickson
- "The key debate from here will be can agents navigate this change with only modest changes to buyer commissions or will they be more meaningful"
The news triggered panic dumps in Zillow Group, plunging 14%, and Redfin, down 6%.
For all the unseasoned realtors, you'd better start looking for another job.
