The impact of the landmark court loss on real estate commissions on the cost of buying and selling homes.

• The $1.8 billion jury verdict against the National Association of Realtors and top brokerage firms underscores the growing legal and market challenges facing real estate commission practices.
• An analyst report from Keefe, Bruyette & Woods predicted that the $100 billion spent on real estate commissions yearly could be reduced by 30%, potentially leaving 1.6 million agents without their primary source of income.
• Homebuyers are more likely to bypass or negotiate lower fees with buyers agents, as commissions are already negotiable.

The recent jury verdict against the National Association of Realtors and major residential brokerages could disrupt the residential real estate market.

The real estate compensation model is the central concern for plaintiffs, who argue that commission rates are excessive, buyer brokers are being overpaid, and NAR rules and corporate defendants' practices result in fixed pricing. On the other hand, NAR asserts that the rules foster competition, transparency, and fairness in local broker marketplaces.

The potential for policy changes that could impact realtors' pocketbooks is palpable, as NAR, whose CEO left shortly after the landmark court loss, is appealing the $1.8 billion jury verdict, so it could be several years before the case — which covers the Missouri markets of Kansas City, St. Louis, Springfield and Columbia — is resolved.

Despite settling with plaintiffs before the recent NAR case verdict, shares of were down over 8% on Tuesday due to fears of litigation.

Real estate agents, homebuyers, and sellers should be aware of potential changes in residential real estate economics.

A bad time for bad news in real estate

At a time when many real estate agents are already feeling a pinch, the jury verdict arrives.

The recent increase in interest rates due to the Federal Reserve's efforts to combat inflation has led to the 30-year fixed mortgage average rate exceeding 8%, despite a slight decrease since. This has intensified the existing affordability crisis in the U.S. housing market. Prospective sellers are hesitant to relocate if they must consider a mortgage rate that is significantly higher than their current one, while millions of potential homebuyers are unable to make the monthly payments and are therefore excluded from the market.

Since 2010, existing home sales have fallen to their lowest level, with a projected 4.15 million transactions this year, according to a report from University of Colorado Boulder scholar-in-residence Mike DelPrete, based on NAR data. This is a significant decrease from the over 6 million transactions in 2021 and 5 million in 2022.

This lawsuit is another blow to real estate franchises, which are already facing challenges in the home sales market, according to Bill Gross, a self-employed real estate broker associate in California with eXp Realty.

The legal proceedings have not yet resulted in a trickle-down effect for individual brokers and agents, but this may change depending on the outcome of ongoing legal battles. According to an analysis by Keefe, Bruyette & Woods analyst Ryan Tomasello, published before the jury verdict, there is a possibility of a 30% reduction in the $100 billion paid in real-estate commissions annually and as many as 1.6 million agents losing their source of income.

Pressure on transaction fees will increase

For years, technology has increased transparency in the fees industry, and recent court battles have further intensified the pressure on this sector.

As real estate prices rise, the fees become more noticeable in relation to the deal size, according to Gilbert J. Schipani, founder of Tempus Fugit Law, which handles commercial and residential real estate transactions for buyers, sellers, realtors, lenders, and businesses.

Schipani stated that lawsuits centered on fees contribute to the overall trend of decreasing fees in the real estate industry.

He stated that it represents a continuation of the path we've been following for the past decade.

He stated that as the court cases progress, there may be more disclosure about fees for the sake of transparency.

Redfin CEO Glenn Kelman wrote that in the weeks before the verdict, the National Association of Realtors updated its guidelines to allow agents to list homes for sale without offering a commission to the buyer's agent. As a result, traditional brokers will likely train their agents to discuss fees with clients. Kelman believes this is the right approach.

Two more tech-focused realty brokerage firms, and , have been added to new legal challenges.

Buyers agents could be the biggest losers

Buyers' agents should be paid by buyers, not sellers, according to plaintiffs, but this could discourage buyers from using agents.

In an email, NAR spokesperson Mantill Williams stated that if plaintiffs succeeded, home buyer representation would no longer exist, which would be a significant loss for many, as buying a home is often the most significant and intricate transaction they will make in their lifetime.

If courts force today's norms to change, more home buyers may try to find properties on their own to save money and negotiate with listing agents, believing they will receive a discounted fee since the latter is already being compensated by the seller, according to Gross.

While not all real estate professionals will work both sides of a deal due to inherent bias, it may happen more frequently depending on market conditions, according to Gross. Additionally, new court rules could potentially prohibit real estate professionals from working both sides of a deal, as Schipani noted.

In his post-verdict analysis, Kelman observed that if buyers continue to engage a buyer's agent, they may negotiate a lower fee due to the increased focus, as it may no longer be included in the home price and can be financed through a mortgage.

According to Gavin Myers, managing partner at Prudence, a venture capital firm that invests in the real estate sector, new agents may be less likely to enter the industry if there are questions about how they get paid or if they'll get paid. This could lead to a risk when trying to break into the industry, as people might not want to work on the buy side or it might be difficult to find high-quality people.

Local housing market changes will be key

The courts and broader market shifts could influence changes in local market rules.

The Real Estate Board of New York (REBNY) recently announced upcoming changes to its rules to promote transparency and consumer confidence in the residential marketplace. The changes, which had been in the works for months, were voted on in October.

From Jan. 1, the seller/owner must initiate compensation offers to buy-side brokers, and listing brokers will no longer be allowed to make the offer or pay the compensation. Instead, the buyer's broker will be directly compensated by the seller or owner of the exclusive property at the closing, as is customary in the New York City area.

The future of residential real estate transactions involves decoupling buy side compensation, and other listing services are expected to follow this lead, according to REBNY's FAQ on its website.

Commissions are already negotiable

While legal challenges persist, real estate professionals can continue with their current business practices. However, NAR advises the use of buyer representation agreements for transparency and comprehension. Additionally, NAR encourages members to inform clients that commissions are negotiable and are established between brokers and their clients.

Another nationwide lawsuit has been filed, in addition to a suit against NAR and brokerages that may go to trial next year and involve multiple markets.

Regardless of the outcome of the Missouri judge or any other courtroom, one thing remains certain: there is no returning to the past, as Kelman stated in his recent post after his company left NAR before the verdict.

Real estate professionals should stay tuned.

It is crucial to carefully read the fine print and stay well-informed for the benefit of both your business and your clients, advised Vickey Barron, a licensed associate real estate broker with Compass in New York City.