Lending Association

US real estate industry undergoes ‘Big Bang’ transformation

In a move with global ramifications, the massive US home buying and selling industry has just experienced a seismic shift akin to the deregulatory explosions in financial markets of the 1980s and 1990s.

In a shock announcement late Friday, America’s National Association of Realtors (NAR) revealed it had reached a settlement with groups of home sellers, agreeing to end landmark antitrust lawsuits by paying $US418 million in damages and eliminating rules on commissions.

CNN reported that the agreement “effectively will destroy the current home buying and selling business model, in which sellers pay both their broker and a buyer’s broker, which critics say have driven housing prices artificially higher.”

The overall settlement in a US court will end rules that guaranteed agents’ commissions on home sales, protecting an estimated $US100 billion a year in fees, commissions, and charges on buying and selling houses across America.

Early estimates suggest US home buyers and sellers could save $US30 billion or more a year in commissions as the market adjusts to new fee and commission structures. These savings will significantly impact inflation and the finances of the real estate industry.

Typically, US home buyers pay around 2% to 5% of the sale price in closing fees, while sellers pay between 6% and 10% of the home’s price — including commissions to the realtor, typically 5% to 6%.

In contrast, Australian commissions are around 2% to 3%.

The agreement will see selling costs fall by 25% to 50%, reshaping the entire business of how houses are bought and sold in the US.

The settlement may lead to an increase in housing activity as buyers and sellers are attracted by lower costs to enter the market, potentially revitalizing the sector after a slowdown in 2023.

The NAR, representing over 1 million real estate agents in the US, has agreed to implement new rules. These include prohibiting agents’ compensation from being included on listings placed on multiple listing services and ending requirements for brokers to subscribe to these services.

The changes could see the market stratify into tiers of agents, from flat fee to full service, akin to how online discount brokers operate in the share markets.

Shares of online real estate companies plummeted on the news, while leading US home builders saw modest gains as analysts predicted lower commissions could reawaken demand for their houses.

The restructuring will pressure real estate agents, companies, banks, and other funding groups, which may face challenges with lower commissions and revenue.

Overall, the transformation signifies a significant shift in the US real estate landscape, with implications for various stakeholders in the industry.