No more 6%? Home buyers and sellers will soon negotiate their own commissions with agents.

By Aarthi SwaminathanRobert SchroederTomi Kilgore

Zillow's stock suffers biggest selloff in four years as NAR settlement could lead to lower earnings and revenue

A major change is coming to the real-estate industry.

On Friday, the powerful National Association of Realtors said it had agreed to eliminate rules on commissions in order to settle lawsuits. It will also pay $418 million in damages.

If approved by a federal court, the settlement is likely to have a significant effect on how the real-estate industry does business.

"We hit the reset button on the housing market today," Michael Ketchmark, the attorney who led a landmark Missouri lawsuit against the real-estate industry over alleged inflated commissions, told MarketWatch.

"This settlement is going to result in tremendous savings for Americans when they sell their homes," he added. "The days of NAR and the large corporate real-estate companies working together to establish a procedure for setting up inflated commissions are over."

Both buyers and sellers will see a change. Traditionally, in most transactions, home sellers have paid a 6% fee to their broker, while buyers have not paid anything to the agent.

The NAR continues to deny any wrongdoing in connection with a compensation rule that has been the subject of intense scrutiny over the last few months.

"NAR has worked hard for years to resolve this litigation in a manner that benefits our members and American consumers," Nykia Wright, interim CEO of NAR, said a statement Friday.

"It has always been our goal to preserve consumer choice and protect our members to the greatest extent possible," she added. "This settlement achieves both of those goals."

Under the settlement, consumers will no longer be compelled to pay commissions to both the listing agent and the buyer's agent when selling their home. Instead, they will choose whether to pay a commission.

The settlement could also mean that potentially tens of millions of home sellers will be eligible to receive compensation through a consolidated class-action payout. The money will come from a fund designated for distribution, if the settlement is approved.

The NAR also continues to push back on allegations that commissions have been set at 6%, arguing that commissions vary across the U.S. and within states. The commission rate, it argues, had always been set based on negotiations between a broker and a client.

As part of the settlement, the NAR will also implement a new rule for the Multiple Listing Service "prohibiting offers of broker compensation" on the MLS. This would mean that broker compensation offers could not be communicated via the MLS, but they could still be pursued off the service.

These changes will go into effect in mid-July 2024, the NAR said.

Home sellers collectively pay about $100 billion annually in commissions to brokers, according to a report by Keefe, Bruyette & Woods.

That practice has come under scrutiny in recent months, but the implications of the settlement are still unclear.

In Missouri, attorney Ketchmark in November won a $1.8 billion class-action jury award for a group of home sellers that held the NAR liable for conspiring to keep commissions for home sales artificially high.

That lawsuit set off a string of dozens of other suits alleging the same.

The Biden administration has weighed in on the issue. The U.S. Department of Justice submitted an opinion in February asking the judge to reject a proposed settlement in a case in Boston, saying that the settlement was inadequate because it would fail to actually change the commissions structure.

The DOJ said the proposed settlement would only make "cosmetic changes" because home sellers would continue to offer the customary 6% fee to their real-estate agents "out of fear that buyer brokers will direct buyers away from listings with lower commissions," otherwise known as steering.

Switching to a model where buyers and sellers pay for their own agents would save sellers $30 billion a year, a study by two Richmond Fed economists estimated.

The NAR, which has a membership of 1.5 million real-estate agents, has affiliate organizations that control the MLS, where most homes for sale are advertised. It has also historically set the standard for the commission rate for real-estate agents across the United States.

The commission structure for real-estate agents who sell homes and help buyers find homes was first set by local real-estate associations in the late 1800s and early 1900s.

The NAR standardized it in 1939, and by the 1950s, "a 5% commission rate became standard practice throughout the U.S.," the study said. "Over the next decade, commission rates generally increased to 5-6%." Since then, the industry has stopped using any fee schedules, but the standard still prevails informally.

Typically, when a home is sold today, the listing agent and the buyer's agent each get a 3% commission, both of which are paid by the seller.

With the settlement, the stage is set for the buyer's agent to no longer automatically receive a 3% commission, which amounts to $12,000 on a median-priced $400,000 home.

The settlement weighed heavily on the stocks of online real-estate marketplace providers. Gordon Haskett analyst Robert Mollins said the proposed changes will likely lead to downward revenue and profitability revisions for residential real estate companies.

Shares of Zillow Group Inc. (Z) tumbled 13.5% toward a three-month low in afternoon trading Friday, putting them on track for the biggest one-day drop since they plunged 21.1% on March 16, 2020. The stock has tumbled 17.1% amid a five-day losing streak.

Among other providers of online real-estate marketplaces, shares of Redfin Corp. (RDFN) slumped 6.3%, Compass Inc. (COMP) took a 12.6% dive, Anywhere Real Estate Inc. (HOUS) gave up 13.5% and Douglas Elliman Inc. (DOUG) lost 14.7%.

Meanwhile, shares of home builders got a boost from the deal, which could make buying new homes a little more affordable. Lennar Corp.'s stock (LEN) gained 2.6%, D.R. Horton Inc. shares (DHI) tacked on 1.1% and PulteGroup Inc.'s stock (PHM) advanced 1.1%.

-Aarthi Swaminathan -Robert Schroeder -Tomi Kilgore

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03-15-24 1446ET

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