DOJ eyes real estate broker commissions, NAR under scrutiny

Billions at stake as NAR faces legal challenges amid calls for reform.

The US residential housing market is under the microscope, with the broker commission system facing antitrust scrutiny from the Justice Department and two private class-action lawsuits.

At the core of the investigation is the commission-sharing system, a structure that typically requires home sellers to pay a 5% to 6% cut of the sale, divided between their agent and the buyer’s agent.

Bloomberg reported that a nationwide case to dismantle the commission-sharing structure is not only a potential threat to the National Association of Realtors (NAR), the industry’s lobbying group, but could also lead to drastic change in the real estate landscape.

The commission-sharing system, largely unique to the US, is preserved by NAR’s control over many of the country’s multiple listing services. Critics argue that this structure inflates home prices, and Michael Ketchmark, lead plaintiffs’ attorney in the Missouri case, asserts that the structure equates to “collusion.” Legal challenges and damages.

The legal challenges are substantial. The Missouri case alone could result in up to $4 billion in damages. The Illinois trial, scheduled for early next year, has plaintiffs seeking as much as $40 billion.

“Our guess is that the lawsuits in Missouri and Illinois will not go that far, but it’s possible,” said Redfin CEO Glenn Kelman. He believes that a DOJ action is necessary to reach a level where the commission-sharing structure is dismantled, a move he suggests would leave “half the real estate agents in this country unemployed.”

Redfin parted ways with the NAR earlier this month, attributing the split to its longstanding issues with agent compensation structure.

DOJ’s concern over housing affordability and commission rates

For the mortgage sector, the spotlight on commission rates comes at a time when the housing market is already grappling with low supply and escalating mortgage costs. The Biden administration’s focus on these rates is intertwined with the broader issue of housing affordability. On a median existing-home sales price of $407,100, a 5.5% commission amounts to approximately $22,390 – a cost often embedded in the home’s listing price and subsequently impacting the mortgage value.

The Justice Department stressed the issue in a recent court filing, expressing its apprehension about “policies, practices, and rules in the residential real estate industry that may increase broker commissions,” the agency said.

A shift in this area could reduce overall commissions by as much as $30 billion annually, according to a study by the Consumer Federation of America.

NAR’s defense

NAR, however, defends the existing system, asserting its role in facilitating homeownership for first-time buyers, especially those from minority and lower-income groups.

“This case is very much about buyer representation and that being at risk,” NAR spokesperson Mantill Williams said in a statement. He emphasizes the importance of professional guidance in the home-buying process.

NAR has pointed out that the commission for buyers doesn’t necessarily need to stick to the conventional 2.5%. NAR said it could be as low as $0. However, many sellers continue to opt for the higher rate, worried that if they offer less, buyers’ agents might direct clients elsewhere – a concern supported by recent studies.

The evolving landscape threatens the future stability of NAR. The association collects $150 in annual dues from its vast membership of over 1.5 million agents. The organization, which last year outspent even the US Chamber of Congress with a whopping $80 million on lobbying, now faces an “existential threat,” David Greer, who has spent over a decade working with NAR, said.

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