A laundry list of adaptations high-volume homebuilding operators need to learn, practice, and become fluent in sooner than later to withstand turbulence and, one day, flourish just got longer:

A court verdict last month stands to radically alter the way real estate agents are paid for their work, and could result in far lower pay for the 1.6 million men and women who sell homes as their main job or as a side hustle." – Anne Marie Chaker, Wall Street Journal [gift article]

Exactly what adaptations the verdict, its ramifications, and the short-, mid-, and long-term fallout will require are far from clear. What is quite evident is that they have "protect-the-bottom-line-from-risk" as a critical reason for their development.

In a whiplash period already roiling with steep supply and demand imbalances and an onslaught of domestic, global, and secular disruptions, what few, if any, participants in today's wild and weird housing market need now is another squeeze on either would-be homebuyers' or homebuilders already-pressured gross margins.

While either direct or knock-on effects of the ruling against the NAR remain in the more-questions-than-answers mode, three root-cause matters make up the opportunity-risk axis for homebuilders and their customers as they navigate tricky and iffy conditions over the next several months. All of this, as the overall economy tries to skirt a consumer household and jobs funk as it continues to cool down the fires of inflation.

• Trust and transparency
• Value creation
• Who pays the price?

We caught up with New Home Star market analyst Dan White on potential fall-out of the ruling last month and here are a few of his observations:

Transparency

There are obviously a handful of different interpretations for what the verdict means for us, for the industry, and for our partners, short-term, mid-term long-term," says White. "Nowhere is that more apparent than right now. Typically speaking, when a large, potentially industry-shifting event happens it's not necessarily great news for everybody in the short term.

At the very least, there will be additional disclosures and transparency measures that need to be enacted. Builders already do a pretty good job of that, especially compared with general real estate where, yes, the transparency around who's representing who, where the commissions are coming from, how those dollars were negotiated and landed on tends to be a gray area."

Builders take it a step further with their disclosures in how we have to set those parameters of who's representing who, where this dollar amount is coming from, where the incentives are, what the commission is."

So think builders are always kind of on the frontline there, and part of it is that they are so driven by customer experience. That's become such a measurable KPI for so many builders in the last decade or so that the customer experience is at the core of what they do and part of pushing that forward was a lot of transparency around these transactions about who's representing who, not wanting to partner with realtors who may negatively impact the buyer experience."

Creating value for homebuyers

At the end of the day, the buyer experience is what builders want to continue to drive forward," White notes. "If buyers convey to builders that they value this partner as a realtor, builders receive this feedback and welcome it. In that case, their role will just continue to adapt. I definitely don't see it going away especially if that remains the buyer sentiment. If anything, builders would probably lean into and say, 'all right, our buyers are finding value in these partners. How can we best partner with them continue to bolster and build relationships, and break down any barriers that might be there for trust and transparency? Because I think we can all agree on both sides.' In every property deal and new construction, we want the transparency to be there. It's a big purchase. There are a lot of pages in contracts. There's buyers that walk a home from five different builders and they start seeing 10 resale homes and trying to keep it all straight. We want everyone to feel good about their purchase. And they feel like they are being taken care of by somebody and if that's an outside realtor, builders are just going to continue to adapt and lean in."

What builders need to do with regard to the emerging and continuously developing technology – mixing in the trust elements – comes down to a lot of education. There is a shift happening and then we continue to see it where we focus on the buyers' total experience. In all our touchpoints and meetings, we use different educational pieces, collateral, and programs to help educate and make the buyer feel better. Builders are going to need to treat realtors in a very similar regard. The best thing builders can do is to treat a realtor as a future customer whether they purchase themselves, or tap into their buyer pool and their MLS contacts and resources. If builders can help fill that gap and help realtors become good proponents for that for their customers, they'll become good representatives for new construction. They'll be able to add more value, more credibly. That's a role that I think builders should want to take on as more of an education and informing piece.

Who will pay?

It's about the allocation of resources. Builders pay a buyer's agent commission in a resale transaction. That agent provides a lot and is expected to provide a lot and to be involved, to be engaged, be a good proponent for the buyer. Then, in new construction, they just don't need realtors as much. So much of new construction has really shifted to a very easy checkout process. There's just not as much room for value to be brought on the buyer side. So, as the technology and the transparency and the experience have developed, builders are questioning more and more why they're paying the same amount for what at the end of the day comes down to a qualified lead.

In a world where buyer's agents' commissions decrease, builders will continue to do what they have done which is to adapt. But I think they’ll always adapt to the market if commissions are starting to be driven down. They're going to match what other builders are doing. If they're struggling to sell some homes, we bring them information about other builders in the same competitive sphere, that may be offering half a percent more. Then, they're very agile and go meet the market. Builders may hesitate to be the first changers in moving commission. So this might result in kind of an extended status quo, while they're all looking at each other waiting for someone to start to make the first adjustment move. Then, somebody makes the first move and everybody adjusts to the market accordingly.

The biggest thing to keep an eye on is whether the burden of paying the buyer's commission falls onto the buyer's shoulders," White notes. "That may put some additional financial strain on the already raging affordability crisis we're seeing. So, as clear-cut and as fair as that would be, that could easily put additional strain. Builders would have to think and start to consider how that then tailors current incentives, promotions, or lending products that have to get into place or price tweaks in some cases to account for that extra affordability factor. Buyers are struggling right now to save for a down payment, and if they're expected to put down an extra three-ish percent, that adds up fast! Builders' ability to either partner with lenders or have in-house strategies to neutralize this is critical. Affordability is on the forefront of everyone's mind."

Looks like that GM is going to continue to get a stress test as that laundry list gets longer.