The big premise of the commission lawsuit against the national association of realtors is that high commission fees were one of the leading drivers of real estate prices. How true is this statement? Will the new commission structure for realtors lead to a reduction in prices or could the opposite now occur? Will this settlement make houses more affordable? What price points will be most impacted by the realtor settlement?
Will the reduction/elimination of buyers fees impact prices
One of the key drivers of the lawsuits against the National Association of Realtors is that commissions are driving up home prices. Unfortunately this could not be further from the truth as commissions make up a small percentage of the sales price (about 5%) and only the buyers portion of these fees will be reduced. This leads to the question will a reduction in buyers fees actually lead to a reduction in housing prices?
The short answer is that it is a huge stretch to assume that sellers will pass these savings on. I suspect most sellers will merely pocket the difference in the reduction in fees as there is a sense that the buyer should pay their own realtor anyway. Essentially, I doubt many sellers are going to reduce their prices.
I will say that it is going to be impossible to truly know the answer because at the same time the realtor lawsuit is being settled, considerable inventory is coming on line during the summer season, and interest rates are remaining high. If there are price reductions it is a huge stretch to say that it is because of buyers commissions as interest rates and supply are much larger driver of price movements.
Elimination of buyers commissions could increase real estate prices
To take the contrarian approach, will the elimination of buyers commissions actually lead to higher prices. If sellers are now basically pocketing 2-3% more from their sale, this means that they have more money to put down on the next house. With more to put down, they can now afford a more expensive house which could lead to prices actually increasing. I foresee the elimination of buyers fees primarily benefiting sellers and their net profit.
Which price points will the elimination of buyers fees impact the most?
The lower price points under about 350k will be impacted the most from the realtor settlement on buyers fees. Although the percentage is the same for a million dollar home and a 350k home, the difference to the sellers of the lower price points are huge especially if they had originally put down less money. For example let’s say someone took out an FHA loan and put down 5%, when they sell to get an extra 2% is enormous as it is an increase of 40% of their existing equity.
On the flip side, buyers in the lower price points likely will not have the money upfront to pay for a retainer for a realtor. This will push most lower price point buyers into the discount model where someone like Zillow for a nominal fee will draft a contract and provide very limited services.
Summary
The elimination of buyer’s fees is the most profound change to real estate since the 1920s when the practice began. Although the attorneys are focusing on how the reduction in commissions will lead to drastically lower home prices, the reality is far different. My base case is that the elimination of buyer’s fees will have nominal if any impact on home prices as sellers keep the difference. As a result there is also a good chance that eliminating buyers fees actually pushes house prices up as sellers have more profit from the sale of a home to apply to the next one.
Unfortunately it is going to be impossible to see if I am right on my predictions as interest rates and supply have a much higher pull on prices than a reduction in buyer commissions but I am convinced that the elimination of buyer’s agent fees will not swing the pendulum largely one way or the other in regards to prices. One thing is for sure that this summer will usher in the most profound changes to how real estate is bought and sold since the 1920s which is the real story.
Additional Reading/Resources:
- https://www.fairviewlending.com/realtors-reach-game-changing-settlement-in-home-buying-and-selling/
- https://www.bloomberg.com/opinion/articles/2024-01-26/lower-real-estate-commissions-would-be-good-for-us-housing-sales
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