The Daily - The Bombshell Case That Will Transform the Housing Market

Episode Date: March 20, 2024

For decades, an invisible hand has been guiding and controlling the American real estate industry, dictating how much buyers and sellers pay to their agents and how homes are sold. A few days ago, after a stunning legal settlement, that control — wielded by the National Association of Realtors — collapsed.Debra Kamin, who reports about real estate desk for The Times, explains how the far-reaching change could drive down housing costs.Guest: Debra Kamin, a reporter on real estate for The New York Times.Background reading: The National Association of Realtors agreed to a landmark deal that will eliminate a bedrock of the industry, the standard 6 percent sales commission.Read about five ways buying and selling a house could change.For more information on today’s episode, visit nytimes.com/thedaily. Transcripts of each episode will be made available by the next workday. 

From The New York Times, I'm Michael Barbaro. This is The Daily. Today, a bombshell legal settlement reached a few days ago is about to change almost everything about buying and selling a home and in the process, make it significantly cheaper. My colleague, Deborah Kamen, explains. It's Wednesday, March 20th. Hi, Deborah.

Hi, Michael. What a treat. Talk of this is surreal. Do you want me just to go? No, I'm going to ask you a question. I'm ready. This is a conversation. I came ready to roll.

What do you want from me? So, Debra, at the highest possible level, what just happened to American real estate? Michael, there's been this invisible hand that's been guiding and controlling the real estate industry for over 100 years. And they have long thought that they were absolutely untouchable because they had so much power, so much influence, so much money. And the biggest crack in their armor that's ever happened just happened on Friday.

Well, what is this crack in the armor? And I guess, who even is this nefarious-sounding group that you're talking about? The group is the National Association of Realtors. Nearly 9 out of 10 home sales are handled by real estate agents affiliated with NAR. And the crack in the armor is that they have had these rules that have controlled how much buyers and sellers pay to their agents and how you work with agents to get a home on the market. agents and how you work with agents to get a home on the market. And then last week, for the first time in its history, NAR's control over this huge industry basically collapsed. And with it, so did many of the costs it was imposing on consumers. Okay. This sounds huge. I think we need to slow

this whole thing down. And I think the way to do that is to have you tell us the story of how the National Association of Realtors, which is not at all a household name, became such a powerful force in the ritual of buying and selling a home in the United States. The NAR is huge. Over their existence, they've grown to 1.5 million members. is huge. Over their existence, they've grown to 1.5 million members. More importantly, they've created a system where you really cannot sell a house

unless you're a member. They even own the word Realtor. They own the word Realtor? Yeah. They even had a campaign a couple years ago to convince people how to say it properly and correctly. They take this very seriously. Okay, okay, I'll bite.

How do you say it properly? It's realtor, not realator. Realtor? Two syllables, not three. Okay. Very important. Extremely important. So I should say, on paper, you can sell a house if you're not a realtor,

if you're just a real estate agent. And not a member of NAR. Not a member of NAR, exactly. But in practice, it's really not that easy because of the system they've created. They make it very difficult. For example, if you want to list a home for sale, It's really not that easy because of the system they've created. They make it very difficult. For example, if you want to list a home for sale, you have to put it on something called an MLS, a multiple listing service. And MLSs, for the most part, are owned and operated by the local subsidiaries of NAR.

They control the databases in which homes basically enter the market. Exactly. And not only the databases in which homes enter the market, but the databases through which realtors tell each other how much commission they will get paid if they sell those homes. And the databases are very important because databases are where real estate agents can see how much commission they will make if they bring a buyer or they sell a home. Typically, when you sell a house in the U.S., you pay a commission fee. It's usually around 5% or 6% to realtors. This is how realtors are making their money. It's what you're paying them for everything they're doing, listing the house, showing the house, and it's how they make a living.

But it's a very high rate. 5% or 6% is one of the highest rates in the world. Almost no other developed country has a rate that high. Okay, and let's talk about 6% for just a minute. That's a number everyone knows if you've ever especially sold a home because it's a number you hate. You hate the fact, no offense to realtors, that you have to give 6% of the money you get for your home to a real estate agent. Right. Well, two real estate agents. Right. Because it gets split. Half goes to the seller agent, half goes to the buyer agent. Right. And just to put it in perspective, because I think it's useful,

if you're selling a million-dollar house, 6% fee is $60,000. If you're selling a half-million-dollar house, it's $30,000. Either way you slice it, it's a lot of money to put in somebody else's pocket for a huge investment that you made. You're trying to get the money into your pocket, but it's coming out of your pocket and going to the agent. Exactly. You're saying the National Association of Realtors should be seen as essentially the force behind that 6% fee, the loathed 6% fee, staying what it has been for so long. NAR will say, we never set 6%. We don't have 6% set in stone. That is true. But they created rules that led to a system where that 6% has become the industry standard, and anyone trying to

challenge it, their business model has fallen apart. Fascinating. And here's how they control the market. For example, if you're a real estate agent and you want to open that home for a customer, in most markets, NAR controls the lockboxes that you use to open the homes. Everyone knows what those lockboxes look like with the little punch key. NAR actually owns one of the two companies in America that makes those lockboxes. Wow. And in many markets, they require their agents to use their own technology. So every aspect of the home selling transaction from the very beginning to the very end, that hand of NAR is guiding it and behind it. And it's been there for a hundred years. Wow. I mean, that sounds an awful lot like monopolistic level of power.

The word monopoly gets thrown around all the time when critics are talking about NAR. Another word that comes up a lot is the word cartel. There's a lot of power. There's a lot of control. And there's also a very organized drive to go after anyone who tries to challenge them. This is just not a level of influence that I associate with the trade group.

I think of trade groups as kind of gathering people together for professional development. Having a happy hour at the hotel. Yeah, networking. Right, exactly. Not controlling A to Z hour at the hotel. Yeah, networking. Right, exactly. Not controlling A to Z elements of the industry.

If there was an NAR in journalism, it sounds like they would control the printing presses. How is it possible that no private company has come along and tried to break into this NAR-controlled market or that the government hasn't looked at it and thought, cartel, monopoly, we got to bust this up? People have definitely tried. So it's not that it's people have not tried. The challenge is that NAR, because they have so much power, they have quashed any attempts at challenging them.

Like what? They sue the heck out of anybody who comes after them. There have been upstart companies that have tried to advertise homes outside of these multiple listing services that NAR controls. And NAR has sued them. And then you get buried in tens of thousands of dollars of legal fees for an upstart tech company. Right. That's a death blow. What about the government? The government has also been going after NAR for more than 20 years.

The DOJ and NAR have been locked into battle back and forth since 2005. But in terms of the government, NAR is not just a trade organization. They are also a political action committee. They have the largest PAC in Washington in terms of dollars raised, and they give millions of dollars to candidates who are in line with their agenda, and they spend millions of dollars fighting candidates who are not in line with their agenda. So anyone in the government who wants to go after NAR knows that they are fighting a battle that probably is bigger and more moneyed than they really want to deal with. Right. Sounds a little bit like another Washington organization with similar acronym, which is the NRA, the National Rifle Association, which has kept a very strong lid on efforts to challenge its authority with campaign dollars. There is a playbook for this sort of behavior, and it has followed pretty clearly.

Right. But I don't think any of us quite understood it was happening in the housing market. Right. And at the end of the day, it wasn't the government that brought them down. And it wasn't a venture capital firm with a ton of money fighting them or trying to be an upstart group. It was five normal blue-collar homeowners and a personal injury lawyer from Missouri who had We'll be right back. So, Deborah, tell us about this unexpected cast of characters that ends up bringing down the National Association of Realtors. So, Michael, in 2018-2019, there was a group of home sellers in Missouri who had learned that they had paid pretty high fees to their real estate agents, and they might have a legal case against them. They were probably paying that kind of standard 6% fee to their agents when they sold the house, right? They were paying the standard 6% fee, but the key was they had not known that that fee was actually negotiable. They thought they had to pay it. Okay, here I need to pause.

It is actually negotiable? It is actually negotiable. It is? It is. And that's the thing. NAR has always said, we don't set the fees. There is no standard fee. But in practice, if consumers don't know that the fee isn't negotiable, and if consumers are told by their agents that they cannot negotiate the fee, that is the fee. Okay. So these folks discover that perhaps they didn't need to pay 6% and did. What did they do? They contacted a lawyer, and they started going through the contracts that they'd signed when they sold their homes. So one of the people went back through her contract, and the contract actually said, what fee do you want to pay your agent? And it said 6%, 7%, 8%, or 9%.

So she did the smart thing, and she chose the lowest fee, circled 6%, and that's what she paid. Right. In other words, like a tipping machine that says 20, 22, 25. Like when you go buy a coffee and the tip starts at 22%. Right, right, right. Exactly. It's inconceivable there's anything beneath that. Or that you actually could opt out. Right. Exactly. Okay. Someone else, he's the son

of a factory worker. He's now the head of Mothers Against Drunk Driving in Missouri. These are really blue-collar people. He was told that he was going to be charged 5.5%. He found out later that he was charged 6%. So his agent just jacked up the fee without telling him. So all these people realized we left money on the table at the most important financial transaction of our entire lives, and we probably have a legal claim against the institution that set the rules that made it so this was possible. NAR. NAR.

So not only are they upset that they had to pay 6% and they could have negotiated it and did not know, they also are realizing that they have paid the fee to the agent that's representing the person that they're going against in the negotiation for the home sale. Which is the buyer. Which is the buyer. Right. sale. Which is the buyer. Which is the buyer. Right. Because as you said earlier, the nature of the 6% fee is that it is split between the seller's agent and the buyer's agent, which no one really tells you or reminds you, but that's what happens. Because it's all happening through a backdoor on these multiple listing sites that you can only see if you're a real estate agent

who belongs to NAR. Okay. So what ends up happening to all these sellers once they discover in their minds that they've been wronged and that they want to do something about it? They hire this attorney, Michael Ketchmark. He's a personal injury lawyer from Missouri. Pretty much nobody outside of Kansas City had heard of him until this moment. He decides he's going to file a class action lawsuit. He decides he's going to file a class action lawsuit. This is not the best time for NAR. This is actually the moment that they were really coming onto my radar as a reporter. I had spent last summer focused on sexual harassment allegations at NAR. And I discovered that NAR's president, his name was Kenny Parcell, had years and years of sexual harassment accusations against him that had been covered up.

And women had been paid off. And at the Times, we published a big expose on those allegations at the end of August, and he stepped down two days later. Your reporting got the head of this incredibly powerful organization to step down. It did, and there have been other resignations since then. And that moment for NAR really put them on the world stage. Suddenly, people are aware that the leader of the organization is an alleged sexual harasser. And women who've been whistleblowers about the sexual harassment have been paid off. And all of that is happening at NAR behind the scenes when this case, where they're being accused of price fixing, ends up going to trial.

Got it. Okay, so what ends up happening to this case as it moves through the legal system just as NAR's leader has been forced out? So the case goes forward, and NAR says, okay, we have a new president. We're kind of in disarray, but we are going to regroup. We're going to fight this. We're absolutely not going to settle. Okay, what ends up happening at this trial? They come guns blazing, high-powered corporate lawyers, black suits, tons of money.

And up against them you have Ketchmark and his team of plaintiffs. And the jury really liked what Ketchmark had to say. A Kansas City jury found the National Association of Realtors and other organizations conspired to keep realtor commission fees high. They agreed that these home sellers were not told that they could negotiate the prices. The plaintiffs argued the organizations forced home sellers to pay both the seller and buyer fees, calling that practice wrong and illegal. So late in October of last year, NAR was found guilty of price fixing. And the jury came back and said, yeah, you're guilty. And the damages are $1.8 billion.

Wow. What we proved was the National Association of Realtors has joined in a conspiracy with the two of the largest corporate real estate brokers to use the system to fix prices. So what happens within hours of this verdict coming through? Is the floodgates open? open. The minute that that verdict came in, we filed the lawsuit against the National Association of Realtors and these other large corporate real estate companies to bring the same relief nationwide. Ketchmark turns around the same day that he won this case and files a national case. So we're talking the exact same argument, but now it's not just Missouri, it's the whole country. The money will be returned to the homeowners that were the victims of this rigged system. It's been going on in our country for about 100 years and it stops today. Wow. So every seller in the country. Every single person who

sold a home in the past four years is now part of this case if they paid a 6% commission and didn't know it. Wow. Across the country already since that case, a case filed by buyers in Illinois, also sellers in Missouri, New York, Texas, and South Carolina. There's also an Illinois case that was... Other copycat suits start happening. And within weeks, we're up to almost 20 lawsuits against NAR, all saying you are a monopoly, you have antitrust violations, and these rules need to change. you have antitrust violations, and these rules need to change. There's been a major shakeup in the real estate world today.

If a settlement is approved in court, homes make it cheaper, and agents and brokers could be out of business. So in the face of all these lawsuits, NAR finally agrees to settle. And late last week, early Friday morning, they agreed to a settlement that includes massive changes that are going to introduce competition into the marketplace. to settle. And late last week, early Friday morning, they agreed to a settlement that includes massive changes that are going to introduce competition into the marketplace. The biggest one being the rules that led to that 6% commission are gone. Gone? Gone.

So is the 6% fee perhaps now gone? It will. It will go away because competition is now going to enter the marketplace. And when competition comes in, people have to lower their fees as a result. A really good example, if you want to look at a precedent in history, is the travel industry. It used to be if you wanted to book a vacation or buy a flight, you had to go through a travel agent. Right. And you had to pay what they told you to pay. But then we had things enter the marketplace like Expedia and Kayak and Priceline.

The same way we now have Zillow and Redfin. We do a lot of the searching for homes ourselves. Just not the buying and the selling. But the fees for searching for a home have not changed, even though the service itself has. It's a lot cheaper now to book travel than it was when you had to go through an agent. It's going to be a lot cheaper to book a real estate agent now as well to sell your home. Okay. I think I understand.

I want to talk about what it would mean for the 6% commission to go away. Because as we talked about previously in this conversation, that was the immovable fact of buying and selling a home and a huge amount of money. A huge amount of money. Americans spend about $100 billion a year on real estate commissions alone. billion a year on real estate commissions alone. Unbelievable. Economists forecast that they're probably going to see that number drop by $20 to $50 billion because these commissions are going to go down. But where it really matters is housing prices. Housing prices have become higher because real estate commissions are baked into the housing price. Right. If you're selling a house and your agent says to you, when you sell this house, you're going to have to pay a 6% fee, so we're just going to bump up the price of the house by 6% to absorb that cost.

So imagine now those fees going down across the board. That bump up is going down as well, so housing prices are going to dip. It's one of the most significant changes we've seen to the housing industry in 100 years. Yeah, I mean, you think about it. If you take a 6% fixed fee in the system and you get rid of it, and if you're right, housing prices fall. What this NAR change means is that the entire U.S. housing market is about to be discounted. It's about to go on sale. It's the prices are about to drop. Absolutely. Okay. What else does the settlement do?

The other major change is that if you are a seller's agent and you're listing a home for sale, you can no longer make an offer of commission to the buyer's agent on these MLS databases. So buyer's agents will no longer be able to say, hey, I'm only going to take people to homes where I know I'm guaranteed to get 3%. Okay. I want to just make sure I understand that. So in addition to this settlement essentially ending the reign of the 6% commission, it's ending this kind of informal conspiracy that's been going on between buyers' agents

and seller agents where they kind of wink and nod at each other and say, I'm going to get my 3%, you're going to get your 3%. In fact, what it does is it kind of ends the very nature of the two colluding over who's going to get what 3%. In fact, what it does is it kind of ends the very nature of the two colluding over who's going to get what. There was nothing informal about it. It was happening in broad daylight on these MLSs. Right. But of course, we weren't on those MLSs. But we didn't know. Exactly. And now we know. Okay. So those are two colossal changes to the market. But it

leaves me with a question. This settlement sounds like it represents people who were in the class action lawsuits. But if I sold a home, I don't know, like three, four years ago, and I look at this settlement, I say congratulations to those in it. But what about me? What about the fact that I and a million and a half other people, we paid our 6% fees. What's in it for us? Yes, Michael Barbaro, you could also make money from this settlement. And I, Debra Kamen, could also make money from this settlement. The settlement is a global settlement because there were so many lawsuits going on at once. It didn't just settle that case in Missouri with the five homeowners. It settled all of them. It's a class action suit that applies to almost every person in America who sold a home

over the last few years. And over the next few years, it's going to take a while, but we're all going to get letters that are going to ask us, if you sold a home and if you paid commission. And we've all gotten these letters, were you part of this? Did you buy a piece of meat from the supermarket on this date? Did you buy a piece of the housing market on this date is the letters we're going to get. And depending on how many people fill out these letters and send them back and how big that pot of money has grown to by the end of it, because there's still some lawsuits that are simmering, that money is going to be divvied up, and parts of it are going to go to homeowners. No one's going to get rich off of this, but yes, we all stand to get a small chunk of

it. If this is, in fact, as you're describing it, a kind of revolution in the American real estate industry, the downfall of NAR, the changes of all these rules. We know that revolutions can be very fast or they can be very slow. And I'm curious if you can, in your mind's eye, kind of imagine what the real estate market is going to look like in five or 10 years

and how much better or more accessible it might be for people as a result of these changes. And I'm asking that in particular because here on The Daily, we've talked so much about how cruel the U.S. housing market is right now. There's a shortage, prices are really high, and young people in particular feel completely locked out of the market. And so is this really going to do something about that, or is it really going to only feel like it's at the margins? No, it will help them, but not in the clean, easy way that you may think. One of the major fallouts of the settlement is going to be the fact that NAR stands to lose

something like two-thirds of its members. Why? Because the major reason people have stayed members of NAR is because they needed access to home listings, and they control the home listings. Now that that access has been broken by the settlement deals, people are fed up with NAR. They pay $100 a year to be a member and now they're saying, what do you do for me? After all this, you lost in court and now I don't even have access

to these listings for my commission. So when they lose two-thirds of their members, that group is now also losing two-thirds of the people who donate to their political action committee. And that lobbying arm in Washington has now been very significantly blunted. And that lobbying arm in Washington is one of the biggest forces behind pro-landlord policies, stopping things like rent control, all of the initiatives in D.C. that have made

the housing market so very brutal for so many Americans. So in the long run, this is going to have a serious impact that will completely change the dynamics of the real estate market. So if we take the NAR out of the equation, we get a more consumer-tenant-friendly housing market. And that is very likely to happen because this settlement essentially kneecaps NAR and leaves its current members with no real incentive to stay members. That is absolutely correct. So it's going to take time, but there's going to be all sorts of ripple effects from this that go well beyond $480 million.

Right. At the end of the day, Debra, this feels like the story of a monopoly that outlived all other monopolies in our system, right? I mean, American economic history is littered with the story of industries where a group or a company have a stranglehold, and it gets broken up. That's the idea of a fair economy. This one lasted so long despite the fact that what it controlled was a pillar of the American dream, which is owning a home. And I wonder how you think about the fact that it took so long to do it. It genuinely shocks me, I guess I'm saying, that this dynamic lasted as long as it did. It shocks me too. And I have to say, when I started this beat about a year ago, I didn't know what NAR was. Most Americans had no

idea that this organization had so much control and so much power over the housing market. The housing market is 20% of the U.S. GDP. This is a huge organization that's been guiding everything from the wings. But what I love about this story is at the end of the day, it was just five normal home sellers who took them on in court in Kansas City and a personal injury lawyer, and they won. And that irony is not lost on the lawyer. He, after the settlement, sent me a quote. It was a David versus Goliath quote from the Bible. That is how he sees himself.

And in many ways, that is what this story is. It's one of those stories where the little guy went up against the biggest guy there was, and they won. And a lot of regular Americans now stand to benefit from this because of its impact on the housing market. Well, Deborah, thank you very much. Well, Michael, thank you very much. A federal court is expected to give final approval to the NAR's legal settlement and make it official in the coming weeks.

We'll be right back. Here's what else you need to know today. Here's what else you need to know today. On Tuesday, Israeli Prime Minister Benjamin Netanyahu said he would push ahead with a planned ground invasion of the southern Gaza city of Rafah, despite pleas for restraint from the United States, which has warned it could be disastrous for the civilians there. In remarks to his cabinet, Netanyahu acknowledged that the White House had asked him not to invade Rafah, but said that he sees no way to eliminate Hamas without doing so. Today's episode was produced by Diana Nguyen, Shannon Lin, and Sydney Harper.

It was edited by Brendan Klinkenberg and Lisa Chow. Contains original music by Diane Wong, Marion Lozano, Sophia Landman, Rony Misto, and Brad Fisher. And was engineered by Alyssa Moxley. Our theme music is by Jim Brunberg and Ben Lansford of Winderly. That's it for The Daily. I'm Michael Barbaro.

See you tomorrow.