(Bloomberg) — The lucrative broker commission system at the heart of the US residential housing market is facing unprecedented antitrust scrutiny from the Justice Department and two private class-action lawsuits that risk weakening the National Association of Realtors, the industry’s powerful lobbying group.
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Federal antitrust enforcers are poised to decide whether to pursue their own case after a years-long investigation, according to a person familiar with the issue. The Justice Department is focused on the real estate commission-sharing system that typically puts homesellers on the hook for a 5% to 6% cut of the sale, split between their agent and the buyer’s agent.
It’s a structure largely unique to the US, preserved by the association’s control of many of the country’s multiple listing services — an essential tool that aggregates properties available for sale in a given region. To use the system, NAR requires sellers to offer compensation to the buyer’s representative, which critics say inflates home prices.
This practice will also be on trial in two antitrust class actions, including one beginning Monday in Missouri. That case could result in as much as $4 billion in damages, while plaintiffs in an Illinois trial early next year are seeking as much as $40 billion.
The commission-sharing structure equates to “collusion,” Michael Ketchmark, the lead plaintiffs’ attorney in the Missouri case, said in an interview. “The day of accountability is coming.”
Read More: DOJ Ditches Realtor Antitrust Pact Citing Need for Probe
The DOJ began investigating residential real estate under the Trump administration, and NAR agreed to measures, including increased price transparency, to settle the case. Biden officials in 2021 pulled out of that agreement, saying they wanted the ability to pursue future antitrust claims against the group, but a federal judge in January said the DOJ is still bound by that settlement. The department is appealing that decision, as the Biden administration expands antitrust scrutiny outside traditional areas.
The Justice Department declined to comment.
‘Seismic Change’
The damages sought in the two civil cases – based on allegedly inflated commissions in each of those markets – would be a blow to the realtor association and the major brokerages listed as co-defendants that haven’t already settled. Re/Max and Anywhere Real Estate Inc. agreed to pay $55 million and $83.5 million, respectively, and to no longer require agents to belong to NAR.
But the bigger threat to the industry as a whole would be a nationwide case brought by the Justice Department to dismantle the commission-sharing structure altogether. In the worst-case scenario for the industry, the federal government could seek to ban sharing commissions, prohibiting sellers’ agents from compensating buyers’ agents.
“Our guess is that the lawsuits in Missouri and Illinois will not go that far, but it’s possible,” Redfin Corp. Chief Executive Officer Glenn Kelman said in an interview. “We think that DOJ action is necessary to reach that level, and that would be a seismic change — basically, half the real estate agents in this country would be unemployed.”
Redfin, an online real estate firm, also withdrew from the National Association of Realtors earlier this month, citing its long-held concerns about agent compensation.
Commission rates, which often get baked into a home’s listing price, are an attractive target for the Biden administration as low housing supply and spiraling mortgage costs combine to create the least affordable housing market in four decades. On a $407,100 house — the median existing-home sales price — a 5.5% commission comes to about $22,390.
In some parts of the world, total commissions for each sale are significantly lower – around 2% in countries like Australia and the UK.
The Justice Department highlighted the issue in a recent court filing asking a federal judge in Boston to hold off on approving a potential settlement in another antitrust suit challenging commission rules.
The Justice Department “is concerned about policies, practices, and rules in the residential real estate industry that may increase broker commissions,” the agency said, asking for a two-month delay to offer further thoughts on the issue.
Lower Payout
Completely untying buyer and seller agent fees could eventually lower commissions by as much as $30 billion annually, according to a study by the Consumer Federation of America, a watchdog group. If aspiring homeowners had to pay agents directly, they would likely shop around before hiring one — increasing competition — or pay an hourly or flat-fee service to handle paperwork at closing.
“Increasingly the industry is accepting the fact that the rates will eventually be untied, and they’re just trying to delay it,” Steve Brobeck, former executive director of CFA, said in an interview.
NAR says the existing system opens the door to first-time home-buyers, especially from minority and lower income groups.
“This case is very much about buyer representation and that being at risk,” Mantill Williams, a spokesman for NAR, said in an emailed statement. He said buying a home is a consequential decision and people “shouldn’t be forced to go it alone.”
Read More: Realtors Want to Fix Discrimination. And Protect the Commission
NAR has said the buyer commission offer doesn’t have to be the traditional 2.5% – the group recently said it could even be $0. But that higher rate persists in most transactions as sellers fear that listing with lower payouts for buyers’ agents would cause them to steer clients away — a concern borne out by recent research.
Indeed, in an email to Re/Max affiliates describing the company’s settlement in the civil case, President and CEO Nick Bailey reminded agents of their “professional obligation” to show properties regardless of the compensation offer.
These changes could also put the future of the National Association of Realtors in doubt. The group collects $150 in annual dues from more than 1.5 million agents. It’s a moment of reckoning for the group that last year surpassed the US Chamber of Congress to be the biggest spender on lobbying in the US, laying out more than $80 million in 2022.
This unprecedented pressure poses an “existential threat,” according to David Greer, who worked with NAR for over a decade. He said the prospect of buyers’ agents exiting the industry – and taking their membership dues with them – in the wake of any reform has left NAR “immensely afraid.”
TORONTO – One expert predicts Ottawa‘s changes to mortgage rules will help spur demand among potential homebuyers but says policies aimed at driving new supply are needed to address the “core issues” facing the market.
The federal government’s changes, set to come into force mid-December, include a higher price cap for insured mortgages to allow more people to qualify for a mortgage with less than a 20 per cent down payment.
The government will also expand its 30-year mortgage amortization to include first-time homebuyers buying any type of home, as well as anybody buying a newly built home.
CIBC Capital Markets deputy chief economist Benjamin Tal calls it a “significant” move likely to accelerate the recovery of the housing market, a process already underway as interest rates have begun to fall.
However, he says in a note that policymakers should aim to “prevent that from becoming too much of a good thing” through policies geared toward the supply side.
Tal says the main issue is the lack of supply available to respond to Canada’s rapidly increasing population, particularly in major cities.
This report by The Canadian Press was first published Sept. 17,2024.
OTTAWA – The Canadian Real Estate Association says the number of homes sold in August fell compared with a year ago as the market remained largely stuck in a holding pattern despite borrowing costs beginning to come down.
The association says the number of homes sold in August fell 2.1 per cent compared with the same month last year.
On a seasonally adjusted month-over-month basis, national home sales edged up 1.3 per cent from July.
CREA senior economist Shaun Cathcart says that with forecasts of lower interest rates throughout the rest of this year and into 2025, “it makes sense that prospective buyers might continue to hold off for improved affordability, especially since prices are still well behaved in most of the country.”
The national average sale price for August amounted to $649,100, a 0.1 per cent increase compared with a year earlier.
The number of newly listed properties was up 1.1 per cent month-over-month.
This report by The Canadian Press was first published Sept. 16, 2024.
MONTREAL – Two Quebec real estate brokers are facing fines and years-long suspensions for submitting bogus offers on homes to drive up prices during the COVID-19 pandemic.
Christine Girouard has been suspended for 14 years and her business partner, Jonathan Dauphinais-Fortin, has been suspended for nine years after Quebec’s authority of real estate brokerage found they used fake bids to get buyers to raise their offers.
Girouard is a well-known broker who previously starred on a Quebec reality show that follows top real estate agents in the province.
She is facing a fine of $50,000, while Dauphinais-Fortin has been fined $10,000.
The two brokers were suspended in May 2023 after La Presse published an article about their practices.
One buyer ended up paying $40,000 more than his initial offer in 2022 after Girouard and Dauphinais-Fortin concocted a second bid on the house he wanted to buy.
This report by The Canadian Press was first published Sept. 11, 2024.
