Housing Market Sees Massive Shift: ‘Very Disruptive’

Recent rule changes over how real estate agents charge commissions are set to disrupt the real estate market, experts say, which could help bring down the cost of home purchases for buyers, help sellers save cash along the way, and bring down fees generated from home sales by billions of dollars.

On Friday, the National Association of Realtors (NAR), which has more than 1.5 million members, settled cases that claimed the organization had engaged in a system that lacked transparency in how commissions in home sales transactions were structured which in turn allegedly burdened sellers with high fees.

The NAR denied any wrongdoing but agreed to pay more than $400 million over the next four years to end the cases. The organization also said it would change the rules on how realtors charge commissions on home sales.

The shift, which could come into effect in the summer, would mean that sellers can no longer advertise the fees they will pay a buyer’s agent—which typically tended to be about 6 percent of a sale price divided between agents. This suggests that both buyers and sellers can negotiate the fees and secure substantial savings during the buying and selling of a home.

Real estate agents, without a guaranteed commission from sellers, could face a much more competitive industry and may be forced to work harder at proving their value during the home purchasing process.

“I think this is going to drive out a lot of agents,” Saad Munir, a Boston-based real estate broker, told Newsweek. “The main reason for that is because I think in order for an agent to be able to succeed in this environment, they’re gonna really need to have a really good idea of what their value proposition is.”

The commissions business which generates an estimated $100 billion a year for agents in the United States, could see those fees cut in half, according to Vishal Garg, CEO of digital mortgage lender Better.com.

“It might take a couple of years, but I think that’s going to come down,” he told Newsweek. “If you think about an industry where the total revenues might go from 100 billion to 50 billion, that’s going to cause a lot of change.”

What it means for buyers

The change in rules in commissions will mean more transparency for buyers when it comes to the cost of purchasing a home, said real estate lawyer Maria D’Avanzo, a partner at Coffey Modica. Buyers will be empowered as a result of the settlement as agents may no longer be paid based on the percentage of a home sale like they did in the past.

“Less steering where the concept of where a buyer’s agent would steer a buyer to a higher priced home because they’re getting paid based on a percentage of that home value,” D’Avanzo said.

The ability of buyers to negotiate the fees could lead to agents charging a flat fee and in the long run save buyers on closing costs when buying a home.

“I think we’re going to move more towards a flat fee type of arrangement like the other participants in the closing—meaning appraisers, surveyors, lawyers, title insurance companies,” she said. “It’ll be cheaper for a buyer when they’re not paying this half of a 6 percent commission.”

Buyers may lose some of the expertise that agents provide but the savings that might come from relying less on buyers could lead to more selectivity in terms of services they look to get from agents.

“So, if you think about it on a $400,000 house, the consumers are going to say, ‘Well, do I really want to spend $12,000 on a 3 percent buyer’s agent fee and how much of that work can I do myself?’ $12,000 is like the price of a used car,” Garg said.

Buyers can pick and choose what they want to get from agents and negotiate fees that fit with the service they receive.

“The main thing is I want to make sure as a buyer that I’m working with an agent that is worth what I’m paying now,” Munir, who has also been a buyer of properties in the past himself, told Newsweek. “As a buyer, just really understanding what my agent’s value proposition is.”

Ultimately, it gives buyers a chance to pick and choose what they want to get from agents, D’Avanzo said.

“Maybe there’s like an à la carte menu, right? If you want me to just bring you to the place to the house, to walk around, let you in, maybe that’s one price,” she said. “If I am also going to be sourcing your engineer or your inspector to do the inspection, that’s another price. And even under that formula, I think a buyer is going to end up paying less than they would if they paid like 3 percent of the purchase price.”

What it means for sellers

Sellers in the current market tend to list homes with a set commission fee. Typically, they would cover the payment that will go to a buyer’s agent. The new rules could give sellers negotiating power in terms of how much they would be willing to pay a buyer’s agent. The current 6 percent that sellers pay to agents may become obsolete and could lead to them earning more from their home sale.

“For sellers, it means potentially they have less cost,” Munir said. “They get to keep more of their proceeds assuming that prices remain the same.”

In a competitive housing market, the new rules are set to give sellers much more flexibility when selling their homes, Garg said.

“If I’m selling my house, then I know my house is a great house and it’s gonna get 15 offers, I might say I’m only gonna pay a buyers agent 1 percent instead of the usual 3 percent,” he said. “So I think what’s going to happen is that—considering this country we have, a shortage of housing supply that we have, a very competitive housing market—you’re going to see buyers agent commissions come down dramatically.”

Going forward, the new rules put sellers in a stronger position, especially in a hot housing market where demand is higher than supply.

“Sellers are going to have an upper hand with regard to their agents,” D’Avanzo said. “The house may sell itself.”

Experts said that the shift expected in the real estate market is unlikely to help lower housing prices. Economic factors—such as inventory of homes and mortgage rates—are likely to shape how expensive buying a home is. What the agent commissions changes will do is help lower the costs of buying a home.

“Houses are going to become more affordable because basically consumers will be able to, sellers, will pay less for commissions,” Garg said.

For realtors, the changes are significant, something that the NAR acknowledged last week, saying that the shift in rules came at a cost but that it was worth it.

“It will be very disruptive to this industry because it’s just been how it’s done for forever, for years and years,” D’Avanzo said. “Six percent type commission split between the buyer and seller paid out of the purchase price…if that’s no longer the business model, it’s going to be very disruptive to the way that realtors operate.”