NAR Settlement: US Homebuyers Anticipating $10,000 Savings Confront Realistic Outcomes

Consumers who had high hopes for substantial savings resulting from a National Association of Realtors’ settlement regarding agent commissions may find themselves facing a more pragmatic reality.

GIF of Jason Bateman in Ozark asking simply, "Where's my money?" Most people impacted by the NAR settlement are likely asking a similar question.

What’s happening with realtors and home prices?

The National Association of Realtors (NAR) recently reached a significant settlement following allegations of anticompetitive practices related to agent commissions. The NAR settlement, prompted by a $1.8 billion verdict against the NAR in Missouri, involves the NAR agreeing to pay sellers approximately $418 million and implementing rule changes. One crucial change prohibits sellers from including compensation details on the multiple-listing service, a key tool for marketing homes.

While this change may encourage sellers to negotiate lower commissions, speculation persists that agents may find alternative methods to discuss commission splits. The full impact of the NAR lawsuit remains uncertain.

The NAR ruling received acclaim from figures like President Joe Biden, who estimated potential savings of up to $10,000, and former Treasury Secretary Larry Summers, who suggested it could ultimately save US households $100 billion. However, the tangible benefits, particularly for first-time buyers, remain uncertain.

Will the changes in commission really payoff?

The timing of the NAR settlement is crucial as the housing market contends with elevated mortgage rates, leading to last year’s lowest sales figures in nearly three decades. The situation is especially challenging for first-time buyers seeking entry into one of the most unaffordable markets in history.

What is a realtor’s commision?

Realtor fees are typically paid by the seller, but they indirectly affect the buyer as they impact the overall cost of the home. The standard commission rate for real estate agents is typically 5% to 6% of the final sale price. It should be noted that this can vary. This commission is usually split between the seller’s agent and the buyer’s agent. While the seller generally covers these fees, they can indirectly affect the buyer by influencing the final negotiated price of the home. In some cases, buyers may choose to negotiate with the seller to cover a portion of the commission as part of the purchase agreement. It’s important for buyers to be aware of Realtor fees and how they may factor into the overall cost of purchasing a home.

How does the NAR settlement impact commissions and home prices?

While theoretically, the NAR lawsuit could result in lower home prices by reducing commissions, experts caution that this outcome is not guaranteed, especially in the short term.

Steve Murray, senior adviser to Real Trends, notes that sellers are unlikely to lower prices solely because their transaction costs have decreased. The National Association of Realtors responded to President Biden’s remarks by emphasizing that commissions were already negotiable before the NAR settlement agreement and will continue to be so.

How will it impact the housing market?

The repercussions of these changes on the market are subject to heated debate. This is mainly due to the full extent of their impact remaining uncertain. The longstanding controversy surrounding the compensation system for US agents adds another layer of complexity. Critics argue that the current structure inflates costs and fosters poor incentives.

Slated to take effect summer of 2024 pending court approval, this change may encourage sellers to negotiate lower commissions. Speculation abounds that agents will seek alternative methods to discuss commission splits, such as through brokerage websites.

Moody’s Analytics Chief Economist Mark Zandi predicts a gradual reduction of commissions over time, with minimal impact on home prices. However, the distribution of savings between buyers and sellers remains uncertain, particularly in seller’s markets.

What is a seller’s market?

In a seller’s market, interest rates are often relatively low, which can stimulate demand for homes. Low interest rates make mortgages more affordable for buyers, increasing their purchasing power and driving up competition for available properties. This heightened demand, combined with limited inventory, contributes to the favorable conditions for sellers. Even if interest rates start to rise in a seller’s market, the impact on demand may be minimal initially. Buyers may still rush to secure properties amid fears of further rate increases. Overall, low interest rates in a seller’s market can lead to higher selling prices and quicker transactions.

What is a buyer’s market?

In a buyer’s market, interest rates can have a more pronounced effect on housing demand. When interest rates are low, buyers may be more motivated to enter the market. They’re mostly attracted by the prospect of lower monthly mortgage payments. Low interest rates can help offset other challenges in a buyer’s market. This can include such issues as high inventory levels and decreased selling prices. Conversely, rising interest rates in a buyer’s market can dampen demand further, as higher borrowing costs may deter potential buyers from purchasing homes. However, if interest rates rise too sharply, sellers may become more flexible on pricing and other terms to attract buyers. This could potentially mitigate some of the challenges associated with a buyer’s market.

How does the NAR ruling impact realtors and their income?

The potential consequences of lower commissions on the industry were a focal point at the recent American Real Estate Society’s annual conference in Orlando. Real estate professor Ken H. Johnson emphasized the complexity of determining who benefits from lower commissions. He suggested that the outcome may vary depending on market conditions.

Moreover, the Department of Justice’s scrutiny of commission sharing raises questions about whether the NAR settlement meets regulatory expectations. As agents adapt to the proposed changes, some are exploring alternative service models. This includes a flat-rate service like in New York and enhanced value proposition in California.

Alternative fees

The NAR ruling has motivated some agents to explore alternative service models, such as a flat-rate service in New York. This means that instead of the traditional commission-based payment structure, where agents receive a percentage of the sale price, agents may charge a flat fee for their services, regardless of the property’s selling price. This alternative model could provide more transparency and predictability in terms of costs for both buyers and sellers.

In addition to flat-rate services, agents in California are focusing on enhancing their value proposition. This means that agents are emphasizing the unique benefits and expertise they bring to the table when assisting clients with buying or selling properties. By highlighting their specialized knowledge of the local market, negotiation skills, and personalized service, agents aim to differentiate themselves and attract clients in a competitive market environment.

What can you expect for housing prices?

While the NAR settlement represents a significant development, observers caution against expecting immediate transformative effects on the industry. As negotiations continue and regulations evolve, the true impact of these changes will gradually unfold.

But realtor fees aren’t the only thing associated with buying a home

Buying a home involves various fees beyond just the purchase price. Here’s a breakdown of the different fees associated with buying a home:

Down Payment: This is a lump sum payment made upfront towards the purchase price of the home. The amount is typically a percentage of the total purchase price, with common percentages ranging from 3% to 20% or more, depending on the type of mortgage and lender requirements.
Mortgage Origination Fee: Also known as an “origination charge” or “loan origination fee,” this is a fee charged by the lender for processing and underwriting the mortgage loan. It’s usually calculated as a percentage of the total loan amount.
Appraisal Fee: This fee covers the cost of hiring a professional appraiser to assess the fair market value of the property. Lenders require an appraisal to ensure that the property’s value supports the loan amount.
Home Inspection Fee: The buyer typically pays for a home inspection to assess the condition of the property and identify any potential issues or repairs needed. This fee varies depending on the size and location of the property and the inspector’s rates.

Closing Costs

Closing costs encompass various fees and expenses associated with finalizing the real estate transaction. They can include:

Title Insurance: Protects the buyer and lender against any defects in the title or ownership of the property.
Escrow Fees: Fees charged by the escrow company or attorney handling the closing process.
Recording Fees: Charged by the county or local government for recording the deed and other legal documents related to the property transfer.
Homeowners Insurance: Typically paid upfront for the first year to insure the property against damages and liabilities.
Property Taxes: Depending on the timing of the transaction, the buyer may need to reimburse the seller for property taxes prepaid for the period of ownership.
Prepaid Interest: Covers the interest accrued on the mortgage loan from the closing date to the end of the month.
HOA Fees: If the property is located in a homeowners association (HOA) community, the buyer may need to pay prorated HOA fees for the current billing period.
Miscellaneous Fees: Other miscellaneous fees may include courier fees, document preparation fees, and administrative charges.
Private Mortgage Insurance (PMI): If the down payment is less than 20% of the home’s purchase price, the lender may require the buyer to pay for PMI. This insurance protects the lender in case the borrower defaults on the loan and typically involves an upfront premium payment, as well as ongoing monthly premiums.

It’s essential for homebuyers to plan for these fees in addition to the purchase price of the home. Doing so will ensure a smooth and successful real estate transaction. Working with a knowledgeable real estate agent and lender can help buyers understand and navigate these costs effectively.

Guidelines for prospective homebuyers:

Financial Assessment: Conduct a thorough analysis of your financial situation, including monthly expenses and income. Aim to keep housing costs, including mortgage, insurance, and taxes, under 30% of your income. Additionally, seek pre-approval from a mortgage lender to ascertain your borrowing capacity and establish credibility with sellers.
Market Research and Negotiation Strategies: Research comparable properties in the area to gauge fair market value. When negotiating, focus on value rather than merely asking for a lower price. Point out any deficiencies or necessary repairs in the property and propose a reasonable reduction based on these factors. Enlisting the expertise of a skilled realtor can facilitate effective negotiation and ensure favorable outcomes.