What a massive new legal settlement means for the future of homebuying

Things are about to get weird for homebuyers and sellers.

I wrote late last year that 2024 would mark the beginning of a great experiment in real estate that would upend the way homebuyers and sellers pay their agents. Well, the experiment officially got underway Friday when the National Association of Realtors agreed to a $418 million settlement to bring to an end a series of class-action lawsuits over agent commissions.

The settlement came after a yearslong battle in which hundreds of thousands of sellers claimed that they were forced into paying unfairly high commissions to real-estate agents. In addition to the monetary penalties, the agreement could enable more buyers and sellers to start negotiating those commissions, which for decades have hovered between 5% and 6% of the sale price. The deal could also push more buyers to forgo hiring an agent or work out an alternate payment structure.

These changes, spread out over millions of transactions a year, have the chance to reshape the housing market. Some industry observers have predicted that the new commission rules could lead to a drop in both home prices and commissions. Buyers could even save as much as $30 billion every year, a recent working paper from the Federal Reserve Bank of Richmond estimated. But there's also the possibility that the Department of Justice decides this settlement doesn't go far enough, which could set up a showdown between the NAR and the DOJ. In other words, while the real-estate revolution is underway, this thing is far from over.

To grasp the scope of the settlement, it helps to understand how agents are paid. In most home sales, the seller uses a chunk of the final sale price to pay out the agents on both sides of the transaction. When a seller lists their home on the multiple-listings service — a database of local homes for sale where agents go to find homes to show clients — they advertise how much they're willing to pay the buyer's agent. For decades, sellers have generally offered buyers' agents 2% to 3% of the final sale price, even though they can technically offer as little as $0. That's because sellers fear that if they offer less than the industry standard, buyers' agents will direct their clients away from their homes, a practice called "steering." Don't offer the standard rate; don't get seen. To fix this issue, the plaintiffs in the lawsuits and the Department of Justice have pushed for a practice called "decoupling," in which buyers and sellers just pay their agents separately. They argue that this would eliminate steering and push down commissions, saving people money and perhaps forcing many subpar agents out of the industry. A lot of agents are already barely scraping by — if their earnings fall, they might decide to exit the business altogether.

The newly announced settlement doesn't go quite that far. While sellers will no longer be required to say how much they're offering a buyer's agent when they list their homes on the MLS, they're not expressly prohibited from offering that compensation somewhere else — it just can't be anywhere on the MLS. There will likely be "a thousand work-arounds," Bret Weinstein, the founder and CEO of the Denver brokerage Guide Real Estate, told me. A buyer's agent could just call up the seller's agent and ask what commission they'll get, or the listing agent could advertise the commission tied to the home on their website. In theory, a seller might still offer compensation to a buyer's agent because they want to get as many offers as possible on their home. If you're a seller and you don't offer anything, then any buyer who wants your home will have to pay their agent out of pocket, and a lot of cash-strapped buyers simply can't do that. In some cases, sellers might still feel pressured to offer the going rate, so the agent's commission could end up looking pretty much the same as it does today.

On the other hand, we're likely to see both sellers and buyers negotiating on commissions in ways they simply haven't before. If sellers are in a desirable market, they might start offering less commission to buyers' agents, or none at all. On a $1 million home, a seller may save $30,000 if they don't promise anything to the agent on the other side of the deal. This would force buyers' agents to get more creative. They could work for a flat fee or cut their commission rate to attract price-sensitive clients. Some might offer varying levels of service for different prices — the white-glove treatment still goes for 3%, but just setting up a few showings is a cheaper rate. Other buyers might choose not to hire an agent at all or just get a lawyer to review contracts and make sure the transaction doesn't go off the rails.

As for home prices, I'm not convinced they'll actually drop as a result of this settlement. It's hard to imagine a seller shaving 3% off their listing price just because they're not offering a commission to the buyer's agent, especially if a comparable house down the street is selling for a similar amount. Sales have slowed down with higher mortgage rates, but the seller still has the upper hand in most parts of the country.

The NAR will pay out a staggering amount of money to the class-action members (and their lawyers), but that $418 million pales in comparison to the billions of dollars in damages that the NAR and other major brokerages were facing as part of these lawsuits. In the first case to go to trial, in October, a jury slapped the NAR and its codefendants with $5.3 billion in damages. The settlement also doesn't mean that the organization is off the hook just yet: One of the biggest remaining questions is what the Department of Justice will think of this proposed settlement, which still needs approval from a federal judge. Earlier this year, the department threw its support behind the idea of decoupling, or just having both sides pay their agents separately. It has made it clear that it doesn't want sellers offering compensation to buyers' agents. Instead, it proposed an alternative in which sellers don't promise anything but buyers can still make offers that are contingent on getting some money back so they can pay their agent: "I'll pay you $500,000, but you give me back $15,000 so I can cut a check to my broker." The key difference is that the amount requested is negotiated between the buyer and their agent, not set by the seller.

So it seems like the newly announced settlement could fall short in the eyes of the department. But even if the DOJ isn't able to push for more changes, this settlement could usher in a new era for the industry — one in which buyers and sellers no longer default to the standard commission rates that have prevailed for decades.

This settlement isn't the end of this saga. The experiment is just beginning.

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