Weekend Talking Points - 'Changes'

Authored By:
Scott Bradley Brixen
John Smith
January 1, 2023
5 min read

A very important week for real estate. The NAR’s proposed settlement will have far-reaching consequences for commissions and competition, and the Fed’s updated “dot plot” forecasts imply that rate cuts aren’t far away.

NAR settlement will unbundle commissions. This is already the biggest news of the year for real estate (yes, I’m aware that Fed rate cuts and a presidential election are coming). The NAR will pay $418 million in damages over the next 4 years. It will also prohibit offers of buyer’s agent compensation to be shown on MLS listings starting in July. Previously, those offers were required. [A lot more on this later.]

Builders are officially bullish (again). The National Association of Homebuilders has been publishing its HMI “builder’s confidence” index for 35 years. In March 2024, the index rose 3 points to 51 (>50 = bullish) as all three of the sub-components of the index (current conditions, future conditions, buyer traffic) moved higher. In March 2023, the index was at 44.

Housing starts bounce back. After a slow, weather-affected January, housing starts rebounded 11% MoM to 1.5mn units (SAAR) in February and were up 6% YoY. Completions jumped to 1.7mn units (SAAR), up 20% MoM and 10% YoY. That’s the fastest pace of completions seen since January 2007!

The Fed’s forecasts. The Federal Reserve kept short-term interest rates steady (target range of 5.25%-5.50%) for the 5th straight meeting. So far, so boring. The last time the Fed changed the policy rate was July 2023.

Of note was the Fed’s latest “dot plot” forecasts for where individual Fed members think rates will be over the next year. Back in December 2023, the median forecast was for 75 basis points (0.75%) of cuts by end-2024. Well, the median forecast is STILL for 75 basis points of cuts — with half of the Fed members (9) seeing the Fed Funds Rate at 450–475 bps (4.50–4.75%) by year-end.

HOAs are multiplying. This will blow your mind. Today, more than 30% of the nation’s housing stock are in communities governed by HOAs. That means that over 75 million Americans could receive nasty notes telling them not to leave their kids’ soccer nets in the driveway. That % figure is rising too, as between 60–80% of newly built homes are in HOA areas. [Realtor Mag]

The Media Is Getting the NAR Settlement All Wrong

On Friday (3/15/2024), the NAR announced a proposed settlement (to Sitzer/Burnett and various other “copycat” lawsuits) that included changes to the way commissions are advertised and paid. Here’s a sample of the headlines major media outlets ran with:

“Powerful group agrees to slash commissions to settle lawsuits.”
New York Times, 3/18/2024

“National Association of Realtors to cut commissions to settle lawsuits.”
CBS News, 3/18/2024

“The NAR real estate settlement could make your next home more affordable.”
MSNBC, 3/18/2024

“The 6% commission on buying or selling a home is gone after Realtors’ association agrees to seismic settlement.”
CNN, 3/15/2024

Wrong. Wrong. Wrong. And wrong.

The NAR never set commission rates. So naturally, the NAR hasn’t agreed to cut commission rates. What has changed is the way that Americans will pay for real estate agent commissions, and the conclusions that the media have drawn about this are often completely wrong.

The NAR Settlement

The National Association of Realtors has agreed to pay US$418 million to the plaintiffs over the next 4 years. More importantly:

  • The NAR will prohibit offers of buyer’s agent commission rates on the MLS. Previously, this was required. This change is supposed to happen around mid-July. This will effectively “decouple” buyer and seller commissions.
  • But sellers will still have the option to pay for some/all of the buyer’s agent commission, this will just have to be offered & negotiated outside of the MLS.
  • Buyer’s agents will be required to have a signed representation agreement before they can show would-be buyers properties that are listed on the MLS. This was a widespread practice before the NAR settlement.
  • An individual will no longer be required to be an MLS member to collect real estate commissions.

This settlement must be approved by the court, the DOJ, and perhaps the FTC. So it could get rejected or amended. In the absence of details about how all this will actually work, there are a great number of uncertainties.

What Does this Mean for Residential Real Estate?

First off, this is big. Really big.

If you’re a real estate professional, you need to be thinking about how to adjust your business plan to the new reality. Agents that know how to articulate their value to consumers will be just fine. Agents that are skilled negotiators will be just fine. Passive players will see only the threat; aggressive players will see the opportunities.

I don’t have a crystal ball, and I’m not a real estate agent, but here are my educated guesses about what happens:

  • Higher costs for buyers. You used to pay 0% commission on the way in. Now you’ll pay something (1%, 2%?), adding thousands of dollars to your entry cost.
  • This issue could become very political, especially during an election year. Weren’t we trying to make it easier to become a homeowner? This looks like another coup for Boomers (they paid 0% on the way in, now they’ll pay less on the way out) and another obstacle for Millennials and lower-income buyers.
  • Will sellers wait until the July implementation to keep more of the sale proceeds? I would if I were looking to sell something in the near-term.
  • Over time, a reduction in total commissions (from ~6% to 4–5% is my guess). But keep in mind that home prices have risen so much that the commission pool available is still massive.
  • Fewer, but more-experienced Realtors. Significant opportunities for market share gains. A 25% drop in Realtor numbers is not impossible.
  • New models for buyer’s agent representation. Good buyer’s agents do a lot, and they deserve to be paid (by someone). A la carte buyer’s agent services will be on offer. Expect the portals (Zillow, Homes.com/CoStar, Realtor.com, Amazon?) to step in where they can.
  • Listing agents will become even more powerful. The better brokerages will move aggressively to win both sides of the deal, creating the potential for the same conflict of interests that hurt the industry in the 70s and 80s and directly led to the creation of the current system!
  • Will lenders and agents start encroaching on each other’s territories? Will dual licensing become more common? I think so.
  • Some buyer referral models (Zillow’s Premium Agent or Flex etc.) may struggle because there is less revenue (commissions) available to cover the costs of the leads.
  • Continued rise of CoStar/Homes.com’s “Your listing, your leads” model. This model will be a huge advantage for CoStar as listing agents look to monetize the buy-side as well.

I’d love to hear your thoughts on the matter. Email me at scott@listreports.com.

What the Fed Said

The Fed kept rates on hold for the fifth straight meeting. (The last time they raised rates was July 2023!) And despite the recent string of “hotter” data (employment, inflation), Chairman Powell came across as fairly dovish [see his quote below]. In addition, the updated “dot plot” forecasts still imply that the majority of Fed members expect 2–3 rate cuts before the end of the year.

Reminder: ‘Dovish’ means inclined to lower rates, more worried about the economy, less worried about inflation. ‘Hawkish’ means inclined to raise rates (or keep them high), not worried about the economy, still worried about inflation.

The bond market reacted very positively to the press conference, with Mortgage Backed Security prices rising ~32 bps, which helped average 30-year mortgage rates move back below 7%.

Current odds on Fed rate cuts at upcoming FOMC meetings:

  • May 1: 11% (up from just 4% last week)
  • Jun 12: 75% up from 63% last week)
They Said It

“We believe that our policy rate is likely at its peak for this tightening cycle and that, if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year.” — Jerome Powell, Chairman of the Federal Reserve

“Additional housing supply is helping to satisfy market demand. Housing demand has been on a steady rise due to population and job growth, though the actual timing of purchases will be determined by prevailing mortgage rates and wider inventory choices.” — Lawrence Yun, NAR’s Chief Economist

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