First-time homebuyers could face thousands in new costs following NAR settlement

Erin Cogswell, Wealth of Geeks

Owning a home is a dream for many Americans. But a new survey by Clever Real Estate finds 66% of first-time homebuyers don’t think they could afford to buy a house. Not if they also have to pay their real estate agent’s commission on top of other costs.

The possible change in purchase terms is a result of a recent class action settlement that cost the National Association of Realtors (NAR) $418 million and forced a rule change.

Based on the nationwide median home sale price of $420,800 and the typical buyer’s agent commission rate of 2 – 3%, a homebuyer could now have to pay an additional $8,416 to $12,624 — likely out of pocket — to cover their Realtor’s commission.

Supporters believe it will eventually lead to lower commission rates and home prices. However, opponents fear that, in addition to the added costs for buyers, the decision will also slow the pace of home sales.


About the NAR settlement

Traditional real estate transactions require home sellers to pay a commission to both the listing and buying agents. The amount is decided on in advance and included in the listing service. Sellers typically pay the commissions using home sale revenue.

The class action lawsuit against NAR argued that home sellers having to pay the buyer’s agent commission was an unfair and anti-competitive practice. The settlement announced in March resolved this issue.

The controversial settlement, which goes into effect mid-August 2024, determined that sellers are no longer obligated to pay the buyer’s agent’s commission. The exact effects of the new rule are unclear, as sellers can still offer to compensate buyers’ agents to incentivize them to bring clients to a home. However, the potential for thousands in additional costs could push some buyers out of the housing market.


The short- and long-term impact of the new rule

Greg Kling, associate professor of accounting at the University of Southern California (USC) Marshall School of Business, expects the market to work itself out in the long term. He explains that if buyers must pay their agents, home prices must decrease to return to a balance. In the short term, Kling believes buyer worry stems from first-time homebuyers looking at homes that may be out of their reach.

“When you add paying a commission, now that home is beyond their budget,” he says. “Versus if they would buy a house in the middle of their budget, then paying a commission would be affordable.”

In addition, first-time buyers are unaware of how average agent commission fees can inflate home prices. In the Clever survey, just 17% of first-time homebuyers knew the typical total commission rate was 5% to 6%.

Kling anticipates buyer agent fees will become negotiable items like other common credits. This shift means buyers can pressure sellers to cover their agent’s fee in return for paying the asking price or meeting other conditions. Buyers can also work with their agents to lower commissions. Similarly, sellers can consider offers where buyers pay their agent fees.

Kling believes real estate agents may start offering buyers cut-rate commissions, regardless of the home sale price. This move may lead first-time homebuyers to prioritize bargains rather than seeking seasoned, skillful agents who can help them find their dream home.

Many consumers hope to reduce or eliminate the need for intermediaries. Around 62% of respondents would consider using online platforms or discount brokers. More than half of buyers (57%) and sellers (52%) would forego real estate agents altogether.


Other challenges for first-time homebuyers

In addition to these new developments, first-time buyers still have to deal with the housing market’s high interest rates. Though rates declined after an autumn 2023 peak of 8%, they remain far higher than in recent years. First-time homebuyers struggle to find a property in their budget amid sky-high rates and still-rising home prices.

Kling says it’s important for first-time homebuyers to understand all home ownership costs. The sale price is only the beginning; buyers should consider property taxes, insurance, utilities, maintenance needs, and a rainy-day fund for more expensive repairs.


Advice for first-time homebuyers

Kling urges first-time homebuyers to create realistic budgets. Real estate agents and financial planners ensure that buyers’ market expectations are accurate. Buyers paying their agent’s commission out of pocket should factor fees into down payments and closing costs, as these can push affordable properties out of buyers’ budgets.

“It’s all about proper budgeting,” he said. “If you have a good budget, and you know what you can truly afford, having to pay your agent’s fee won’t be a deal breaker.”

Kling advises buyers not to take an adjustable-rate mortgage (ARM) amid high interest rates. After enjoying a few years of a lower rate, sudden rate increases put their monthly mortgage payments out of reach.

Finally, he encourages buyers to meet with a reputable agent and be transparent about all the costs of finding their perfect home. “They will be worth the fee you pay them,” he says.