How a Lawsuit Against Realtors Went Sideways

On March 15th, 2024, the Chicago-based National Association of Realtors (NAR) made waves with its announcement of a staggering $626 million settlement in response to two class-action lawsuits from 2019. These lawsuits accused the NAR of wielding excessive market power, which allegedly allowed them to set lucrative commissions for their agents, ultimately driving up housing prices for potential buyers.

Fast forward a year later, and while some law firms have raked in millions, the settlement has yielded minimal tangible benefits for aspiring homeowners—save for a few clarifications regarding agent commission structures. The crux of the lawsuits stemmed from a misjudgment about the extent of NAR’s market influence, which set off a chain reaction of misguided attempts to rectify a non-existent problem.

At the heart of the proposed remedy was a rather misguided notion: restricting access to information about buyers’ agent commissions. The rationale was to enable home buyers to negotiate their commission rates directly with their agents. However, this theory reflected a naive misunderstanding of how the real estate market operates in reality.

One key takeaway from this saga is that attempting to suppress vital market information is a fool’s errand, often leading to unforeseen consequences that can do more harm than good. Additionally, what some might perceive as excessive market power often results from buyers and sellers freely determining the price of a service that offers substantial value.

To provide some context, traditionally, when a home was sold, a standard 6% commission was deducted from the sale price, split evenly between the buyer’s and seller’s agents, each pocketing 3%. The plaintiffs believed that lowering these commissions would automatically lead to a decrease in home prices nationwide.

Here’s the blueprint the lawsuit proposed to revolutionize the real estate market and make homes more affordable:

Firstly, it advocated for a ban on disclosing commission information on multiple listing services (MLS), aiming to prevent agents from steering buyers towards homes that offered the highest commissions. Post-settlement, all commission split information was barred from MLS listings.

Secondly, the settlement clarified that home sellers could choose their own commission structures, departing from the conventional 3%-3% split. For instance, a seller could opt to pay their listing agent 3% and the buyer’s agent 1%, or even forego paying the buyer’s agent altogether. This was supposedly to empower buyers and sellers to negotiate terms more freely.

However, the initial premise of banning commission information has proven largely ineffective, as savvy market participants have found ways to circumvent these restrictions. For example, some listing agents have taken to leaving three cookies on the kitchen counter, a key fob marked with the number 3, or even playing the movie Three Amigos in the background to subtly hint at the 3% commission for the buyer’s agent. A recent article in The New York Times depicted these agents as cunning villains, evading regulations, but in reality, they were simply responding rationally to a policy that aimed to obscure market information.

Beyond these quirky practices, the majority of agents have not resorted to such antics. The absence of MLS commission information has merely resulted in a clunkier process where a buyer’s agent must now make numerous calls to ascertain commission splits for multiple homes.

The lawsuit’s architects believed that empowering buyers and sellers to negotiate lower commissions would lead to a decrease in commissions and, subsequently, home prices. Yet, a year later, little has changed except for a newfound transparency in discussions between agents and buyers regarding who pays whom. “It has created a higher level of transparency between buyers and their agents, which I think is terrific,” remarked Harvey Blankfeld, a Las Vegas real estate agent quoted in a recent article. However, he lamented that it hasn’t led to lower costs in Vegas.

The plaintiffs overlooked a critical reality: few buyers are willing to shoulder the financial responsibility of paying their agents directly when sellers traditionally covered those costs. This shift creates additional stress and pressure during the home buying process.

Consequently, sellers who believed they would save by paying, say, 3% to their own agent and nothing to the buyer’s agent encountered unforeseen complications. When buyers discover this arrangement, they often pivot to other listings that offer commissions to their agents. A reduced pool of buyers leads to fewer offers, which ultimately drives down home prices. This explains the stagnation in commission structures a year post-settlement; the traditional 3%-3% division proves to be a natural equilibrium within the market.

In fact, the only significant shift since last year has been the substantial windfall for the plaintiffs’ lawyers. They pocketed a whopping $208 million—one-third of the settlement—while the estimated 50 million affected homeowners stand to gain a mere $8 each, assuming they even apply for damages.

The NAR is not the omnipotent oligopoly some media outlets portray. Companies like Open Door and Redfin do operate with lower commission rates, closer to 2%, but their market share remains negligible, accounting for less than 1% of transactions. The for-sale-by-owner (FSBO) option exists for homeowners, yet most shy away due to the potential for lower sale prices and the hassle involved. In fact, the FSBO market share hit a historic low of 7% in 2023, as per NAR statistics.

In essence, while alternatives exist, most buyers and sellers fail to see their value proposition. Any ambitious new real estate firm could enter the market with lower commission splits, yet this occurs infrequently. Over 90% of home buyers and sellers still seem to prefer the traditional model, valuing the personal connection with an agent from a reputable real estate company.

This preference arises from the understanding that agents provide both tangible and intangible value, often difficult for newcomers to appreciate. They connect clients with reputable service providers and offer insights into fair market values and negotiation strategies.

Moreover, agents navigate the complex preferences of clients, which may vary widely based on individual tastes, local conditions, and more.

By attempting to obscure crucial information regarding commission disclosures on the MLS, the unintended fallout from the NAR lawsuit could potentially reduce the number of new homeowners unable to afford upfront payments for agent fees. Fortunately, the market has displayed resilience, finding workarounds that help prospective homeowners avoid pitfalls.

The nearly 80-year-old tradition of sellers compensating buyers’ agents with approximately a 3% commission may have its flaws, but its principal advantage lies in the simplicity and transparency that facilitate complex and emotionally charged transactions. As history has shown, people tend to be remarkably resourceful when there’s profit to be made.

A year after the judgment, we find ourselves largely back where we began, with the familiar 5%-6% commission split paid by sellers. This outcome reflects the market’s preference, albeit with options like FSBO still available. We didn’t need an expensive lawsuit to reach this conclusion.

While the enhanced transparency regarding commission structures between buyers and sellers is a beneficial outcome, simple adjustments to the buyer’s agent agreement could have spared us the hefty legal expenses, primarily benefiting the lawyers involved.

Craig J. Richardson is the Truist Distinguished Professor of Economics at Winston-Salem State University. His wife Cathy Richardson is a Realtor.