Buying and selling a house is an integral part of the American consumer experience, with 6 million buy/sell transactions recorded annually. According to the National Association of Realtors, whose 1.5 million membership includes residential brokers and salespeople, only 8 percent of sellers sold their homes in 2020 via For-Sale-By-Owner, while 88 percent of buyers used a licensed real estate agent to help them purchase a home. And 89 percent of sellers used a licensed real estate agent to sell their home.
All states license real estate brokers, and 44 states license real estate salespeople. While a salesperson must work for a broker, a broker can work independently.
Home sellers pays their own agents, one representing the buyer and the other the seller, who in turn equally share their commission with the buyer’s agent. This shared/total commission has traditionally ranged been between 5 percent and 6 percent of the home sale price.
Generally, a condition for listing a home on a multiple-listing service requires publishing the compensation offered to the buyer’s agent. The rules governing how buyer agents are financially compensated date to the 1990s — although today, using online digital technology, many home buyers are doing more of the work themselves.
As noted by the Consumer Federation of America: “Throughout the 20th century, industry leaders worked to establish uniform, fixed-rate commissions.”
For example, in the 1950s the 5 percent commission rate was nearly uniform across the United States while recently, The Wall Street Journal found evidence that the real estate brokerage commission in today’s real estate marketplace averaged 5.5 percent.
This industry phenomenon has been under recent scrutiny. In a 2019 Brookings Institution study, economists Panie Jia Barwick and Maisy Wong found that “commission transaction costs can induce significant lock-in effects that limit household mobility, as every $1,000 of additional mortgage or property taxes, household mobility is reduced by 10 percent to 16 percent.”
In 2021, Roger P. Alford and Benjamin H. Harris, in their study published in the Cato Institute’s Regulation, concluded that: “The NAR requires real estate brokers to be members of the association in order to gain access to … Multiple Listing Services, where houses are posted for sale. Through this requirement, the NAR imposes mandatory rules to limit competition and raise fees paid by homeowners.”
Likewise, the Consumer Federation of America released a 2022 report written by Stephen A. Brobeck, a senior fellow, which concludes that “5-6 percent rates also discourage first-time home ownership since purchasers typically pay about half this rate through higher sale prices.”
Recently, a jury awarded a $1.8 billion verdict — with the judge being able to treble damages to $5.4 billion — to Missouri home sellers in October 2023 against the NAR and major brokerage firms, with a finding in this private antitrust suit that they had conspired to keep commission rates higher. The NAR plans to appeal this verdict in Moehrl v. National Association of Realtors, et al.
Two major plaintiff brokerage firms — Anywhere Real Estate and Re/Max Holdings — agreed to class-action lawsuits for nearly $140 million combined, and although not admitting wrongdoing, the two defendants agreed not to require their agents to belong to the NAR. CohenMilstein, the plaintiffs’ attorneys, estimates eventual damages in this litigation, post trebling, could reach $40 billion.
What effect will this private antitrust case have on the future of the existing real estate compensation commission rate and of price competition in the real estate brokerage industry? One expert predicts a 30 percent reduction in the average real estate brokerage commission rate for an annual American consumer savings of $30 billion. In addition, the Justice Department has attempted to reopen a Trump-era antitrust investigation into real estate industry practices but has been blocked in court (although being appealed). Justice has conducted two high-profile antitrust investigations of the NAR in the last 20 years.
Technology, however, has been gradually substituting for real estate brokerage labor in the home-selling arena. Such technological innovations as the use of 3D videos online to view advertised homes, online website home searches, e.g., Realtor.com, Trulia and Zillow, online mortgage approvals, and remote closing documents, are saving consumers’ time and money. These technological innovations — along with successful private antitrust litigation results — have yet to be fully incorporated into reducing the real estate brokerage commission service costs to the economic benefit of the house-hunting American consumer.
