Earlier this month, the National Association of Realtors (NAR) finalized a settlement agreement to address a series of lawsuits. These legal actions primarily focused on the practice of "tying," where NAR members mandate that commissions paid to buyers' agents be set by the seller's agent when a home is listed. Given that nearly 90% of all homes sold in the United States are listed through a Multiple Listing Service (MLS), these NAR practices significantly impact the realty market. The settlement agreement could potentially disrupt the entire realty market and significantly alter how Americans buy and sell homes. Considering the substantial size of the market—where American consumers pay around $100 billion in real estate commissions each year—the agreement also has the potential to impact the broader U.S. economy.

The practice of tying buyer and seller commissions has been criticized for inhibiting competition and driving up fees. Tying arrangements establish the compensation for a buyer's agent before the buyer knows the quantity or quality of services their agent will provide, making it harder for buyers to negotiate fees. Sellers may also feel pressured to offer higher commissions to increase the chances of selling their home. This pressure often occurs through "steering," where buyers' agents may subtly direct their clients to homes offering the standard commission. Studies have shown that homes not offering buyers' agents at least a 2.5% commission have a lower chance of being sold, and those that do sell spend more time on the market.

The anticompetitive impact of tying is worsened by several factors. In ten states, buyers are legally prohibited from receiving rebates on their commissions, meaning that commission rates cannot be negotiated. Additionally, buyers are often unaware of commission levels offered by sellers, as only a small fraction of local MLSs allow brokers to publish these rates. This lack of transparency means that homebuyers may not realize their agents' incentive to steer them toward high-commission properties.

Despite these concerns, public pressure to reform the realty market may be hindered by misconceptions about who ultimately pays for realty services. While sellers fund the buyer's commission from the sale proceeds, economic theory suggests that buyers bear a portion of this cost through a lower purchase price in the absence of commissions.

Apart from tying, other competition concerns in the real estate market include steering by buyers' agents away from properties listed outside the MLS, such as "for sale by owner" (FSBO) properties. Additionally, some state-level policies require sellers' agents to offer a minimum level of services, discouraging consumers from seeking alternative, lower-cost realty services.

On March 15, 2024, NAR offered a settlement to resolve several lawsuits alleging that its policies inflated commission prices and harmed home sellers. The settlement, following the $1.8 billion verdict in the Sitzer-Burnett case in October 2023, aims to protect NAR and its members from further damages. If approved, NAR will pay $418 million in damages, and tied compensation for agents will cease on MLSs. Buyers and agents will need to explicitly agree on services, and online MLS databases will no longer display commission rates. NAR will also be required to allow agents to be paid without MLS subscription.

While this settlement would protect NAR and most of its members, not all members would be covered. Larger brokerage employees and those working for corporate defendants not settled in the Sitzer-Burnett case remain unprotected. These groups can adopt the settlement rules and contribute to the payment to be released from liability.

Although this settlement marks progress, it does not resolve all legal issues facing NAR and the real estate industry. Class-action lawsuits by homebuyers are ongoing, and the Department of Justice continues to challenge NAR commission rules. The impact of these legal developments on how Americans buy and sell homes remains uncertain pending court approval. If approved, the end of tying and steering could empower homebuyers to negotiate commissions and explore alternative compensation models, potentially leading to lower housing transaction costs. This change could also improve geographic mobility, as high transaction costs can hinder people from relocating to areas with better job opportunities. However, the impact on the labor market, especially for real estate agents, remains unclear, with possibilities ranging from a decline in agent numbers to a boom in innovative business models in the realty market.