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Market-Based Solutions to Vital Economic Issues
Apr 11, 2024

The NAR Settlement and First-Time Homebuyers

In a landmark decision poised to redefine the contours of the American real estate landscape, a recent settlement with the National Association of Realtors introduces sweeping changes that recalibrate the traditional dynamics of the housing market. At the heart of this agreement are significant alterations to how real estate professionals conduct their business, aimed at enhancing the transparency and fairness of property transactions. These adjustments, though broad in scope, fundamentally change the interaction framework between real estate agents, buyers, and sellers, moving away from long-standing practices to adopt a more equitable approach to home buying and selling.

To dig deeper into the implications of this pivotal settlement, Eric Maribojoc, a professor of the practice and associate director for the Affordable Housing Initiative at UNC Kenan-Flagler Business School, offers a unique perspective on what these industry shifts mean for buyers, sellers, and the broader housing market.

Can you provide a quick overview of the NAR settlement?

Eric Maribojoc: There’s a lot to the settlement, but the first significant outcome is that Multiple Listing Services, or MLS (the centralized data portal for buying and selling residential real estate in various metro areas), can no longer allow Realtors to advertise what they would pay buyer’s agents on the MLS. This measure represents a departure from previous practices, where it was common for Realtors to openly disclose such compensation details.

The second major result is that when Realtors or agents represent buyers in a transaction or when they’re searching for a house, there must be a written agreement in place for compensation between the buyer’s broker and the buyer before the process starts. I think those are two of the biggest changes negotiated as part of the settlement.

These are the two aspects most people are focusing on, which will influence future interactions and behaviors of buyers, sellers, and brokers alike.

How might the settlement affect the affordable housing sector and first-time homebuyers?

Eric Maribojoc: I don’t expect immediate changes. We need to see how the industry and its players – buyers, sellers and Realtors – react over time. Regarding home prices, I don’t anticipate a significant change. Sellers are unlikely to decrease their home prices because of the settlement, even though the seller’s broker won’t be advertising on the MLS about paying the buyer’s broker. Home prices are based on the market price for a house, and sellers will continue to price their houses based on market conditions, regardless of brokerage fees and how those fees are split. Sellers might end up keeping more of the home sales proceeds as brokerage fees decline.

The bigger issue is that most single-family markets in the U.S. are seller’s markets due to supply constraints. Sellers have a strong position in setting their home prices, and the primary way to influence pricing is by increasing supply. Changing brokerage commissions alone won’t significantly alter pricing. However, the settlement introduces more transparency in how things are determined, including the impact of brokerage commissions on transaction prices. This is beneficial for the market.

I’m particularly interested in how this settlement affects first-time homebuyers, who rely heavily on brokers for education and market access. First-time buyers generally have less income than repeat buyers, so if they are now responsible for a significant portion of the buyer’s broker’s fee, this could increase their costs. However, the settlement doesn’t prohibit offering a buyer’s broker commission through means other than the MLS, nor does it prevent sellers from paying the buyer’s commission if they choose. This new transparency and flexibility could lead to new business models that help buyers, particularly first-time buyers, access the market in valuable ways.

Given the recent settlement, how might access to real estate information and resources evolve for first-time homebuyers and the market at large?

Eric Maribojoc: There are various ways for first-time homebuyers to get educated and access the marketplace. For instance, consider buying a car as an analogy. Nowadays, potential buyers have multiple means to research before visiting a car dealership. This information has largely moved online, available in databases that are easy, low cost or even free to access. Thus, buyers can gather information on their own before entering the marketplace.

This has not always been the case with buying houses. Information has not been readily available in an easy or low-cost manner for people to access and understand, sometimes being proprietary and accessible only to Realtors via the MLS. Having a broker was valuable, especially since buyers did not have to pay for these services directly. However, the lawsuit contends that brokers might have an incentive not to show all available properties, as some listings could offer higher compensation than others.

Now, there’s the opportunity for new resources to emerge, such as databases about the market and available properties that are easier for people to navigate, potentially even free. Training classes for first-time homebuyers, which have been available but perhaps not as widespread, could become more common, offered for free, through nonprofits or for a nominal fee.

Yet, it’s also possible that things may not change significantly. Buyer’s brokers can still be compensated by sellers in ways not involving the MLS. This means the market could evolve in a manner where there’s not much difference from how it operates today.

It’s interesting to speculate how market players will react over the next year or so and what developments will arise. My primary interest is in how this affects first-time homebuyers, who already face difficulties accessing the market. Will this increase their challenges, or will new business models develop to assist them? This is one of the potential outcomes of the settlement.

How might the recent settlement in the real estate market impact the rental market, particularly in relation to first-time homebuyers?

Eric Maribojoc: It impacts renters because first-time homebuyers are renters that are graduating out of the rental market. So, the more difficult it is for renters to access homeownership, the longer they remain renters, which in turn, affects the market. And part of the reason the rental market has been strong in recent years is due to challenges faced by renters who could become first-time homebuyers but struggle to find accessible, affordable or suitable properties. If this settlement introduces additional hurdles for those considering their first home purchase, it could further complicate the transition from renting to homeownership. Consequently, individuals may stay in the rental market longer than they otherwise would.

What other trends are you closely watching?

Eric Maribojoc: I try to keep my eye on the different ways market players are trying to increase supply: You can increase supply by building more on existing property, or allowing more housing where housing is scarce. This could involve new discussions on zoning, trying to encourage more housing to be built where housing currently occurs only in low density. That’s happening in many jurisdictions around the country. There are also ways to develop housing at lower cost.

One trend that we’re looking at closely is how developers are trying to develop what are called middle-income housing or essential housing, sometimes also called workforce housing. Whether developers can build new products in such a way that they can produce affordable rents for the middle-income portion of the workforce. Attempting to deliver these properties at scale – in large enough numbers to impact the market – is something new being tried in many markets.

The last thing is there are some new initiatives to expand the role of the federal government in providing affordable housing for lower-income households. That would mean the expansion of programs like the Low-Income Housing Tax Credit, which recently passed the House and is now pending in the Senate. The current legislation is targeting a fairly substantial expansion of the program, which will result in more production of affordable housing for low-income households.

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