Changes for buyers, sellers, real estate fees

Spring has sprung, and now hearts may be growing fonder for buying a house or condo.

But amid continuing high demand/low supply, prices remain high and out of reach for most people trying to buy.

Interest rates remain high. And, as part of the cost, so do real estate fees.

So the news last week that the National Association of Realtors (NAR) would change what brokers charge to sell homes, and that this could start to bring the cost of buying down, would seem on the surface to provide hope prices will go down.

Maybe, maybe not. But it's something more than 1.5 million NAR members in the U.S. are following closely. Are they all getting rich on commissions? Not that often, according to surveys, which show the average income of a real estate agent in California is around $90,000. Many agents (not Realtors) work part-time at the trade. With median prices of homes still hovering around $1.5 million in this county, commissions for agents can range from $45,000 on a median price home with a 3% commission to twice that for 6%.

Here's how the system has been working: Home sellers pay a commission typically between 5% and 6% of a home's selling price — which is usually split between the seller's and buyer's agent.

The current set of rules that effectively mean sellers are the ones who set compensation for buyer agents, date to the 1990s. Commissions have mostly remained around 5% to 6% even as home values have skyrocketed and many buyers do more of the work finding a home themselves online. Buyer agents earn a 2.5% to 3% commission no matter how little or how much they help their client and have little incentive to obtain the best deal for their client because they pocket larger commissions on higherpriced homes.

Under the settlement, the NAR will pay $418 million over roughly four years and agreed to bar seller agents from advertising a blanket offer of compensation to buyer agents on a Multiple Listing Service. The settlement relates to a federal court case, where, last November, a Kansas City jury delivered a $1.8 billion verdict to home sellers in Missouri against the NAR and two major brokerages, finding they had conspired to keep commission rates high.

Lawyers representing home sellers in the court case argued the prevailing model suppressed competition by making it difficult for buyers and sellers to negotiate lower rates. For decades, buyers didn't typically pay agents out of their own pockets. The buyer's agent commission has been paid by the seller and is baked into the house price.

The NAR deal, which goes into effect this summer, could hit agents who represent home buyers particularly hard because it could reduce their commissions and dent demand for buyers' agents altogether and could spawn new payment models, such as flatfee structures where buyers' agents charge by the hour or for specific services. Buyers might have to foot the bill up front if they want an agent to represent them. Still, if buyerbroker commission rates are negotiated directly by the home buyer, they could fall as agents would likely further compete for business.

But the settlement notably doesn't bar seller agents from advertising buyer-broker commissions on other home-selling platforms. Nor does it forbid buyer brokers from steering clients away from homes whose sellers pay lower or no commissions. In essence, the system is still rigged in favor of the real estate industry and legal scrutiny will undoubtedly continue until there is a genuine free market in the buying and selling of homes.

At the same time, consider that sellers do not, in most cases, raise the price of a home to cover commissions and other closing costs. The market sets the price of a home.

And, despite online shopping and multiple sources of information buyers and sellers have at their disposal, over 90% chose to use an agent last year. We'd expect that to continue, even under a new commission system.