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How New Rules for Real Estate Commissions Could Affect First-Time Buyers

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With a landmark legal settlement poised to upend a decades-old norm that has dictated who pays real estate agents and how much, economists, agents and lenders are beginning to worry that the burden could now be on first-time home buyers.

Buyers may soon have to pay out of pocket for something that had always been baked into the price. And buyers who are new to the market or have smaller down payments on hand — typically, moderate- and middle-income households: often Black and Latino home buyers who have long lagged behind their white peers in homeownership rates — are going to feel the most pain.

“First-time home buyers are usually the people who don’t have much cash and experience — and that experience matters,” said Daryl Fairweather, the chief economist of Redfin, the online brokerage that cut ties with the National Association of Realtors last year.

Buyers did not have a seat at the negotiating table when N.A.R., the powerful trade group, agreed on March 15 to pay $418 million in damages and to abandon its longstanding rules about how commissions are set, advertised and paid. The lawsuit was initially brought by home sellers in Missouri who accused N.A.R. of artificially inflating home prices by coupling commissions paid to sellers’ and buyers’ agents.

Under the settlement, once it is approved by a federal court, there will be a commission “decoupling.” That means buyers and sellers would each be responsible for paying their own agents rather than expect the seller of a home to pay a single commission, invariably 5 or 6 percent of the sales price, to the listing agent who then splits it with the buyer’s agent. The new rule changes will likely lower commission costs considerably, by as much as 30 to 50 percent, economists and analysts estimate. Still, another fee — albeit potentially a smaller one — will be added to the buyer’s side of the ledger.

Most buyers will also have to sign an agreement with an agent before even viewing a property. Sellers will no longer be allowed to include commissions in the listing. Sellers could still ultimately pay buyers’ commissions but are likely to drop them in competitive markets, the very ones where buyers are under the most financial strain.

For experienced buyers with plenty of cash on hand, commissions may not make a significant difference in the calculations; such buyers may also feel confident enough to have little or no representation.

But for buyers who barely cobbled together enough cash to cover down payments and closing costs, coming up with more money at the bargaining table might be one check too many. Such buyers may be pushed out of the market altogether or persuaded to forgo representation as they negotiate what is likely the largest purchase of a lifetime.

“That’s the real question and the real potential unintended consequence,” said Susan M. Wachter, a real estate professor at the University of Pennsylvania’s Wharton School, a former assistant secretary at the Department of Housing and Urban Development.

The changes in commissions come at a time of profound housing inequities.

Americans who bought homes right before or in the early months of the pandemic reaped the benefits of the most dramatic run-up in home values in U.S. history, as home prices soared 45 percent from December 2019 to June 2022. Those who bought or refinanced a home during that time secured historically low mortgage rates, some below 3 percent.

Today’s buyers are living through a very different housing market, one where home prices keep climbing amid an anemic inventory and stubbornly high mortgage rates (they are hovering below 7 percent).

“It’s the mind-set that you have to get into homeownership, and then — bam! — we just got hit with a major roadblock,” said Shanta Patton-Golar, a real estate broker in Las Vegas whose clients are predominantly young Black and Latino families and single parents, many working in the city’s casinos; her typical clients grew up in rentals with parents who never owned a home, she said. “Many of them are first-generation home buyers,” she said. “This is their chance to turn their history into generational wealth.”

Her clients rely on down payment assistance programs and on sellers willing to cover closing costs. “We’re pinching from this place to this place to this place so they can come up with the funds to get in a home,” said Ms. Patton-Golar, who has been a real estate agent for 20 years.

With no money left to cover another line item, the one that will go, she fears, will be her paycheck. Ms. Patton-Golar said she was already losing sleep, worrying about how her clients will fare alone at the negotiating table.

“How will they know if this is a Fair Housing situation?” she said. “How will they even know if they need to have an inspection? How do they negotiate if the appraisal comes in lower?”

Already, some buyers and plenty of real estate agents are nervous. Lab Coat Agents, a Facebook group for real estate agents with over 165,000 members, has turned into an ad hoc group therapy session since news of the settlement broke. “I believe most buyers won’t pay plus some can’t pay,” one member posted.

And a few days after the settlement agreement was announced, Kathryn Puerini, 42, walked into a real estate agent’s office in Rhode Island. Halfway through the meeting, the agent slid a sheet of paper across the table: an agreement with a clause stating that if the seller’s agent failed to pay the buyer’s commission, the couple would be on the hook for 2.5 percent of their future home’s purchase price.

Tally the math, and that agreement would add $10,0000 to Ms. Puerini’s out-of-pocket costs if she were to buy a $400,000 home. “I didn’t even know how to respond,” she said.

Ms. Puerini walked out of the meeting without signing.

Of course, a buyer could ask a seller to cover the commission as a concession, but in a fierce bidding war, adding one more thorny contingency to a long list makes a thin offer look weaker.

Banks will not be terribly helpful, either, unless lending rules change. As Dave Medina, a loan officer for Citywide Home Loans in California, put it, “We’re not going to loan somebody something that is more than what the home is worth.”

Existing lending rules create a problem that didn’t exist before. Buyers have always indirectly paid the entire commission — but the cost was included in the sales price and was also wrapped into the loan.

And some lending restrictions will further complicate matters. For example, recipients of Veterans Affairs loans are prohibited from paying any real estate commissions or fees, under any circumstances. The rule “is as crystal clear as it gets,” Mr. Medina said, adding, “Adjusting V.A. guidelines is not an easy thing to do.”

Even buyers with conventional loans will face challenges because there are strict limits to the amount of money a seller can credit a buyer at the closing table, too.

The rules from the settlement take effect in mid-July, if approved by a judge as expected. Laurie Goodman, the founder of the Housing Finance Policy Center at the Urban Institute, anticipates that policymakers and the real estate industry will hammer out new guidelines ahead of that deadline. “They are ripping down the existing structure, but there is nothing in place,” she said. “There is going to be a period of adjustment, while the market figures out what to do.”

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