How the NAR Settlement Could Hurt First-Time Homebuyers

The recent settlement between the National Association of Realtors (NAR) and plaintiffs in a class-action lawsuit is being hailed as a triumph for transparency and competition in real estate. However, for first-time homebuyers already struggling with affordability, this change may have unintended consequences that worsen their financial challenges. By shifting the responsibility for paying buyer agent commissions from sellers to buyers, the settlement introduces new upfront costs that could derail homeownership plans. Furthermore, by lowering transaction costs, the settlement could inadvertently drive up home prices, creating an even steeper barrier to entry for prospective buyers. This article explores how these changes, while well-intentioned, may unintentionally harm first-time homebuyers.

How the Existing Structure Helps Cash-Strapped Buyers

Traditionally, real estate agent commissions in the U.S. averaged 5-6% of the sale price, with the seller covering both their own and the buyer’s agent fees. This structure allowed buyers to implicitly finance their agent’s fees through their mortgage—even if, theoretically speaking, this should not be the case, as a practical matter it is. However, the NAR settlement has disrupted this long-standing practice. Sellers are no longer obligated to pay buyer agent commissions, leaving buyers to negotiate and pay these fees directly. While this shift aims to enhance transparency and provide buyers with more control over their agent relationships, it introduces significant financial implications, especially for first-time homebuyers.

Financial Strain on First-Time Homebuyers

First-time buyers often face tight financial constraints, relying on limited savings for down payments and closing costs. Under the new rules, buyers must now allocate additional liquid funds to pay their agent’s commission. For instance, on a $300,000 home, a 3% buyer agent commission equates to $9,000—an amount that previously could be rolled into the mortgage. Now, this expense must be paid upfront, alongside the down payment and other closing costs. This change could force buyers to delay purchasing a home, settle for a less expensive property, or exhaust their savings, leaving little room for unexpected expenses.

While proponents argue that this shift could save buyers money by allowing them to negotiate lower commissions, the immediate need for liquid funds poses a significant barrier. Even if the total transaction costs decrease, the upfront nature of these fees disproportionately impacts first-time buyers, who often lack the financial flexibility of repeat homeowners.

Higher Home Prices: A Hidden Cost

Ironically, while reducing agent commissions lowers transaction costs, the NAR settlement could indirectly contribute to higher home prices. A recent study by the National Bureau of Economic Research (NBER) found that lower agent fees increase the value of housing as a durable asset. With lower transaction costs reducing the future expense of reselling a home, housing becomes more valuable, driving up prices. Ironically, the paper found that reducing total agent commissions from 6% to 3% could lead to a 7.3% increase in home prices. This result might seem counterintuitive, but buyers are willing to pay even more for a house when they know they aren’t going to have to pay the “realtor tax” when they resell it: They know they will likely get this money back when they resell later, which is not true of the realtor fees.

This effect disproportionately benefits current homeowners, who enjoy immediate gains from higher resale values. However, prospective buyers, particularly those entering the market for the first time, bear the brunt of these price increases. Rising home prices, combined with the requirement to pay agent fees upfront, create a dual challenge that further erodes affordability.

Complexities of Decoupling Fees

The settlement also introduces complexities in the negotiation process. Buyers must now sign written agreements with their agents, explicitly outlining compensation terms before viewing properties. While this change enhances transparency, it requires buyers to have a clear understanding of market norms and their financial capacity to negotiate effectively. Many first-time buyers may lack the experience or confidence to navigate these negotiations, potentially leaving them at a disadvantage.

Moreover, decoupling fees shifts immediate costs to buyers without fundamentally addressing affordability issues. Although this change increases price transparency, it disproportionately impacts buyers with limited cash reserves. The requirement to pay fees directly could discourage some from entering the market altogether, shrinking the pool of potential buyers and altering market dynamics in unpredictable ways.

Long-Term Implications

In the long run, the NAR settlement may lead to a more competitive real estate market, with agents adopting alternative compensation models such as flat fees or hourly rates. These changes could ultimately reduce transaction costs and provide buyers with more affordable options. However, during the transition period, first-time buyers are likely to face increased financial strain and uncertainty. The combination of higher home prices, upfront agent fees, and the complexities of navigating a new system may delay or derail their homeownership plans.

Conclusion

The NAR settlement represents a significant shift in the structure of real estate transactions, with implications that extend beyond the immediate goals of promoting transparency and competition. For first-time homebuyers, the changes in agent commission fee structures impose a substantial upfront financial cost, compounding the challenges of saving for down payments and qualifying for mortgages. Additionally, the potential for rising home prices due to reduced transaction costs threaten to make homes even less affordable.

While the settlement may pave the way for a more competitive and efficient market in the long term, its immediate effects underscore the need for careful policymaking. Deregulation and other policies that increase the supply of housing, particularly starter homes, are sorely needed to compensate for the negative effects the NAR settlement will have on affordability.

Franklin Carroll

Franklin Carroll is Kukun's VP of Modelling and Analytics; After finishing his studies at the University of Chicago, he worked at Fannie Mae where he helped build Collateral Underwriter, roll out the Value Verify initiative, and specialized in collateral related and credit related policy.

Published January 8, 2025