This article is the personal opinion of MT Realty Advisors, a Long & Foster team, and does not reflect the views of Long & Foster, it's ownership or affiliates. By now, most of us have read the mainstream headlines around the proposed settlement between the National Association of Realtors (NAR) and the Plaintiffs in the Sitzer Burnett case. While opinion pieces abound, they tend to repeat a click-bait narrative almost as though they’ve been written with the same AI copy. “Realtor commissions are going away”, “Consumers stand to gain a windfall of savings”, and “real estate is forever changed”. The devil is in the details, and many of the articles arguably fall short of details. Anyone who knows our team’s approach to real estate – informed by my past career in hedge and private equity funds – knows we use data to shape our real estate outlook. Get the data, and let the data do the talking. Seems simple enough. Since analytics are noticeably absent from most opinion pieces, allow me to shed light on the recent turn of events using data while trepidatiously accepting the challenge of compressing this synopsis in a ten-minute read to accommodate our typical attention span. Start your clocks! This article will get to the heart of answering the very pointed and personal question we are all asking. “How does this news potentially impact my investment in the housing market?” At the end of this article, I’ll dive into some of my predictions you may or may not find a repetitious read. First, let me get into the story that no one is telling. It starts like this, “once upon a time…” #1 Background: A Preface to the Story Unfolding There once was a widely accepted view that U.S. homeowners should have the right to sell their homes freely. They should be able to use a trusted advisor or go at it alone. They should decide the terms they felt were best for them and they should use the methods that would achieve the best net return. This included the practice of offering “cooperative compensation” to a buyer’s rep bringing a ready, willing, and able buyer. The National Association of Realtors rule states “REALTORS® shall cooperate with other brokers except when cooperation is not in the client’s best interest. The obligation to cooperate does not include the obligation to share commissions, fees, or to otherwise compensate another broker.” Yet most home sale transactions use the cooperative compensation practice. The Sitzer Burnett class action lawsuit challenged this practice - asserting cooperation led to inflated consumer costs. What is behind the seismic shift? According to some, despite no industry-set pricing model, too high a fee is being charged to real estate consumers. According to others, steering is the root of the issue. This illegal, discriminatory practice in real estate occurs when one alters practices based on race, religion, gender, sexual orientation, or other protected factors. Let's tackle this one first. The steering crowd assertion is that buyer agents would only show properties where the compensation offered is at an acceptable level to the agent. Remove the opportunity to identify what compensation is offered on a property and eliminate agents steering consumers based on personal, greedy motivations. Furthermore, the sellers won’t feel “pressure” to offer compensation. All consumers win - the end. Sounds simple enough. A recent paper analyzing home sales in Massachusetts between 1999 and 2011 even seems to emphasize this point having found that listings with lower commission rates not only took longer to sell than their counterparts but were also more likely to not sell at all. One opinion writer’s assessment of the findings? “Agents, in other words, are more likely to do business with other agents when they all agree on higher commissions.” However, indulge me as I present data-driven facts that are more easily verified than this one author’s indictment. It spells out the story of how your property value – likely your greatest asset – may be impacted by this Tale of Two Housing Worlds. #2 Cooperative Compensation: A Tale of Two Housing Worlds First, one needs to understand that most traditional loan guidelines do not allow buyers to roll realtor fees into their loan amount. In addition to the down payment and other customary closing costs, a first-time borrower also needs to be ready to foot the bill for their representation of choice. Thousands of dollars stand in the way of housing affordability for buyers. Sellers care about this since they need able buyers in order to sell their home. The real estate market evolved – scaling the insurmountable, upfront costs – through a variety of techniques including cooperative compensation. Let’s say it with the data. Example 1: Being able to forgo a direct payment to a buyer’s realtor, a theoretical buyer may be able to buy a home sooner and/or pay more. The cost to finance an extra $5,000 amounts to $30 more in a monthly mortgage payment, and a home priced an extra $10,000 more would tack on only $60 using a 6% interest rate environment. Given the fact that many first-time buyers are struggling to come up with needed down payment and closing costs, foregoing a direct payment to their buyer may be an attractive deal. With this sentiment being so common, cooperative compensation is often seen by sellers as a needed strategy for quickest and highest priced home sale. Example 2: A recent buyer client of ours was able to purchase a first home and keep $7,000 in savings – money needed to make certain repairs and budget for other related moving and maintenance expenses. Had the seller not authorized cooperative compensation, the money needed post-closing would have been depleted to foot those bills. The decision to purchase would not have been made by this buyer. The seller – who saw our offer as the best - would have ended up with a more sour deal and less net return. Home sellers have long understood the housing affordability gap and the bridge that cooperative compensation builds. This practice has become so common that some may falsely assume it’s required. Misinformation around representation being "free" comes from poorly sourced articles or from consumers who may not fully understand the technicalities of the process. Another reason cooperative compensation may be commonplace in the minds of most sellers is that the U.S. Department of Veterans Affairs is particularly restrictive. The Department goes so far as to say their buyers cannot pay their realtor - period! Veterans, literally forbidden to pay for realtor representation, are left with one choice if a seller isn’t willing to approve cooperative compensation. Go at it alone. To put this in context, over 320,000 loans with a combined value of $119,424,838,080 were issued to veterans in 2023. That accounts for 10% of the Mortgage Banker’s Association’s projected 2023 loans. Here’s the data for our local market: Example 3: In our Central Virginia MLS last year, for every one hundred conventional homebuyers - allowed to pay for realtor representation - twenty-five VA borrowers were not. Should a seller not have offered cooperative compensation, the choice to proceed unrepresented or to select another home were the two given our nation’s veterans. If VA buyers passed on the home, sellers had less competition for their property. Economics 101 suggests less competition usually means a lower net sales prices. We had 1,600 VA borrowers buy a house in our Central Virginia market last year. With a better understanding of real estate realities, the previously referenced argument that realtors are steering consumers away from homes offering lower or no compensation falls flat. The true narrative appears that consumers – not their realtors – are doing the steering. Generations past and present of innovative sellers see the opportunity that cooperative compensation techniques offer. Maybe this is the reason their homes sold and their competitors who offered no compensation incentives did not? Which brings me to my next point - the punch line of the untold story. #3 DOJ Statement of Interest: The Punchline & Untold Story The bigger headline – the story no one is telling – is the Department of Justice’s (DOJ) statement of interest as it relates to a Massachusetts case. Similar to Sitzer Burnett, the parties reached a settlement agreement for court approval. However, the DOJ may stand in the way of the settlement – asserting the settlement should not be approved unless a seller's right and opportunity to offer cooperative compensation is completely removed. Armed with the facts, one can surmise that a housing market in which the seller isn’t free to offer cooperative compensation is a housing market that could see diminished returns on the seller’s housing investment for the reasons we mentioned above. Affordable housing gaps – top of mind for voters in this election year according to the Financial Times/Michigan Ross – may be a buck more easily passed to a trade association like NAR. However, the promotion of a free & stable housing market fueled by cooperative compensation does not appear to hinder market access whereas unnecessarily burdensome government restrictions just might. While the DOJ asserts their proposed restriction fosters consumer protection, removing buyers from the market - which will no doubt snuff out the homeownership dreams of many Americans and limit the competition most sellers want – seems an odd way of protecting consumers. To put this in perspective using data: Example 4: Currently, if cooperative compensation covers buyer agent compensation, that concession (or seller expense) is not subject to interested party contribution (IPC) guidelines so long as the realtor fees are considered customary for the market. However, in the DOJ’s ideal world where a seller is no longer permitted to offer cooperative compensation, buyers may have to go down the path of asking for a seller concession – commonly referred to as a credit. For buyers putting down less than 10%, they could be faced with asking for a credit that offsets their realtor fees or their closing costs but not both due to a 3% cap allowance. This DOJ effort to protect consumers appears more of a setback for sellers - who benefit from a variety of sales strategies in a competitive market – and buyers - already digging deep to take their bite at the wealth-building homeownership apple. While it may be easier for the DOJ to pin the tail on the other donkey, the reality is putting up more barriers to homebuying could have devastating potential to claw back home-value gains that baby boomers and next-generation homeowners have realized from an unfettered market. #4 Possible Consumer Outcomes: Choose Your Own Adventure If you are still reading, now is the time to decide if you want to continue on past my ten-minute allotment and understand the realities the current NAR settlement may bring if approved. Any possible outcomes are speculative at this point, of course, but wide consensus exists around these potential changes:
What we do know is that consumers have been – and will continue to be – the driving force of the housing market. Some may see an oasis of benefits from the shifting times. Others may see their home ownership wealth building dreams evaporate like a mirage long after the headlines move on to the next flavor of the day. Time will tell. The End. Never want to miss a post? For more useful real estate tips & tricks, subscribe to our mailing list or contact us with any real estate questions.
Authored By: Kat Medaries, REALTOR® MT Realty Advisors of Long & Foster Real Estate Village of Midlothian Sales, 1100 Jefferson Green Circle, Midlothian, VA 23113 Licensed to sell in the Commonwealth of VA | Equal Housing Opportunity For informational purposes only. Not intended as legal, financial, tax or credit advice.
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