Several real estate groups recently criticized the Consumer Federation of America’s support for uncoupled buyer and seller agent real estate commissions, writing in HousingWire that, “CFA has seemingly lost sight of its core purpose advocating for those most in need of consumer protection.” CFA has long maintained that coupled commissions (where sellers split commissions between the seller’s and the buyer’s broker) have allowed Realtors to set prices, overcharging all home buyers and sellers tens of billions of dollars each year. Regrettably, the HousingWire piece completely ignores this fact.
While the Realtor’s critique seeks to isolate CFA, a nationally prominent pro-consumer organization since 1968, CFA is in good company. Uncoupled commissions are supported by independent economists, law professors, think tanks on both the right (CATO Institute) and the left (Brookings Institution), the Federal Trade Commission, and most importantly, the U.S. Department of Justice (DOJ). Since the 1940s, the DOJ has repeatedly sued the industry to introduce more price competition. Today, price competition has a chance because of their efforts and class action litigation, culminating in a jury decision against the industry.
Today’s controversy has been triggered not by political lobbying or legislation but by a jury verdict in a class action alleging price fixing and consumer harm and a proposed settlement entered into by the National Association of Realtors, one of the defendants in that lawsuit.
As that jury concluded, Realtors in the current system do not compete on price. They do not mention commissions at all in their marketing and on their websites. Mandatory commission offers from listing agents (and sellers) to buyer agents that are now required to be included in NAR-operated Multiple Listing Services (MLS) listings have allowed the industry to maintain near-uniform commission rates of 5-6% and deterred negotiation over these services. The authors suggest that price fixing and overcharging for services are necessary to help first-time and LMI homebuyers achieve homeownership and that only wealthier and repeat buyers would benefit from these changes.
The groups criticizing CFA, and by extension, DOJ, argue that uncoupling commissions will harm first-time home buyers, especially Black and Hispanic homebuyers who may have limited resources to pay down payment and closing costs. We acknowledge and share their concerns and urge the industry and housing advocacy groups to work together with us on solutions to end price-fixing in real estate brokerage while ensuring that the most vulnerable consumers are not harmed in the transition to a new status quo. However, these real estate groups claim that violating antitrust laws and price-fixing are the only ways to maintain an accessible marketplace. While transitioning to a new system is always challenging, we believe all consumers can benefit when prices become negotiable and lowered.
Settlement of the class action litigation, which has yet to receive final approval from the courts or DOJ, would be disruptive. New industry rules prohibit mandatory offers of compensation through multiple listing services. The regulations also, at the industry’s initiative, effectively require buyers working with buyer brokers to sign agreements before touring homes. CFA never supported this requirement and advocated instead for early disclosure of prices with a signed contract before the first offer. The timing of this signing and unreadable anti-consumer buyer contracts developed by the industry have created unnecessary confusion.
One problem here is that federal regulations, strongly supported by the industry, severely limit buyers’ ability to finance their agents’ commissions. Financed commissions would truly uncouple rates, making it possible for buyers to negotiate them. Today, buyers already pay these commissions because they are baked into financed purchase prices by broad agreement among economists and industry experts. If commissions could be financed, federal agencies, appraisers, and the marketplace would ensure they were stripped from sale prices, lowering home prices.
The Kansas City jury whose decision kicked off these developments required the industry association and major companies to pay Missouri plaintiffs over $5 billion (with triple damages) because they felt it was unfair to ask home sellers to pay the commissions of buyer agents and their listing agents. However, the litigation settlement does allow buyers to request buyer agent commissions from sellers, and we expect that buyer agents will urge clients to make this request and that listing agents will urge their clients to accept it. This ability will ease the transition to a fairer, more price-competitive market.
In this new marketplace, all consumers will benefit. Because of their ability to negotiate commissions, we predict that average rates will eventually decline from 5-6 percent to 3-4 percent, saving consumers tens of billions annually in lower commissions. A price-competitive marketplace would force all agents to pursue and competitively price their services actively, the hallmark of a free market in which those offering the best combination of service and price should succeed.
CFA has consistently promoted the interests of all consumers and proudly prioritized the needs and interests of consumers with low- and moderate incomes. Ending uncompetitive practices in real estate will benefit all buyers and sellers. We also strongly believe that policy should be tailored to redress inequities. To this end, we strongly support allowing real estate commissions to be financed through mortgage proceeds, encourage consumers and their buyer agents to request sellers share the consumers’ costs through direct and transparent negotiations and have consistently supported efforts to fully fund effective homeownership education and counseling to empower consumers in buying or selling a home. In our broader housing work, we have also helped lead a broad coalition to force the Federal Home Loan Bank (FHLB) system and Fannie Mae and Freddie Mac to do more to enable LMI consumers to become homeowners.
We believe industry members will continue to play an essential role in educating home buyers and sellers. But we also think these consumers, especially those with limited resources, need independent advice about navigating the homebuying process. Currently, HUD-certified housing counseling agencies and first-time home buyer programs are limited in scope. We encourage the groups criticizing CFA to join us and non-profit housing groups to support greater financial assistance to these programs.
Stephen Brobeck is a Senior Fellow at the Consumer Federation of America.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
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