How National Association of Realtors settlement will affect homebuying in Chicago

Erika Villegas has been a real estate agent for about 20 years. During that time, she’s seen major shake-ups in the housing industry, from the Great Recession to the pandemic’s initial chilling effect on homebuying.

But a $418 million antitrust settlement by the Chicago-based National Association of Realtors has Villegas and other Chicago Realtors unsure about what they should be bracing themselves for — same goes for their clients. Yet the changes spurred by the settlement is expected to have a lasting impact on the real estate market.

What led to the settlement that could upend how Americans buy and sell homes?

In a series of class-action lawsuits, homeowners accused the NAR of fixing broker commissions at high rates and discouraging sellers from seeking better terms. In March, the trade group agreed to settle the lawsuit. And last week, a federal judge in a Missouri court granted preliminary approval to the settlement. A final approval hearing is scheduled Nov. 26.

The group — which boasts 1.5 million members, making it the nation’s largest trade organization — celebrated the preliminary approval on Tuesday, saying it was “in the best interests of all parties and class members.” In its settlement, the NAR denied any wrongdoing.

A NAR spokesperson said in a statement: “It has always been NAR’s goal to resolve this litigation in a way that preserves consumer choice and protects our members to the greatest extent possible. This proposed settlement achieves both of those goals and provides a path for us to move forward and continue our work to preserve, protect, and advance the right to real property for all.”

Villegas, president-elect of the Chicago Association of Realtors, describes her clients’ awareness about the settlement as a “mixed bag.”

It’s become a point of conversation with some clients, but even before the settlement, Villegas regularly discussed how fee structures and compensation worked with her clients.

“We’re adding now that there is a proposed settlement and how it could affect them,” she said. “But these conversations we’ve had … haven’t really changed from the day I started doing business.”

Key questions for consumers

Justin Greenberg of Berkshire Hathaway HomeServices Chicago has had many conversations with clients about the proposed settlement. The reoccurring theme, he said, is curiosity — how does the settlement impact them as buyers or sellers?

Starting in July, homebuyers will need to sign an agreement that discloses their broker’s commission. The contract — which must be signed before a Realtor can represent a client and show them properties — provides clarity on the services the client can expect from their Realtor. It also discloses how much the agent will be compensated and by whom, according to the Chicago Association of Realtors.

Typically, broker commissions are paid by sellers and the seller’s agent usually agrees to split the commission with the buyer’s agent. This means homebuyers often don’t incur an extra cost when working with a Realtor.

The commissions typically range from 5% to 6%, which amounts to at least $20,000 on a $400,000 home sale. Commission rates have historically been shared on the Multiple Listing Service, accessible to agents, but the settlement will end that practice.

Villegas said prior to the NAR’s settlement, Illinois didn’t require buyer-agency agreements, though she always used one. She said the new written agreements will be a big day-to-day change for agents in Chicago and the state.

Norman Miller, a real estate professor at the University of San Diego, said broker agreements are always a good idea. It benefits the consumer to have a clear understanding of what services will be offered by their agent and to have an outline of all the fees associated with the homebuying process.

“They should ask the agent, ‘What are you going to do for me? How do you add value?’” Miller said. “I’d want to know what they do for me, and the answer should be, they help me spot land mines.”

Miller said commission fees should decline after the settlement, pointing to the existence of platforms like Zillow. It’s “too easy to search for homes on your own today,” he said.

It’s key to always ask and negotiate commissions — something Miller did when he purchased a property in Washington.

“Right now, the fees are fairly high, relative to the amount of work it takes, because you’re gonna go in and tell them what home you want to see,” Miller said.

Villegas said it’s important to remember commissions were always negotiable, even before the proposed settlement.

She said her commission as an agent at Oak Park’s RE/MAX In the Village are “all over the board” and based on individual client conversations.

Big market impact?

Greenberg said the looming changes from the settlement haven’t deterred buyers and sellers. In fact, he thinks it’s done the opposite. Many homebuyers are coming off the sidelines, he said, wanting to close on a home before the rule changes upend the process.

Greenberg and Villegas don’t believe the settlement will have a big impact on local home prices, which are influenced by a number of factors.

“We’re in a market where there’s a huge shortage of inventory, and the real estate market is — and always has been — driven by basic principles of supply and demand,” Greenberg said.

Villegas also pointed to interest rates, which have yet to fall despite predictions of a drop in 2024. She said interest rates could be a bigger disruption to home prices if rates are slashed this year.

Mortgage rates have been rising in recent weeks, a setback for home shoppers this spring homebuying season. The average rate on a 30-year mortgage rose 7.17%, its highest level since late November, mortgage buyer Freddie Mac said Thursday. The rate averaged 6.43% last year.

Even if the settlement means more consumers are proactive about negotiating broker commissions, Miller doesn’t think the impact will be enough to drastically change home prices.

What could be more powerful is if firms try to become competitive on broker commission rates, he said, like advertising 1% rates to edge out other real estate firms.

He predicts in 10 years the industry will see less part-time real estate agents and hobbyists, those who sell a handful of homes each year or primarily help family and friends.

Greenberg said there’s been a lot of misguided hate toward real estate agents because of the settlement and it’s focus on broker commissions. He encouraged consumers to contact agents if they have questions about the settlement.

“The good [agents] are here to stay because the good ones do provide a good value,” he said. “Anytime you go to a restaurant and you get great service, you leave a nice tip as a result of it. The commissions aren’t a tip, but it’s compensating us for the service that we’re providing.”