Realtors settlement expected to lower housing prices

The National Association of Realtors has agreed to settle litigation that accused the real estate group of artificially inflating real estate commissions – a blockbuster decision that could fundamentally reshape the housing market for buyers, sellers and agents.

The real estate group, which represents 1.5 million real estate agents around the country, said it will pay $418 million over four years to settle several cases. Crucially, the settlement would do away with a fixture of the housing market: the 6% sales commission.

Here’s what you need to know.

What does the NAR settlement mean for home prices?

Home prices are slated to drop. That’s because the sticker price will no longer come with steep commissions that are typically automatically accounted for. Overall, economists estimate that the changes could cut the $100 billion U.S. consumers pay in real estate commissions by 30%.

Fewer transaction costs might also incentivize people to move, buying or selling homes more often. Home prices could get pulled down then, too, since part of the reason the housing market is so tight is because people – especially those avoiding high mortgage rates – are staying put and clogging available inventory.

What does this mean for people selling and buying homes?

Under the agreement, a seller’s agent will no longer be required to make offers of commission to a buyer’s agent. That practice is called decoupling and could ultimately save the nation’s homeowners money when they go to buy and sell.

The deal could also spur more buyers to avoid using agents altogether, or become more choosy with how much they pay in commissions. For example, they might decide to hire agents for fewer services, and therefore pay less.

Hundreds of thousands of agents also may decide to leave the industry as a result. Some estimates suggest that 1 million agents could leave the field. Meanwhile, some agents could reshape their business models to specialize in a-la-carte services and primarily focus on working with buyers and sellers who don’t need a ton of help.

What happens to the standard 6% commission?

Until now, that cost has been paid for by the seller and gets worked into a home’s final sale price. This 6% commission is the highest of its kind in the world. Think of it this way: the median sale price of a house was $412,778 in February, according to Redfin. Under the 6% commission standard, sellers would be paying around $24,766 in commissions.

With the settlement, that rate will no longer be the default.

That means agents will have to accept lower commissions. Agents will still have leverage based on their competition and knowledge about a sale. But more will rely on negotiation.

When might these changes take effect?

The new rules will take effect in July, according to a person close to the settlement negotiations who spoke on the condition of anonymity to discuss the terms of the agreement. But the settlement still has to be approved by a federal court.

What’s happening in the broader housing market?

The housing market is being strained in multiple directions, but has remained hot overall. The Federal Reserve has made an aggressive push to raise interest rates and slow the economy down. And high mortgage rates, in turn, have culled some demand from the market. But even mortgage rates hovering around 6 or 7% haven’t been enough to deter prospective buyers. (Mortgage rates are expected to inch down further this year as the Fed prepares a series of interest rate cuts, likely in the second half of the year.)

Meanwhile, overall home prices have inched up, making it harder for new buyers to gain a foothold in the market, and widening the affordability gap in large parts of the country.

Economists are expecting prices to ease as thousands of new homes finish construction and become available later this year. The idea is for the supply of new homes to catch up with demand, helping prices settle.

Aaron Gregg, Rachel Kurzius and Julian Mark contributed to this report.