Oct 23, 2023 - Economy

These lawsuits could upend the real estate market

Illustration of a set of keys with a percent sign keychain

Illustration: Sarah Grillo/Axios

A closely watched jury trial underway in Kansas City, Mo., could upend a contentious cornerstone of the U.S. real estate market — broker fees.

Why it matters: The case, one of two antitrust class-action suits filed against the largest brokers in the country and the National Association of Realtors (NAR), could shake the powerful trade group's stronghold on the industry — and change how Americans buy houses.

  • Already, two of the defendants, Anywhere Realty and Re/Max, settled both suits — scaling back their relationship with the NAR and paying a total of $139 million in damages.
  • The Department of Justice is also reportedly weighing antitrust action against NAR, according to Bloomberg.

At issue: Broker fees, specifically the seller's payment to the buyer's agent, are at the heart of the case.

  • Under NAR rules, which agents must follow to gain access to most local real estate databases, the seller pays the fee, which gets split between the seller's real estate agent and the buyer's.
  • In these listings, sellers are required to include a fee offer (even if it's zero) — which is visible to buyers' agents, but not usually visible to the prospective buyers themselves.

The plaintiffs, who represent the sellers of more than 260,000 homes in Missouri, Kansas and Illinois, argue that the system is effectively a conspiracy that keeps home prices artificially inflated.

By the numbers: In 2020, Americans paid over $85 billion in residential real estate commissions, the DOJ wrote as part of a prior antitrust investigation.

  • Though the NAR has recently said that the fee could be as low as $0, research has found that the fees tend to remain overwhelmingly uniform.
  • The commission system amounts to "collusion," the lead plaintiff attorney in the Missouri case told Bloomberg.

Zoom out: For decades, critics have called out NAR and this system for inflating home prices — and misaligning the goals of the buyer and their agent.

  • After all, agents get paid more if the buyer pays more.
  • "The industry, from a consumer point of view, doesn't make much sense," said Steve Brobeck, a senior fellow at the Consumer Federation of America who's long worked on this issue.
  • For the same amount of money many folks pay in broker's fees, you could buy a car, he points out. The broker fee on a $500,000 house, would be $30,000. "It's nuts."

The big picture: The internet has disrupted just about every marketplace in the country, typically making things cheaper you can trade stocks for no fee, for example.

  • And yes, the process of homebuying has been changed by the internet: Homebuyers now scope out listings online and might not even contact a broker until they know specifically what home they want.
  • But even after online listings really took off in the mid-aughts, fees are about the same — about 5% on average, according to data from Housing Wire.

The other side: In an email to Axios, a representative from the NAR said its rules and system benefit consumers and the market. They note that "compensation is always negotiable" and that commissions fluctuate depending on the market.

  • Changing its rules "would jeopardize consumers' equal access to homes for sale, affordability, and the stability of the entire housing market," the trade group argues.
  • Changing the structure of fees could make it harder for cash-strapped buyers to afford homes, they argue, citing a paper co-authored by a George Washington University business school professor and fellow at the Urban Institute.

Reality check: The NAR's dominance has proved incredibly difficult to shake. Even if it loses these trials and is forced to pay up  it's not clear that meaningful structural change will follow.

  • Advocates are calling for decoupling — with buyers paying their agents directly, and possibly including that fee in the financing of the home.

What's next: The trial is expected to end early next month.

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