Colluding for higher commissions: Gauging the fallout of a major judgment against brokers

Imagine you had a unique database with complete information on every property in the U.S. Hundreds of thousands of real estate professionals would want access to your info, and you could charge them a fortune for access.

Or you could think bigger. Why not leverage your database to generate above-market sales commissions for everyone involved?

You might pay a lot of money to maintain this goldmine...

There's a problem with this scheme, though.

Coordinating to promote higher charges would constitute a cartel, which is illegal under U.S. antitrust laws. You wouldn’t go to jail, but the damages would be extreme because (i) the real estate market is huge and (ii) antitrust damages are tripled in litigation.

This is exactly what happened to Realtors in a Missouri courtroom last week. After a two-week trial, jurors needed less than three hours to find the National Association of Realtors and related defendants liable for conspiring to maintain high commission rates. The damages (which cover sales in Missouri, Illinois, and Kansas between 2015 and 2022) could exceed $5 billion.

From the New York Times:

A federal jury ruled on Tuesday that the powerful National Association of Realtors and several large brokerages had conspired to artificially inflate the commissions paid to real estate agents, a decision that could radically alter the home-buying process in the United States.

The realtors’ group and brokerages were ordered to pay damages of nearly $1.8 billion. The verdict allows the court to issue treble damages, which means they could swell to more than $5 billion.

It’s a decision that has the potential to rewrite the entire structure of the real estate industry in the United States, lowering the cost of moving homes by reducing commissions. 

NYT, 10/31/23

Plaintiff's claims

Plaintiff's example of how the NAR and its members collude, from a defendant's training manual

Sample commissions on sale of $500,000 home

Missouri's antitrust law

The NAR will certainly appeal the verdict. And, as is true with many damage awards, perhaps the NAR will make progress on appeal and/or in a parallel case scheduled to go to trial next year.

Either way, last week's case will almost certainly mark a definitive pivot in the path of the residential real estate business.

Here's how we could see this playing out...

Winners

• Good real estate sales agents: Many real estate agents are exceptionally good at their job. They bring substantial value to their clients. Who knows how many of the two million licensed real estate agents fall into this bucket, but let's guess 25-50%. They'll be fine. In fact, this ruling and its shockwaves could help good agents.
• Friends and family members of lackluster agents: The lifeblood of the other 50-75% of licensed agents are friends and family members who award their business based on relationships instead of experience, professionalism, etc. There will likely be less room for these folks, so you may have fewer awkward moments ("Can I list your house?") over Thanksgiving dinner in future years.
• Online real estate firms: Zillow, Redfin, Opendoor, etc. have been getting crushed over the last two years, but this ruling could quickly improve their ability to serve homeowners. To date, they've been blocked from tapping into commissions. If last week's verdict holds, expect them to make big moves to serve buyers and sellers (but especially buyers).
• Homeowners: In theory, all homeowners should win; if commissions fall across the board, then there's more for owners to keep. In reality, we suspect these benefits will be disproportionately split and the overall benefit may not be as great as anticipated. [Sidenote: Have you ever tried to manage a transaction without brokers? It's painful.] Nevertheless, there would likely be some net benefit to homeowners in a sub-6% world.

Losers

• Traditional brokerages: Re/max, Compass, Coldwell Banker, Keller Williams, and their peers stand to lose the most. They get about half of the skim that comes from excess commissions (assume 3% of 6%), and we could easily see the market shifting where the house's share comes under significant pressure. In an already challenging market, this could mean consolidation.
• Lackluster agents: Sales agents who leverage friends and family to eke out a decent year every once in a while will likely be looking for another career path. Residential real estate is a tough business, defined by nights and weekends, and those who aren't able to generate extensive customer loyalty or who lack the stamina to be a 50+ hour-a-week professional will likely be pushed to the sidelines. The costs of entry (for brokerages and agents) are just too high to justify below-average activity.
• Incumbent politicians: The NAR has given politicians nearly $1 billion over the last 20 years, and it's been pretty easy money for those politicians. Antitrust rulings take much of the power away from politicians, which means some of that cash may go away. Even if it doesn't, the NAR may not have much left to go around if it has to start paying $5 billion judgments.
• First-time buyers: If you buy your first home today, the cost of your broker is covered by the seller. But it's likely that a compliant structure would have you (the first-time home buyer) pay your own broker. So it's essentially a tax on new buyers who never got the benefit of having sellers cover commissions. ...as if first-time buyers needed another reason to be depressed about the prospects of owning.

Commercial real estate spillover effects?

Residential real estate may be similar to commercial real estate on the surface, but there are key differences. One of them is information. Although there are certainly powerful trade organizations in commercial real estate, there's nothing like the National Association of Realtors or the MLS systems in CRE.

CoStar you say? Sure, it's somewhat like an MLS in that it houses a lot of property info. But CoStar originates much of that information and charges subscription fees and, unlike NAR, doesn't regulate membership rules that promote fixing commission rates. Consequently, we don't see many direct parallels to this situation in commercial real estate.

However, one effect could be a moderate move of residential agents into commercial real estate. They're already licensed, and they may see increased value in getting paid for more specialized knowledge and skills.