Real Estate Commissions Face Added Scrutiny in Justice Probe

An appeals court decision allowing the US Justice Department to investigate the National Association of Realtors is likely to embolden the agency’s push for even more separation between buyers’ and sellers’ agents.

The scrutiny tracks with the Biden administration’s attempts to address record-high housing costs, industry observers say.

“What they want is a more free-form—more dynamic, more negotiable—market,” said Max Besbris, a sociology professor at the University of Wisconsin-Madison who studies housing.

The US Court of Appeals for the DC Circuit ruled last week that the DOJ can investigate NAR, rejecting a bid by the real estate trade group to enforce a 2020 settlement with the Trump administration to close the case.

The DOJ can now probe how potentially unlawful conduct by NAR might be contributing to high real estate commissions in the US, DOJ antitrust chief Jonathan Kanter said in a press release applauding the appeals court ruling.

NAR said in a statement it believes the government should be “held to the terms of its contracts” and is considering next steps in light of the appeals court decision. That 2-1 ruling followed a settlement of private litigation last month over NAR’s commission fee structure that still left room for sellers’ agents to dictate commissions for buyers’ agents.

The question now is whether the Justice Department will be able to succeed where private litigation has faltered in changing the close relationships between sellers’ and buyers’ agents.

Looming intervention from the federal government to alter the commission system marks “another chink in the armor of the NAR,” Besbris said.

NAR has more than 1.5 million agents and other real estate professionals as members, and has dominated the real estate industry for over a century.

Decoupling Compensation

In NAR’s roughly $418 million settlement, which still requires court approval, the trade group agreed to modify how agents communicate about compensation, but didn’t eliminate such communication entirely, leaving the possibility of collusion.

Equipped with renewed investigative authority, the DOJ will likely seek to compel a complete separation of compensation for buyers’ agents and sellers’ agents, said John Kwoka, an economics professor at Northeastern University and former Federal Trade Commission chief economist under agency Chair Lina Khan.

Real estate is an “odd market” in which a seller’s agent influences the conversation on the buyer’s side of the market, Kwoka said.

“That’s not the way a market normally looks. And when one sees that, antennas should be up that something is amiss,” Kwoka said. DOJ officials “clearly are seeking more separation of the two sides.”

Under NAR’s current compensation structure, sellers pay a commission—typically around 6%—that is divided between representatives for both sides of a transaction. Sellers are often forced to enter into such arrangements in order to market their homes on multiple listing services, or MLS, the industry’s main tool for publicizing listings.

Read More: How the 6% Real Estate Commission Became Endangered: QuickTake

As part of NAR’s settlement last month, agents won’t be able to put compensation offers on multiple listing services. But the agreement includes workarounds for brokers to continue to make offers of compensation to buyers’ agents outside the listings.

These loopholes in the settlement could maintain steering incentives and raise red flags for the DOJ, said Ryan Tomasello, managing director at Keefe, Bruyette & Woods who covers the real estate industry.

“The DOJ is not likely to view those proposed changes as enough to restore an efficient competitive marketplace,” Tomasello said.

The NAR settlement would “certainly bring fees down,” said Norm Miller, professor emeritus of real estate finance at the University of San Diego. But, Miller added, fees wouldn’t necessarily fall as quickly as the DOJ would like, in part because of seller credits—money sellers can still offer buyers to cover the buyers’ closing costs.

Settlement Intervention

Industry observers speculate the DOJ might weigh in on last month’s NAR settlement to compel a more substantial separation of buyers’ and sellers’ agent commissions, now that an appeals court has handed it more leeway to probe the trade group.

The DOJ hasn’t publicly said what its investigation will focus on, beyond the need to probe NAR policies that govern agent commissions.

But a statement of interest filed in February in a separate private lawsuit in Massachusetts against buyer-broker commission rules gives a glimpse into the government’s thinking. In that brief, the DOJ rejected the proposed settlement between a class of former home sellers and New England’s largest MLS, claiming it “perpetuates the very same competitive concerns that trouble the current rule.”

“There’s definitely a clock ticking here given the natural timeline that the settlement approval process is going to take,” Tomasello said. Filing a statement of interest asking the court to pause approving the NAR settlement would be a “natural route” for the DOJ to take, he said.

The appeals court’s decision expands the DOJ’s ability to involve itself in the NAR settlement, agreed Stephen Brobeck, senior fellow at the Consumer Federation of America.

But ultimately, a complete decoupling of commissions—that is, ending the relationship between the listing agent and the buyers’ agent in terms of compensation—is nearly impossible, Brobeck said. Regulators should try to go as far as they can in compelling a complete separation “without encountering such intense opposition from people or institutions that it’s not politically sustainable,” he added.

“We have to accept the reality that there will always be a potential for price collusion,” Brobeck said. “We need to erect as many barriers as we can to that collusion.”