“Real estate is the single largest component of wealth in our society,” according to David Ling and Wayne Archer in their book Real Estate Principles: A Value Approach. It’s also the largest balance-sheet asset for most people. Plus, because of the large unit value of real estate purchases, most of us have few situations in our lifetimes where we sell and/or buy primary residences.
The single-family residential real estate market has been a roller coaster over the past five years due to market phenomena such as the COVID-19 pandemic, historically low inventories of available properties (regardless of low or high interest rates), longer development approval processes that limit new supply, and institutional and small investors who buy to rent becoming a major demand force. All these have led to a painful lack of affordable housing, frustrated buyers and uncertainty for real estate professionals.
As if the aforementioned conditions aren’t enough to make our heads hurt, in October 2023, we learned about a $418 million legal settlement by National Association of Realtors (NAR), which has the potential to transform the way residential real estate is bought and sold in the future.
It is too early to have clarity on all the ways this will impact the residential market; however, the essence of the NAR settlement changes the way commissions or brokerage fees are allowed to be paid on home sales. These changes go into effect on August 17, 2024, and the following information tries to capture what this means for today’s residential market.
Residential Market Insights
First, home purchases and ownership are often the biggest investment decisions in people’s lives, as median unit prices in the U.S. are now over $400,000. Second, most people don’t buy and sell primary residences many times during their lifetimes. Third, for the past 30 years, the residential real estate industry has traditionally operated with a market specialization of being a “buyer’s agent” with commissions remaining negotiable.
Fourth, most sophisticated sellers and buyers recognize the benefits and value of professional real estate representation to maximize their goals and mitigate downside risk. Fifth, until the NAR settlement, commissions paid on sales were traditionally split between a listing and selling (buyer) agents and advertised as such on the Multiple Listing Service (MLS).
And last, the NAR settlement prohibits sellers’ agents from listing buyer agent compensation on the MLS listing and requires buyers’ agents to have written contracts in place with their clients for official representation, creating a cloud of uncertainty for agents who previously worked with buyers under the former MLS model.
New Market Realities
From a review of relevant articles, posts and informal interviews with real estate professionals specializing in residential sales, these new market realities could affect agents, sellers and buyers:
- In Delaware, before the NAR settlement, the law did not require buyer agents to enter into exclusive buyer agency agreements. In Pennsylvania, the law did require it before this event. After the NAR settlement, it is now also required in Delaware.
- If a buyer wants agent representation, the MLS will no longer contain compensation for buyers’ agents from the seller listing, requiring buyer agents to seek compensation from the buyers.
- This MLS change could become a major challenge for buyers going forward, especially if they can’t afford to pay a buyer agent on top of the down payment and closing costs. Initially, this condition seems to impact inexperienced (first-time homebuyers) most, when representation could be most valuable.
- From the seller’s perspective, if they are unwilling to provide fees to a buyer agent, this could affect the potential pool of buyers who might pursue their property.
There is no way to predict all the future impacts from the NAR settlement. However, one takeaway remains constant: On a purchase at the price magnitude of a median-priced home, it is wise to seek as much guidance and professional assistance as possible and become well informed about making such a major investment. Having the benefit of someone who has spent decades in the real estate industry and has irreplaceable market knowledge is a worthwhile decision for such a large investment.
Dr. David Wilk, MAI, CRE, is the assistant professor and real estate program director at Temple’s Fox School of Business, as well as a real estate counselor who has completed projects in 49 U.S. states, Canada, Mexico, Europe, South America, the Caribbean, Asia and the South Pacific.
Related: 6 Reasons Why Businesses and Individuals Should Move to Delaware
