With a landmark legal settlement poised to overturn a decades-old rule that dictated who pays real estate agents and how much, economists, agents and lenders are beginning to worry that the burden could now fall on first-time home buyers.
Buyers may soon have to pay out of pocket for something that has always made the price. And buyers who are new to the market or have smaller down payments in hand — typically middle- and middle-income households: often black and Latino homebuyers which are long overdue behind their white peers in homeownership rates — will feel the most pain.
“First-time home buyers are typically the people who don’t have a lot of cash and experience — and that experience matters,” said Daryl Fairweather, chief economist at Redfin, the online brokerage that cut ties with the National Association of Realtors last year . .
Buyers had no seat at the bargaining table when NAR, the powerful trade group, agreed on March 15 to pay $418 million in damages and drop its longstanding rules on how commissions are defined, advertised and paid. The lawsuit was originally filed by Missouri home sellers who accused NAR of artificially inflating home prices by tying commissions paid to sellers’ and buyers’ agents.
Under the settlement, once approved by a federal court, there will be a “disengagement” committee. This means that buyers and sellers will be responsible for paying their own agents rather than expecting the seller of a home to pay a flat commission, always 5 or 6 percent of the sale price, to the agent who then splits it. with the buyer’s agent. The new rule changes will likely cut supply costs significantly, by as much as 30 to 50 percent, economists and analysts estimate. However, another fee – albeit potentially smaller – will be added to the buyer’s side of the ledger.
Most buyers will also need to sign an agreement with an agent before even viewing a property. Sellers will no longer be allowed to include commissions in the listing. Sellers could eventually pay buyers’ commissions, but they are likely to dump them in competitive markets, precisely those where buyers are under the most financial pressure.
For experienced buyers with plenty of cash on hand, commissions may not make a significant difference to the calculations. These buyers may also feel confident enough to have little or no representation.
But for buyers who barely scraped together enough cash to cover down payments and closing costs, finding more money on the negotiating table can be too much. Such buyers may be pushed out of the market altogether or persuaded to drop representation as they negotiate the biggest purchase of their lives.
“That’s the real question and the real potential unintended consequence,” said Susan M. Wachter, a professor of real estate at the University of Pennsylvania’s Wharton School and a former assistant secretary at the Department of Housing and Urban Development.
The supply changes come at a time of deep housing inequality.
Americans who bought homes just before or during the first months of the pandemic reaped the benefits of the most dramatic increase in home values in US history, as home prices rose 45% from December 2019 to June 2022. Those who bought or refinanced the home during that time secured historically low mortgage rates, some below 3 percent.
Today’s buyers are living through a very different housing market, where home prices continue to climb amid anemic inventory and stubbornly high mortgage rates (it’s hovers below 7 percent).
“It’s the mindset that you have to go into home ownership and then — bam! “We just got hit with a big roadblock,” said Shanta Patton-Golar, a Las Vegas real estate broker whose clients are mostly young black and Latino families and single parents, many who work in the city’s casinos. Her typical clients grew up in rentals with parents who never owned a home, she said. “A lot of them are first-generation home buyers,” he said. “This is their chance to turn their history into generational wealth.”
Her clients rely on down payment assistance programs and sellers who are willing to cover closing costs. “We’re pinching from this place to this place to this place so they can find the money to get into a house,” said Ms Patton-Golar, who has been a real estate agent for 20 years.
With no money left to cover another line item, what will go, she fears, will be her salary. Ms Patton-Golar said she was already losing sleep worrying about how her clients would fare at the negotiating table.
“How will they know if it’s a fair housing situation?” he said. “How will they know if they need to check? How do they negotiate if the rating is lower?”
Already, some buyers and many real estate agents are nervous. Lab Coat Agents, a Facebook group for real estate agents with more than 165,000 members, has turned into an ad hoc group therapy session since news of the settlement broke. “I think most buyers won’t pay plus some can’t,” one member posted.
And just days after the settlement agreement was announced, Kathryn Puerini, 42, walked into a real estate agent’s office in Rhode Island. Halfway through the meeting, the agent dropped a piece of paper on the table: an agreement with a clause saying that if the seller’s agent didn’t pay the buyer’s commission, the couple would be on the hook for 2.5 percent of the future price purchase of their home.
Do the math and this deal would add $10,000 to Ms. Puerini’s costs if she were to buy a $400,000 home. “I didn’t even know how to answer,” he said.
Mrs. Puerini left the meeting without signing.
Of course, a buyer could ask a seller to cover the commission as a concession, but in a fierce bidding war, adding one more thorny risk to a long list makes a thin offer look weaker.
Banks won’t be terribly helpful either, unless the lending rules change. As Dave Medina, a loan officer for Citywide Home Loans in California, put it, “We’re not going to lend somebody more than what the house is worth.”
Existing lending rules create a problem that didn’t exist before. Buyers always indirectly paid the entire commission — but the cost was included in the sale price and also included in the loan.
And some borrowing restrictions will further complicate matters. For example, veterans loan recipients are prohibited from paying real estate fees or fees under any circumstances. The rule “is as clear as it gets,” Mr. Medina said, adding, “Adapting VA guidelines is not an easy task.”
Even buyers with conventional loans will face challenges because there are strict limits on the amount of money a seller can credit a buyer at the closing table, too.
Rules from the settlement take effect in mid-July if approved by a judge as expected. Laurie Goodman, founder of the Housing Finance Policy Center at the Urban Institute, expects policymakers and the real estate industry to come up with new guidelines before that deadline. “They are tearing down the existing structure, but there is nothing,” he said. “There will be an adjustment period while the market decides what to do.”