Consider This from NPR - A $418 Million Settlement Could Change U.S. Home Buying. But Who Benefits?

Episode Date: March 19, 2024

The way we have bought homes for the last 100 years could change as soon as July. Who wins, who loses, and who gets a share of the $418 million class-action settlement?Learn more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

For a lot of people, buying or selling a home may be the biggest financial decision they'll ever make. And it can be a complicated process. Buyers need to think about down payments, interest rates, homeowners insurance. It adds up to a significant chunk of change. So, we closed on the house three weeks ago. The asking price was $390,000, and we wound up paying $9 billion plus closing costs. Okay, maybe not as much as in that SNL spoof of house hunting reality shows. But one fee buyers usually don't have to pay is commissions for realtors.

So you know how it happens now is you sell a house, 5 to 6 percent comes off the top, half goes to the seller's representative, Half goes to the buyer's representative. Jill Schlesinger is a CBS News business analyst speaking there with NPR's Here and Now. The commission model has been a practice in real estate for more than 100 years, but all that is about to change. Right now, the seller said, hey, why should we pay the buyer's agent? Why is that coming out of my pocket? Last year, a group of home sellers won a class action lawsuit against the real estate industry. A federal jury found that agents had conspired to keep commissions artificially high. So the National Association of Realtors has reached a settlement that could mean home sellers will no longer foot the total bill for agent commissions. The industry average is 6% of sale price. Most industry analysts believe this will put downward pressure on the commissions paid,

maybe lopping off about 30% of the $100 billion consumers pay in commissions every single year. Consider this. The settlement could lower the cost of buying and selling a home, but it could also drive some real estate agents out of business, and buyers might have to shell out even more cash to chip in on realtor fees. It's definitely going to alter the business and how we operate as real estate agents, no doubt about it. Coming up, we look at who might win and who might lose and who might get part of the $418 million class action settlement. From NPR, I'm Sasha Fiverr.

It's Consider This from NPR. Big changes are coming to the way people buy and sell houses in the United States. The National Association of Realtors settled a lawsuit last week that could upend the way real estate agents are paid and do away with the traditional agents commission of 5 to 6 percent. That has prompted a reckoning for buyers, sellers, and real estate agents. This change won't happen overnight, but over time, it could lower the cost of buying and selling a home. NPR's Scott Horsley joins us now to help sort some of this out. Hi, Scott. Great to be with you, Sasha. Scott, starting with the basics, the National Association of Realtors agreed to pay $418

million as part of this legal settlement. Who gets that money? Well, lawyers are going to get a chunk of it, but the rest will go to the people who sold their homes in recent years and paid what critics argue were inflated real estate commissions. Now, the timing depends on where you live, but in some parts of the country, the settlement covers people who sold homes as much as a decade ago. Benjamin Brown co-chairs the antitrust practice at Cohen Milstein, which is one of the law firms that brought this case.

And he says a lot of people might be entitled to a piece of the settlement. We don't know the exact number, but we estimate it to be in the neighborhood of $40 or $50 million. And you can get details of who's covered by the settlement at a website, realestatecommissionlitigation.com. And I'm going to repeat that because I assume there are probably a lot of listeners who want these details. So that was realestatecommissionlitigation.com. Is that right? All one word. That's right. Great. 40 to 50 million people could get part of the payment. Wow. I'm particularly interested in this because I have a relative who sold a home in recent years, paid a very large commission. So you're saying, Scott, that even people who aren't part of the legal case right now might be able to be part of this class action and get a little money back for what they paid a realtor.

That's right. You should definitely check the website to see if you're eligible. Realtors also agreed to make changes in how commissions are handled going forward. Give us a sense of what these new compensation arrangements could look like. Yeah, well, for decades, the norm in this country has been for the person selling a home to pay both her own agent and the buyer's agent. And the buyer's share of that commission had to be spelled out in order to advertise the home on the big regional listing sites. Now, realtors insist they never fix those commissions, but as a practical matter, that public notice worked to enforce a sort of floor that often kept commissions in the neighborhood of 5% or 6%, which is split between the buyer's and seller's

agent. Starting in July, sellers will no longer have to spell out a commission for the buyer's and seller's agent. Starting in July, sellers will no longer have to spell out a commission for the buyer's agent, and Attorney Brown thinks that's going to lead to a lot more negotiation and more competition. Usually when you have open competition, prices come down. We've certainly seen that in other industries, whether it's stockbrokers or travel agents. And keep in mind, 6% on a $400,000 house, that's $24,000. So there's a lot of room for potential savings. Oh, sure. And in high-cost real estate markets, where houses routinely sell for a million, those commissions were enormous that the realtors were getting. Absolutely. So give us more detail about how these new arrangements might work for either

buyers or sellers. There's going to be more opportunity to shop around, and there may be a lot more options. For sellers, they might be able to negotiate a flat fee, for example, that's not tied to the selling price. Buyers will, in some cases, end up paying for their own agent for the first time, so that means they'll have an incentive to negotiate. Right now, most real estate transactions are like all-inclusive resorts where you pay the fee no matter what you use. Brown says you could imagine more a la carte pricing, especially for buyers who do a lot of their own house hunting on the Internet and really just need somebody to kind of handle the final paperwork. even for those, quote unquote, full service models where brokers are holding your hand and driving you around and doing more work, those prices will also probably come down. Economists at the Federal Reserve Bank of Richmond estimate this could save buyers about $30 billion a year. Most of those savings would be coming out of the pockets of real estate agents.

Scott, in terms of a la carte pricing, so maybe an open house could cost one fee. Maybe a staging of a house could cost another. Is that the idea? That's right. And for the buyer, maybe you pay each time you go to visit a house if the realtor tags along with you. Oh, interesting. How are real estate agents reacting to this? They're still trying to figure out what this is all going to mean. Kevin Wilson heads the Realtors Association in Nashville. He found out about this settlement like everybody else on Friday morning and says he spent a busy weekend trying to figure out what it means. Do I think that realtors have to learn to do business in a different way? Absolutely. But I also think this is a wrinkle in the landscape,

not a landmine. You can tell this is a guy who's got years of experience telling house hunters, I know that foil wallpaper in the bathroom is hideous, but it does not have to be a deal breaker. Without a guaranteed commission, Wilson says, agents will have to demonstrate their value to clients. But realtors who do that already should be okay. Commissions are how most agents make their money. They depend on them. So it seems like a lot of realtors could see a huge impact on their livelihood. Absolutely. The National Association of Realtors has a million and a half members right now. It might not have that many in a few years. We know the U.S. has a lot more real estate agents than other countries. If fixed commissions go away, some of those agents may decide to pursue other lines of work, especially those who are practicing part-time or as a side hustle. It's possible that when all this is sorted out, the commission pie is significantly smaller, but there are fewer agents splitting it up so the individual pieces don't necessarily shrink. It is such an awful time right now for most homebuyers. They're dealing

with incredibly high house prices, pretty high mortgage rates, relatively speaking. What does this change potentially mean for homebuyers? Yeah, if commissions come down, that should get wrung out of the home prices and lower them somewhat. But it could also mean that buyers have to pay out of pocket for their own agent for the first time. And that could be a challenge, especially for first-time buyers who typically need the most hand-holding. That's a concern for Vanessa Perry. She's a professor at George Washington University's business school and a fellow at the Urban Institute's Housing Policy Finance Center. Many first-time homebuyers are already at the absolute max of what they are able to borrow.

They're not going to be able to come up with any additional cash to pay their own agent. Now, sellers could still agree through negotiation to pay the buyer's agent as they do now, but in a hot housing market, there's no guarantee of that. Eventually, there could be a way for buyers to roll their agent's fee into the mortgage so they could pay it off over time, but that's going to require some changes in the mortgage rules. So that's one of the things that's going to have to be sorted out. For people who are thinking of buying or selling a house in the next, say, six months, what should they be thinking about? Good question. This settlement takes effect in July, right in the middle of summer when a lot

of people are shopping for homes ahead of a new school year. Should that affect their timing? Should you hurry up to get it done before or wait until after the settlement takes effect? Hard to say. It's certainly something for buyers and sellers to talk to their agents about. But as Attorney Brown notes, this is just one of many factors that people have to consider. Usually you have to sell when you have to sell because you're moving or you have some change in life circumstance. Then there's interest rates that are changing. And then there's broader sort of pricing trends. So there's a lot of moving pieces. And this will be one.

And this, I think, will be a significant one. But whether that's a game changer that means that people's time frames should shift, I think that's up to the individual. And it's still an open question how long some of these changes will take to sort of work their way through the system or what the real estate market might look like a year or two from now. NPR's Scott Horsley, thank you. You're welcome. This episode was produced by Mark Rivers.

It was edited by Jeanette Woods and Julia Redpath. Our executive producer is Sammy Yenigan. It's Consider This from NPR. I'm Sasha Pfeiffer.