The broker commission system at the heart of the U.S. housing market is under attack from multiple directions. The Justice Department is scrutinizing how most real estate agents are paid, and plaintiffs’ attorneys in class action lawsuits are accusing the industry’s powerful trade group, the National Association of Realtors, and several big residential brokerages of colluding to keep commissions high. On Oct. 31, a Missouri jury in one of those suits sided with the plaintiffs in a verdict that could result in multibillion-dollar damages. If more litigation follows that path, it could fundamentally alter the way buyers and sellers compensate their agents.
1. How does the U.S. commission system work?
The seller typically agrees to pay a 5% to 6% commission on a sale of their property. Once a sale is completed, the seller’s agent splits the commission with the buyer’s agent. This system is largely unique to the U.S., and it’s tied to the Realtors’ association’s control of many of the country’s multiple listing services, which aggregate properties available for sale in a region.
2. What’s the issue with broker commissions?
They’re high by global standards. For a home that sells at the median price—about $431,000 today—a 6% commission comes to nearly $25,860. Because the cost comes out of the purchase price, the payment is often effectively financed by the buyer’s mortgage. In most other countries, total commissions for each sale are significantly lower – around 2% in Australia and the UK. Critics of the system, including the litigants against the Realtors’ association, contend that commissions are so high because of industry collusion that prevents price competition.
3. What happened in the Missouri case?
A jury sided with the plaintiffs, finding that the Realtors’ association and others colluded to keep commissions high. It called for damages of almost $1.8 billion to compensate a class of 500,000 plaintiffs who sold homes in Missouri in recent years. That amount could be tripled because the jury found that the defendants acted with intent rather than negligence. The Realtors’ group says it plans to appeal the decision, arguing that the current system benefits consumers by supporting “market-driven pricing” and promoting competition.
4. What about the other cases?
After the Missouri decision, the law firm representing the plaintiffs filed another lawsuit against the Realtors’ association and seven brokerages, seeking more than $100 billion in damages. And a separate Illinois class action also contends that the commission system amounts to illegal collusion that harms consumers. After the Missouri verdict, the chief executive officer of the Realtors’ association announced his resignation earlier than planned.
5. Couldn’t home sellers and buyers negotiate lower commissions?
Legally, yes—commissions aren’t fixed by law, and many sellers don’t know that commissions are negotiable. But an industry standard known as the buyer-broker commission rule requires sellers’ agents to offer compensation to buyers’ representatives as a condition of submitting a property to a multiple listing service, a vital tool for marketing homes. In practice, that leads to the 6% commissions that sellers typically pay. The system can be opaque: Researchers at the Consumer Federation of America said buyers and sellers often find it hard to understand exactly what agents charge for commissions, according to a report that studied 263 agent and broker websites, spoke with hundreds of agents and surveyed more than 2,000 consumers. Some brokerages, including Redfin Corp., have pulled out of the Realtors’ group, citing its positions on commissions as well as allegations by employees of the Realtors’ association that they were sexually harassed by the group’s former president.
6. What’s the Justice Department looking at?
The Justice Department is examining whether the commissions system violates antitrust law. That’s a potentially bigger threat to the industry: In the worst-case scenario, the federal government could seek to ban sharing commissions nationwide, prohibiting sellers’ agents from compensating buyers’ agents. Commission rates, which often get baked into a home’s listing price, are an attractive target for the Biden administration as low housing supply and skyrocketing mortgage costs combine to create the least-affordable housing market in four decades.
7. What happens if the industry does away with the commission structure?
The Consumer Federation of America, a nonprofit advocacy group, estimates that the commissions paid by consumers would fall 20% to 30% if there was “effective competition.” Still, industry advocates say such a change would carry risks. Purchasing a house is complex and expensive, and buyers need expert advice. Some home buyers might not be able to pay for an agent out-of-pocket, which could limit the help they get, these advocates say. Compensating buyers’ agents, and coordinating that through a local multiple listing service, helps foster competition that makes for a more efficient market, the Realtors’ association has said.
The Reference Shelf
Bloomberg Intelligence analyst Kevin Tsao said after the Missouri decision that lower commissions could hurt Zillow Group Inc. by reducing listings on its real estate site.
Bloomberg Opinion columnist Barry Ritholtz argued in 2017 that the process of buying and selling a home in the U.S. was needlessly inefficient and ripe for change.
National Public Radio’s “The Indicator From Planet Money” discusses the Missouri verdict.
This article was provided by Bloomberg News.