What does this $1.8 billion real estate lawsuit mean for homebuyers and sellers?

A "sold" sale sign outside of a yellow house.
A sale sign stands outside a home in Wyndmoor, Pa.. The CEO of the National Association of Realtors is stepping down, Thursday, Nov. 2, 2023, nearly two months before his planned retirement, a move that comes just two days after the trade group was dealt a punishing judgement in federal court over its rules on real estate agent commissions. AP Photo/Matt Rourke

A federal jury in Missouri recently ruled that the National Association of Realtors, along with two major brokerages, conspired to set and keep high commission rates for agents.
The media hailed the case as one that could change the home-buying process. But what does it actually mean for buyers, sellers and real estate agents? John Kwoka, Neal F. Finnegan Distinguished Professor of Economics and antitrust researcher, breaks it down.

What is the basis of the lawsuit?

When selling a home, the seller pays a commission to both their agent and the buyer’s agent. The commission is usually 5% to 6%. Often this amount has already been set when the property is posted for sale, leaving buyers and sellers little room for negotiation, Kwoka explains.

Headshot of John Kwoka.
John Kwoka, Neal F. Finnegan Distinguished Professor of Economics. Photo by Matthew Modoono/Northeastern University

The plaintiffs said buyers should pay their own agent and the commission fee should be negotiable. The NAR argued that commissions are negotiable. But the U.S. Department of Justice said the NAR is not transparent about the commissions. This allows agents to steer buyers toward properties with high commission offers, lets buyers think broker services are free, and leaves little to no room for negotiation.

“When I go to buy an ordinary product or service, I get to find alternatives or to negotiate down if it’s a one-on-one negotiation over how much to pay,” Kwoka says. “In the case of housing, it’s predetermined.”

The ruling makes it so NAR must change its rules to be more transparent about commission rates, allowing more room for negotiation. 

What is the National Association of Realtors?

The National Association of Realtors is a trade association. Millions of real estate agents comprise it with over 1,200 local associations. Agents must be enrolled to use the term Realtor and are bound to NAR rules when they join. Most real estate agents are part of NAR, Kwoka  says, and it is difficult to break into the industry without becoming part of this organization. 

“That’s the core competitive concern,” Kwoka says. “The contractual agreement between agents and NAR doesn’t give buyers any choice in what they’re going to pay.”

NAR President Tracy Kasper released a statement on the verdict on Oct. 31 saying the association would appeal the ruling and ask the jury to reduce the $1.8 billion in damages.
“In court, NAR presented evidence that consumers are better off and business competition is able to thrive because of our rules and how well local MLS broker marketplaces function,” the statement says. “In fact, the NAR cooperative compensation rule for local MLS broker marketplaces ensures efficient, transparent and equitable marketplaces where sellers can sell their home for more and have their home seen by more buyers while buyers have more choices of homes and can afford representation. “

What does this mean for real estate agents?

The decision has both pros and cons, Kwoka says. On the one hand, it allows agents to be more competitive in their commission rates.

“It’s long been suspected that this way of specifying rates prevented buyers from competing and prevented the emergence of alternative sales and pricing,” Kwoka says. 

On the flip side, it means Realtors are making less than they were before on transactions. Kwoka says some agents may leave the industry, especially after 2020, when homes flew off the market and Realtors were making a lot of money.

“When sales are hot by themselves, people are going to pile into the industry because the margins are awfully favorable,” he says. “Some folks probably feel (like) their livelihood is threatened here.” 

What does this mean for homebuyers and sellers?

Even with the potential for appeal from NAR, Kwoka says some agencies might react to this ruling quickly, in fear that doing business the old way may make them liable. Consumers may see a shift in agents’ contracts so far as setting commission rates. 

In the longer term, the market may see more competition.

“We don’t know exactly what entrepreneurial agents will come up with,” he adds. “One thing is pretty sure is there’ll be alternative ways of getting an agent. They might find it possible to get a wider variety of rates. And it does mean, on the other hand, that it will require consumers to do a little more searching and shopping. If you don’t like that, the NAR will still be there.”

Kwoka says this could also eventually mean lower home prices since commission is often factored into pricing. This could provide some relief for buyers in a competitive and pricey market.

“The average home sales price in the United States is about $500,000,” Kwoka says. “Six percent is $30,000. That’s a lot of money for a $500,000 house. If you ask whether the agents who did work added that much value to the property, I’ll bet a lot of people will decide the answer’s no. And that is the place where they start to negotiate.”

What does this mean for an industry as a whole?

Antitrust agents and the trust division of the Justice Department and the Federal Trade Commission have been trying to fix the trust issues with real estate for a long time, specifically the issues caused by the NAR, Kwoka says. 

While this court case was decided by a state court, it still is a step in the right direction so far as reconsidering the importance of brokers for real estate transactions, he adds.

“The real estate business has been looked at for 20 to 30 years as archaic and laced with overpaying and inefficiencies,” Kwoka says. “This is a really big victory for (homebuyers).”

Erin Kayata is a Northeastern Global News reporter. Email her at e.kayata@northeastern.edu. Follow her on X/Twitter @erin_kayata.