The $1.8 billion verdict that could lower home prices
It took a Kansas City jury just three hours to find that the National Association of Realtors conspired with two of the nation's largest brokerages to keep commissions on home sales high — but it will take much longer for the verdict's ramifications to shake out.
Why it matters: U.S. homebuyers spend around $100 billion a year on broker fees — if the jury's verdict is upheld, that number will likely shrink and home prices could fall, too.
- The decision puts the defendants on the hook for $1.8 billion with the possibility of treble damages, and could also shake up the business of buying and selling homes.
- Real estate agents, investors and mortgage brokers are nervous about what's to come.
Catch up fast: At issue were the commissions paid to real estate agents on most home sales.
- Right now sellers typically pay a fee of 5%-6% of a home's sale price; that money is split between the seller's agent and the buyer's agent.
- The plaintiffs argued that NAR and its co-defendants conspired to keep those rates high and that the system prevents sellers or buyers from negotiating the fees down.
State of play: The case is likely to drag out for a while. NAR said it would appeal the verdict, and ask the judge to lower the damages awarded.
- Even so, it's likely that these fees are going to start dropping now. In the lead-up to the verdict, NAR had already said a seller's fee could be as low as zero.
- And brokerage firms might now start telling their agents to have conversations with clients about fees, welcoming negotiations, said Redfin CEO Glenn Kelman in a blog post.
- "Rather than saying that a fee for the buyers' agent of 2% or 3% is customary or recommended, agents will say that a buyers' agent fee, if one is offered at all, is entirely up to the seller," he wrote.
The impact: That sort of thing could spur fee competition between brokers — and competition is a great way to bring prices down.
Longer-term: If the jury's verdict is upheld, the plaintiffs have also asked the judge to establish a remedy.
- To take a page from Gwyneth Paltrow, that could mean that fees get consciously uncoupled — sellers pay their real estate agent and buyers pay their person. And each negotiates that fee down.
- The long-term upshot from there could be home prices falling.
- That's because right now the fee paid to a homebuyer's agent is baked into the home's sale price, notes Steve Brobeck, a senior fellow at the Consumer Federation of America who's long worked on this issue. If that fee goes away or is reduced, the sale price will be lower.
Yes, but: Some in the industry argue that uncoupling fees will hurt buyers, who will have to shoulder that cost upfront. NAR says lower-income buyers are most vulnerable here.
- The solution, Brobeck says, is to let homebuyers include fees in their mortgages. But right now there are regulatory hurdles to that option; theoretically NAR (an immensely powerful lobbying operation) could push for that.
What's next: The lead attorney in the Kansas City case filed another lawsuit against NAR and seven more brokerages (including Redfin) right after the jury verdict came down.
- Another nearly identical class-action suit against NAR is scheduled for trial next year. Meanwhile, the Department of Justice is closely watching these cases.