The residential real estate industry might be completely upended by a recent jury verdict that was rendered against the National Association of Realtors and major residential brokerages.
The crux of the matter lies in the real estate compensation model. Plaintiffs claim that buyer brokers are overpaid, commission rates are excessive, and fixed pricing results from NAR regulations and the corporate defendants’ actions. NAR, on the other hand, argues that the regulations encourage competition and effective, transparent, and fair local broker marketplaces.
The case, which involves the Missouri markets of Kansas City, St. Louis, Springfield, and Columbia, could take several years to resolve because NAR, whose CEO departed soon after the historic court loss, is appealing the $1.8 billion jury verdict. However, there is a real possibility that similar lawsuits will be filed, which could have an effect on realtors’ bottom lines in terms of policy changes.
The effects on the market are still being felt. For example, even though Re/Max Holdings had settled with plaintiffs prior to the recent NAR case verdict, its shares were down more than 8% on Tuesday due to concerns about potential litigation.
The following information about prospective changes in residential real estate economics is important for real estate agents, buyers, and sellers.
Unfavorable news for real estate at this time
The jury’s decision comes at a time when a lot of real estate brokers are already struggling.
The Federal Reserve’s aggressive efforts to combat inflation have resulted in a sharp increase in interest rates, which has caused the average 30-year fixed mortgage rate to surpass 8%. This has exacerbated the affordability crisis already present in the US housing market. Millions of prospective homebuyers are currently shut out of the market because they are unable to make the monthly payment, and potential sellers do not want to move if they have to consider a mortgage rate that is at least twice as high as their current one.
Recently, existing-home sales fell to their lowest point since 2010. In October, scholar-in-residence Mike DelPrete of the University of Colorado Boulder reported that, based on NAR data, current home sales are expected to reach 4.15 million transactions this year, a decrease from over 6 million in 2021 and 5 million in 2022.
“This lawsuit is just another punch in the gut for real estate franchises at a time when home sales are already under pressure,” stated Bill Gross, a self-employed real estate broker associate with eXp Realty in California.
As a result of the legal proceedings, individual brokers and agents have not experienced much of a trickle-down effect thus far. However, this could change in the future, depending on how the numerous fronts of litigation play out. Before the jury’s decision was made, Keefe, Bruyette & Woods analyst Ryan Tomasello released an analysis last month that predicted as many as 1.6 million agents would lose their source of income and that real estate commissions would drop by 30% to $100 billion annually.
There will be more pressure on transaction fees.
Over the past few years, there has been increasing pressure on fees from the industry. This pressure is heightened by recent court battles and technological advancements that increase transparency.
Additionally, according to Gilbert J. Schipani, founder of Tempus Fugit Law, which represents buyers, sellers, realtors, lenders, and businesses in commercial and residential real estate transactions, fees are more noticeable in relation to the size of the deal as a result of rising home prices.
According to Schipani, lawsuits centered on fees support the broader movement in the real estate industry to reduce fees.
“It’s an additional stride towards the path we’ve been following for the last ten years,” he stated.
According to him, there will probably be more fee disclosure in the future as court cases develop because of transparency concerns.
“In the weeks preceding the verdict, the National Association of Realtors already updated its guidelines to let agents list homes for sale that don’t offer a commission to the buyer’s agent,” recently wrote Glenn Kelman, CEO of tech-driven real estate brokerage firm Redfin. It’s highly likely that traditional brokers will now teach their agents to be open to discussing fees. This is how things ought to be.
Two more tech-focused real estate brokerages, Compass and RedFin, are among the targets of recent legal disputes.
