A bombshell hit the real estate industry with the National Association of Realtors’ recent $418 million settlement. The size of the crater is still taking shape.
Some analysts have suggested that it could result in a 30% reduction to the $100 billion that Americans pay each year in commissions; others have suggested that home prices could drop. But what if it’s really, really bad for homebuyers, the people who need the most help amid an affordability crisis?
“There are winners and losers here,” Mark Karlan, a lecturer in finance, real estate, and law at UCLA, told Coins2Day. “This isn’t an unequivocal win across the board.”
Karlan, who has participated in billions of dollars’ worth of real estate transactions, sees that 30% in savings hitting one side of the market heavier than another. “Sellers of the properties are probably going to be better off,” he said, since they’re bound to pay 3% of the home-sale price, instead of 6%, as before. However, there could still be situations where sellers are paying what was the standard if they want an optimal experience: Paying the buyer’s agent might mean they have a better chance at finding the best buyers, Karlan explained. Or maybe, if a seller is paying 3%, the seller’s agent will offer a buyer’s agent 1%. Even so, the percentage coming from the seller isn’t changing. Or sellers will simply pay their agent 2% and forget about the buyer’s agent.
Things have been rough all around for the last year or so in the housing world, but sellers seem to have the upper hand because of how tight supply is. Prices haven’t dropped, and homes are still selling quickly, with lots of competition and multiple offers, generally. And those might sound like small numbers, but they’re not. If you were to sell your home for a million dollars on a 2% commission, that would be $20,000. Let’s say it’s a 6% commission, that would be $60,000. I don’t have to tell you how big of a difference that is.
Now to buyers, who are really the losers in this scenario. “Before this settlement, it was absolutely understood that the fee, 5% or 6%, was paid by whom? Entirely by the seller, which meant the buyer paid how much? Zero,” Karlan said. The same math applies. If someone is purchasing a million-dollar home on a 2% commission, they’d pay their agent $20,000. In earlier circumstances, when you’d pay nothing, $20,000 is a lot. Not to mention, buying a home is already substantially more costly now than before the pandemic. And if people are already scrambling to come up with a down payment, and sometimes relying on the help of parents or other family members, it’s going to be extremely difficult to find more cash. And we’ll see buyers choose to go unrepresented, he said.
That brings us to another loser: real estate agents and brokers. Lower commissions will translate to lower incomes, Karlan said, and that could mean fewer real estate professionals. “With less revenue coming into the business, a number of people are going to have to drop out,” he said. “They’re just not going to make a living.”
It’s important to note that the settlement still needs approval and wouldn’t take effect until this summer. Even so, it will take time for everyone to adapt, he explained. It’s not going to happen overnight.
