1. Background
The main parties of any residential real estate transaction are the seller of the property and the buyer, who are usually represented by real estate agents who act as intermediaries during the transaction. Real estate agents play a crucial role in alleviating the search friction by allowing sellers to market their properties to potential buyers, while informing buyers of which properties are available. Agents are compensated through commissions, typically set at 5-6% of the home’s selling price, which is usually split equally between the sellers’ and buyers’ agents. Agents are generally affiliated with real estate brokerages that keep a share of the commissions that ranges from 20% to 40%.
The MLS serves as the primary marketplace within a local market for residential real estate transactions, centralizing listings from member agents on a single platform. The MLS operates as a two-sided platform, where sellers’ agents list properties for sale while other agents view all available listings. Most of the 534 MLSs in the United States are affiliated with the NAR and adhere to its Handbook and policies. The participation of agents in the MLS is founded on two core principles from the NAR: cooperation and compensation. Cooperation means that agents agree to share listings and work cooperatively with competitor agents and brokerages. The cooperation principle was more strongly enforced through the introduction of the Clear Cooperation Policy (CCP) in 2019, which stated that any public marketing activity of a property meant that sellers’ agents needed to list the property in the MLS within one business day. If the agents failed to list after publicly marketing a property, agents face fines that are set by each MLS but these generally increase each day the listing is not in the MLS. Compensation required the sellers’ agents to make blanket offers of compensation to buyers’ agents as part of the MLS listings.
In Burnett et al. v. NAR, plaintiffs alleged that the NAR and a group of large brokerages conspired to maintain artificially high commission levels. They argued that MLS rules and corporate bylaws forced agents to abide by NAR policies, which required sellers to offer commissions to buyers’ agents. Buyers had limited input on their agents’ compensation, and many were even unaware they were indirectly paying their agents through the home price. Furthermore, Plaintiffs alleged that commissions remained at 5-6% through steering, whereby buyers’ agents steered buyers away from properties offering lower commissions, while sellers’ agents would use this threat to convince sellers to offer this level of commission.
The settlement aims to address these issues by promoting transparency for buyers and trying to involve them more in deciding the commission paid to their agents. According to the settlement, agents are no longer allowed to make offers on the MLS and buyers need to sign an agreement with their agents before touring a property. The expectation is that buyers will now be responsible for negotiating the fees they pay to their agents, which would result in lower commissions.
2. Short-run Impact on Commission Levels and Housing Prices
There is some anecdotal evidence that commissions have remained virtually unchanged at the levels that were predominant before the settlement. Agents have been using other fields within the MLS or informal agreements to hold to the same commission structure. Additionally, the lack of standardization means that the agreement between buyers and agents may have become a formality, thereby failing to foster negotiation on the commissions.
While the unchanged commission structure can be explained by the short time the settlement has been in effect, a case study suggests that the commission structure may not change in the subsequent years. Before the settlement, the Northwest MLS (NWMLS), which comprises the majority of Washington state’s counties, had independently removed the requirement for a seller’s agent to offer compensation to the buyers’ agents when listing a property. In 2022, the NWMLS also implemented a set of rules to enhance transparency about buyers’ agents’ commissions and to promote the negotiation of agents’ commissions. These changes were expected to lower buyers’ agents’ commissions, but studies have found the commissions have remained unchanged. A report published by the Consumer Federation of America called the changes adopted by the NWMLS an example of an ineffective restructuring of the industry. For example, they found that following the updates implemented by the NWMLS, 99.7% of the listings included buyer’s agents’ compensation offers and 93.0% had commission rates that were 2.5 or 3%. Even though the NWMLS is not affiliated with the NAR, its policies and procedures still encourage cooperative compensation between agents, which is reflected in the uniformity of their agents’ commissions.
Unsurprisingly, the effect of the settlement on the fees on real estate transactions and housing prices has attracted the attention of mass media and academia. Media coverage has reported they expect the new commission pricing structure to make home buyers more prone to negotiate fees, leading to a reduction of home prices. A working paper by Borys Grochulski and Zhu Wang from the Federal Reserve Bank of Richmond estimates a search and matching model in which buyers’ agents’ commissions are fixed at a supra-competitive level. The buyers, who are cognizant of the excessive price, then unnecessarily extend the search for properties. Under a new commission pricing structure, where services provided by the buyers’ agents are paid by the buyer with an a-la-carte structure, prices move to the competitive level as buyers internalize the cost of search. This new commission structure results in improved consumer welfare and a decrease in housing prices. In contrast, a recent NBER working paper by Buchak, Matvos, Piskorski, and Seru predicts that housing prices will increase as a result of the new commission pricing structure. The intuition behind the price increase is that the reduced fee paid to agents makes housing transactions cheaper, and thus more frequent. Since houses are durable assets, sellers today internalize the future dynamic effect of lower transaction costs and increase the price of the house to capture part of the future increased value of the asset.
3. Long-Run Impact on Platform Entry
Another important dimension that has not received as much attention is whether the MLSs will still be the main platforms used to resolve the search friction arising from interested buyers not knowing which properties are available for sale. We believe the answer to this question is at least as important as the effect on housing prices to guarantee an efficient and competitive residential real estate market. A fragmented marketplace could result in reduced efficiencies stemming from worse matches between buyers and properties, decreased competition when bidding for properties, and increased closing times.
Before the settlement, the MLSs centralized most listings in a local market through a mix of compensation acting as the carrot and the CCP as the stick. The elimination of compensation from the platform thus raises the question on whether the CCP and the path dependence from existing network effects would be enough to maintain the MLSs as the main platform for residential real estate transactions. Although the answer is by no means obvious, there is some evidence that the MLSs might be losing some its preponderance as the main platform. For starters, it is not clear that the CCP would withstand antitrust scrutiny. Lawsuits from the Top Agent Network and ThePLS.com have already alleged the CCP is excluding competitors to the MLSs. Also, the CCP allows an exception for Office Exclusive listings in which marketing of listings within an office or brokerage would not trigger the CCP. Although the true extent of this practice is unknown, estimates suggest listings that are sold by agents before being listed in the MLS have been rising over the last decade. Furthermore, NAR members have been asking for a more flexible CCP that would extend the time to list a property after marketing or relax what constitutes public marketing, which if adopted, would expand the range of transactions that would be completed outside the MLSs.
The increasing number of Office Exclusive listings suggests that large brokerages are one of the candidates that could substitute the MLSs as marketplaces. In the post-settlement world, they may actually have an incentive to do so.
The main obstacle for brokerages to start acting as marketplaces is the difficulty to amass enough size to benefit from the network effects that the MLSs currently have, which means that there are multiple possible scenarios that depend on how many agents and listings they can attract. An extremal scenario is for a brokerage that consolidates enough share to tip the market, and thus attracts most agents so that their platform becomes the dominant one. Then an additional antitrust concern is that agent would need to affiliate with this brokerage to access the listings information, which would reduce the bargaining leverage of the agents. The other extreme is when multiple brokerages each become a platform. Then the degree of information fragmentation and competition for listings would be inversely related to the extent of multi-homing. In practice, a marketplace constituted by brokerages is possibly somewhere in the middle: e.g., small markets may be dominated by a single brokerage platform, while large markets may be served by multiple competing platforms.
Syndication platforms like Zillow are other players which may become substitutes to the MLSs if the MLSs were to lose their place as the main residential real estate marketplace. However, this scenario would require upending the business model of syndication platforms as they currently rely on information from the MLSs on which properties are for sale, and obtain most of their revenue from generating leads and selling advertisement slots for real estate agents. In the absence of the MLSs, syndication platforms would need to start creating incentives for real estate agents or sellers directly to use them as the main house listing platform. Zillow emerges as the most natural candidate due to the popularity of its website and the immediate association with housing, but competitors like Realtor.com or entrants could emerge as alternatives or substitutes.
Finally, the current juncture might be used by technology companies to disrupt the existing marketplace. We imagine a scenario in which artificial intelligence, or a large statistical model is used to aggregate data on a household’s mobility habits, financial situation, and shopping patterns, together with information on amenities and housing market trends to create personalized recommendations for both sellers and buyers. If this happens someday, the role of agents as matchmakers would decline significantly as the search friction is solved algorithmically, as it happened in other industries like travel booking or online advertising.
Considering potential platform entry, a question is whether there is space in this market for only a single dominant platform or for a multi-platform equilibrium. It is also an open question whether one is preferable to the other in terms of customer welfare. On one hand, a single dominant platform would reduce the search costs but at the expense of potential supra-competitive prices and a higher risk of price fixing or discrimination by whomever controls the platform. On the other, a multi-platform equilibrium might result in market segmentation and increased search costs, but with more price competition.
4. Conclusion
To conclude, it is likely that commissions and housing prices will not change in the short run with the settlement, due to institutional inertia. However, over time, the position of MLSs as the single dominant platforms for residential real estate transactions may change either through antitrust enforcement or due to disruption from existent players or future entrants. This future could present itself in multiple scenarios, all of which will have ample space for economic analysis to play an important role to ensure a fair and competitive residential real estate market.
