The Fallout: How Will The NAR Deal Impact New Home Sellers?

John McManus -

First came the verdict.

Last week came the settlement.

The NAR agreed to no longer require a broker advertising a home for sale on MLS to offer any upfront compensation to a buyer’s agent. The rule change leaves it open for individual home sellers to negotiate such offers with a buyer’s agent outside of the MLS platforms, though the home seller’s broker has to disclose any such compensation arrangements.
The trade group also agreed to require agents or others working with a homebuyer to enter into a written agreement with them. That is meant to ensure homebuyers know going in what their agent will charge them for their services.
The rule changes, which are set to go into effect in mid-July, represent a major change to the way real estate agents have operated going back to the 1990s, and could lead to homebuyers and sellers negotiating lower agent commissions." – Fortune

Now comes the shake-out.

For homebuilders and their partners, the immediate pros and cons are a double-edged sword, and the longer-term implications—possibly game-changing—are far from being truly recognized, appreciated, or strategically addressed.

Two separate New York Times analyses in the wake of last week's lightning rod tidings of the $418 million settlement outlined:

Depending on who you're willing to listen to, what happens next will likely result ...

  • ... in a positive for home sellers (including new home sellers), possibly sparking greater willingness to sell existing homes once the grand bargain takes effect
  • ... in either more significant price optionality for home buyers, a net neutral effect, or, in some cases, a negative impact of having to pay a commission to their real estate advisor.

The best that can be said about the upending of residential real estate practices that have been common since the early 1990s is that transparency, clarity, market competition, and value have a better chance of rising through the emotional fog of both home buyers' and sellers' journeys. In that sense, a pro-consumer factor comes with both the verdict and the settlement.

Fact is, however, what is pro-consumer for home sellers is not the equivalent of pro-consumer for home buyers, particularly at a moment when would-be home buyers bring challenges and consumer behaviors to the table that set them apart from other eras and generations. For example:

  • They are now more often digital and A.I. natives, for whom real estate advisor value-creation may evolve into a self-service mode more common to consuming all goods and services.
  • They are also more likely to be buffeted by a slew of affordability challenges, ranging from mortgage qualification to down payments to monthly payments. Should they now incur an added cost of a real estate representative's commission in the bargain, an added 1% to 3% commission – $4,000 to $12,000 – would be a deal crusher.

According to this piece:

The picture for first-time buyers and those with tight budgets is murkier.
They'll no longer get a real estate agent for free — and might wind up paying out of pocket for the service, depleting cash they need for that down payment and other fees. And it's not clear if they can roll an agent's fee into a mortgage. That may require regulatory changes." – Axios

We discussed some of the high-level implications for new-home sales with New Home Star market analyst Dan White, when a verdict against the National Association of Realtors came down last October. The context for the dialogue was this:

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?

Here are a few of the highlights of that conversation with New Home Star's Dan White, as they're still relevant today:

Transparency

There are obviously a handful of different interpretations of what the verdict means for us, the industry, and our partners, short-term, mid-term, and 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, additional disclosures and transparency measures must 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 whom, where the commissions are coming from, and how those dollars were negotiated and landed on tends to be a gray area."
Builders take it a step further with their disclosures, explaining how we have to set the parameters of who's representing who, where this dollar amount is coming from, where the incentives are, and what the commission is.
Builders are always 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

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 and welcome this feedback. In that case, their role will just continue to adapt. I 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 to bolster and build relationships and break down any barriers that might be there for trust and transparency? Because we can all agree on both sides.' In every property deal and new construction, we want transparency to be there. It's a big purchase. There are a lot of pages in contracts. Some buyers walk a home from five different builders, and they start seeing ten resale homes. Then, they try to keep it all straight. We want buyers to feel like they are being cared for by somebody, and if that's an outside realtor, builders will continue to adapt and lean in."
What builders need to do about the emerging and continuously developing technology – mixing in the trust elements – comes down to a lot of education. A shift is happening. We continue to see it when we focus on the buyers' total experience. In all our touchpoints and meetings, we use 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 treat a Realtor as a future customer, whether they purchase themselves or tap into their buyer pool and MLS contacts and resources. If builders can help fill that gap and help Realtors become good proponents 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?

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 permanently adapt to the market if commissions start 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 offer half a percent more. Then, they're very agile and go meet the market. Builders may hesitate to make the first changes in moving commissions. So this might result in an extended status quo while they're all looking at each other, waiting for someone to start making the first adjustment move. Then, somebody makes the first move, and everybody adjusts to the market accordingly.
The biggest thing to watch is whether paying the buyer's commission falls onto the buyer's shoulders," White notes. "That may put additional financial strain on the already raging affordability crisis. So, as clear-cut and fair as that would be, that could easily put additional strain. Builders would have to think and start to consider how that would be done, then tailor 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 at the forefront of everyone's mind."