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Consumer group predicts 20-30% drop in commissions 

The NAR settlement will lead to better service and lower costs for homebuyers, new research from the Consumer Federation of America suggests.

April 8, 2024
4 minutes

Key points:

  • The CFA estimates that in time, home transaction costs could be reduced by 20-30%.
  • The consumer watchdog group also predicts a rise in discount brokerages and other downward pressure on agent commissions.
  • Additionally, the report recommends that consumers be allowed to finance agent commission fees.

A new report from the Consumer Federation of America suggests that the outcome of last month's proposed settlement from NAR and ongoing class action litigation surrounding agent commissions would ultimately benefit both buyers and sellers. 

The consumer watchdog group — which has previously highlighted the glut of inexperienced and part-time agents in the industry — said that decoupling seller and buyer agent commissions  by eliminating mandatory offers of compensation would give consumers more negotiating power. This would result in better service and lower costs on home purchases, leading to a real estate marketplace that "would also be more rational and fairer."

Lower real estate transaction costs

While the jury is still out on whether or not reduced agent commissions would directly translate to lower home prices — a theme that has been speculated on and covered in mainstream media sources in recent weeks — CFA researchers confidently assert that cost savings would be seen over time.

"For several years, the Consumer Federation of America (CFA) has estimated the potential consumer savings at 20-30 percent," the report authors wrote, noting that outside experts have concluded commissions could decline by 20-50% in a more competitive marketplace, "lowering homeownership costs by tens of billions of dollars annually." 

The CFA points to real estate transactions in New York City, where total agent commissions are more typically between 3-4%, as a possible model that could be replicated across the country. A 2-3 percentage point drop in overall agent commissions in real estate transactions would result in cost savings to buyers and sellers, the organization said. 

"Today's high housing costs are driven by many factors, and if the noncompetitive cost of real estate commissions can be lowered by any amount it will be incrementally helpful," the report reads. 

More variance in fee models, specialization

The CFA pointed to other consumer benefits that could emerge in a post-settlement world, such as a rise in discount brokerages, flat fee models and agents who specialize in first-time homebuyers — all of which could put further pressure on the industry to reduce fees, savings consumers money. 

"Since MLSs will no longer be allowed to make available information on buyer agent commissions, discounters and flat rate brokers would be empowered," the report reads. "Even traditional Realtors would feel marketplace pressure to lower rates." 

But more experienced agents would likely rise to the top, being able to charge more for their services, while newer agents would have to be more flexible — a theme that some in the industry have already been promoting

"In today's marketplace, agents charge similar rates regardless of their experience, competence, or the time they spend on the sale," the report reads. "Among other effects, these equal rates plus easy entry have persuaded nearly two million Americans to obtain real estate licenses even though only 4-6 million homes are sold each year."

The need to finance agent fees

While the CFA sees a clear benefit to changes in commission structure, the organization also notes that more needs to be done — specifically, the government-sponsored enterprises (GSEs) that help consumers line up financing should allow buyers to finance agent fees.

"Today most buyers do not have the option to explicitly include buyer agent commissions in their mortgages," the report reads. "Loans supported by federal agencies and the GSEs, which comprise a large majority of all loans made to first-time home buyers, either prohibit or limit this inclusion or would increase loan-to-value ratios that already average 95 percent for these buyers."

In March, NAR reached out to the VA, FHA, and Fannie Mae and Freddie Mac to ask for changes in their policies to allow buyers to finance agent compensation. Allowing buyers to fold their agent fees into their loan, argued NAR, would help ensure buyers continue to have representation while being able to compensate an agent through their loan.

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