U.S. Department of Justice Looks to Change Real Estate Commission Structure
The U.S. Department of Justice is seeking to level the playing field when it comes to real estate commissions, potentially bringing big changes to how real estate agents earn their fees. Currently, home sellers pay the entire commission to their agent, with the amount the buyers' agent will receive being decided in advance. This often leads to a 5% to 6% fee, which can be a significant cost for sellers, especially on higher-priced homes.
According to a court filing on Thursday, the Justice Department believes this system should change. The filing outlines the department's objections to a preliminary settlement in a Massachusetts antitrust lawsuit, in which a group of home sellers claimed that a rule for listings on a local Multiple Listing Service (MLS) was "anticompetitive" and resulted in artificially high commission rates. While the Justice Department is not directly involved in the case, its filing is a "statement of interest" that sheds light on how the department believes real estate commissions should be paid.
Ryan Tomasello, a KBW analyst following the court cases, stated in an interview that this is the first time the Justice Department has revealed its vision for a more competitive market for brokerage commissions. The recommendations put forth by the department could have a significant impact on the ongoing debate about broker commissions in courts across the country. "These recommendations carry a lot of weight," Tomasello emphasized.
Among the Justice Department's recommendations is an injunction that would prevent sellers from making commission offers to buyer brokers altogether. The department believes this would promote competition and empower buyers to negotiate directly with their own brokers.
The Massachusetts lawsuit is one of several recent court cases challenging the current structure of real estate commissions. The lawsuits often name brokerages, MLSs, and the National Association of Realtors trade group as defendants. At the core of these battles are guidelines that require a seller's agent to advertise the commission they are willing to pay to a buyer's agent.
The National Association of Realtors has defended the current compensation structure, stating that it benefits consumers and creates efficiency in the real estate market. The association argues that changing the structure to require buyers to pay their own broker would only make homeownership even more unattainable for low- and middle-income homebuyers.
The Justice Department has objected to a proposed settlement in the Massachusetts case, stating that it offers insufficient changes to the determination of buyers' agent commissions. Simply making commission payments optional is not enough, according to the department. It argues that as long as sellers are allowed to make buyer-broker commission offers, they will continue to offer higher commissions out of fear that buyer brokers will steer buyers away from listings with lower commissions, a phenomenon known as steering.
The Justice Department has been largely on the sidelines as it appeals a previous settlement with the National Association of Realtors over commission practices. The outcome of that appeal is expected by the end of March.
Analyst comment
Positive News: The U.S. Department of Justice is looking to level the playing field between home buyers and sellers by changing the way real estate agents earn commissions. The department wants to eliminate the tradition of home sellers paying the entire commission and aims for buyers to negotiate directly with their own brokers. This could drive a more competitive market for brokerage commissions.
Market Prediction: If the U.S. Department of Justice’s recommendations are implemented, it could lead to changes in the real estate market. The elimination of seller-paid commissions and empowering buyers to negotiate directly with brokers may increase competition and potentially lower commission rates. However, it may also face opposition from real estate agents and industry associations who argue that the current structure benefits consumers and promotes efficiency. The market’s response will depend on the outcome of ongoing court cases and any subsequent regulatory actions.
