Several real estate groups recently criticized the Consumer Federation of America’s support for decoupled broker commissions for buyers and sellers. HousingWire that “CFA appears to have lost sight of its primary purpose, which is to advocate for those who need consumer protection the most.” CFA has long claimed that tied commissions (where sellers split commissions between the seller’s agent and the buyer’s agent) have allowed agents to fix prices, overcharging all home buyers and sellers by tens of billions of dollars each year. Unfortunately, HousingWire Piece completely ignores this fact.
While the real estate agent’s criticism is aimed at isolating the CFA, a nationally known consumer organization since 1968, the CFA is in good company. Uncoupled commissions are supported by independent economists, law professors, think tanks of both the right (CATO Institute) and the left (Brookings Institution), the Federal Trade Commissionand 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 lawsuits culminating in a jury verdict against the industry.
Today’s controversy was sparked not by political lobbying or legislation, but by a jury verdict in a class action lawsuit alleging price fixing and consumer harm, and a settlement proposal from the National Association of Realtors, one of the defendants in the case.
As the panel noted, real estate agents do not compete on price under the current system. They do not mention commissions at all in their marketing and on their websites. Mandatory commission offers from brokers (and sellers) to buyers’ agents, who must now be listed on the Multiple Listing Services (MLS) listings operated by the NAR, have allowed the industry to maintain nearly uniform commission rates of 5-6% and prevent negotiations for these services. The authors suggest that price fixing and overpricing of services are necessary to facilitate home ownership for first-time buyers and LMI property purchasers. and that only wealthy regular customers would benefit from these changes.
The groups criticizing CFA, and by extension the DOJ, argue that decoupling commissions will harm first-time homebuyers, particularly 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 housing industry and stakeholders to work with us on solutions to end price-fixing in the real estate brokerage business while ensuring that the most vulnerable consumers are not harmed in the transition to a new status quo. However, these real estate groups contend that antitrust violations and price-fixing will 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 lower.
A settlement of the class action lawsuit, which has not yet been finally approved by the courts or the Department of Justice, would be disruptive. New industry rules prohibit mandatory compensation offers by multiple listing services. The rules also require, at the industry’s initiative, that buyers working with buyer’s agents sign contracts before touring homes. CFA has never supported this requirement, instead advocating for early price disclosure with a signed contract before the first offer. The timing of this signing and the illegible, anti-consumer buyer’s contracts developed by the industry have created unnecessary confusion.
One problem is that federal regulations, strongly supported by the industry, severely limit buyers’ ability to finance their agents’ commissions. Financed commissions would actually decouple prices and allow buyers to negotiate them. Today, buyers already pay these commissions because they are factored into financed purchase prices by broad agreement among economists and industry experts. If commissions could be financed, federal agencies, appraisers and the market would ensure that they are factored out of sale prices, which would drive down home prices.
The Kansas City jury whose decision set these developments in motion ordered the industry association and the major companies to inform the plaintiffs in Missouri about 5 billion US dollars (with treble damages) because they believed it was unfair to require home sellers to pay the commissions of buyers’ agents and their brokers. However, the litigation settlement allows buyers to require sellers to pay commissions from buyers’ agents, and we expect that buyers’ agents will urge their clients to make this demand and that brokers will urge their clients to accept this demand. This ability will ease the transition to a fairer, more price-competitive market.
This new market will benefit all consumers. Because of their ability to negotiate commissions, we expect average rates to eventually drop from 5-6 percent to 3-4 percent, saving consumers tens of billions of dollars annually in lower commissions. A price-competitive market would force all agents to actively promote their services and set competitive prices – the hallmark of a free market in which those who offer the best combination of service and price should succeed.
CFA has consistently advocated for the interests of all consumers and made the needs and interests of low- and moderate-income consumers a top priority. Ending anti-competitive practices in real estate will benefit all buyers and sellers. We also firmly believe that policy should be designed to eliminate inequities. To that end, we strongly support funding real estate commissions with mortgage proceeds, encourage consumers and their buyer’s agents to require sellers to share in consumers’ costs through direct and transparent negotiations, and have consistently supported efforts to fully fund effective homeownership education and counseling to assist consumers in buying or selling a home. As part of our broader work on housing, we have also helped lead a broad coalition to compel the Federal Home Loan Bank (FHLB) system and Fannie Mae and Freddie Mac to do more to enable LMI consumers to own homes.
We believe industry members will continue to play an important role in educating home buyers and sellers. But we also believe these consumers, especially those with limited means, need independent advice in navigating the home buying process. Currently, HUD-certified housing counseling centers and programs for first-time home buyers are limited in scope. We encourage the groups critical of CFA to join us and nonprofit housing groups to support greater financial support of these programs.
Stephen Brobeck is a senior fellow at the Consumer Federation of America.
This column does not necessarily reflect the views of the editorial staff and owners of HousingWire.
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