 Billions at stake as NAR faces legal challenges amid calls for reform.
The US residential housing market is under the microscope, with the broker commission system facing antitrust scrutiny from the Justice Department and two private class-action lawsuits. At the core of the investigation is the commission-sharing system, a structure that typically requires home sellers to pay a 5% to 6% cut of the sale, divided between their agent and the buyer’s agent. Bloomberg reported that a nationwide case to dismantle the commission-sharing structure is not only a potential threat to the National Association of Realtors (NAR), the industry’s lobbying group, but could also lead to drastic change in the real estate landscape. The commission-sharing system, largely unique to the US, is preserved by NAR’s control over many of the country’s multiple listing services. Critics argue that this structure inflates home prices, and Michael Ketchmark, lead plaintiffs’ attorney in the Missouri case, asserts that the structure equates to “collusion.” Legal challenges and damages. The legal challenges are substantial. The Missouri case alone could result in up to $4 billion in damages. The Illinois trial, scheduled for early next year, has plaintiffs seeking as much as $40 billion. “Our guess is that the lawsuits in Missouri and Illinois will not go that far, but it’s possible,” said Redfin CEO Glenn Kelman. He believes that a DOJ action is necessary to reach a level where the commission-sharing structure is dismantled, a move he suggests would leave “half the real estate agents in this country unemployed.” Redfin parted ways with the NAR earlier this month, attributing the split to its longstanding issues with agent compensation structure. DOJ’s concern over housing affordability and commission rates For the mortgage sector, the spotlight on commission rates comes at a time when the housing market is already grappling with low supply and escalating mortgage costs. The Biden administration’s focus on these rates is intertwined with the broader issue of housing affordability. On a median existing-home sales price of $407,100, a 5.5% commission amounts to approximately $22,390 – a cost often embedded in the home’s listing price and subsequently impacting the mortgage value. The Justice Department stressed the issue in a recent court filing, expressing its apprehension about “policies, practices, and rules in the residential real estate industry that may increase broker commissions,” the agency said. A shift in this area could reduce overall commissions by as much as $30 billion annually, according to a study by the Consumer Federation of America. NAR’s defense NAR, however, defends the existing system, asserting its role in facilitating homeownership for first-time buyers, especially those from minority and lower-income groups. “This case is very much about buyer representation and that being at risk,” NAR spokesperson Mantill Williams said in a statement. He emphasizes the importance of professional guidance in the home-buying process. NAR has pointed out that the commission for buyers doesn’t necessarily need to stick to the conventional 2.5%. NAR said it could be as low as $0. However, many sellers continue to opt for the higher rate, worried that if they offer less, buyers’ agents might direct clients elsewhere – a concern supported by recent studies. The evolving landscape threatens the future stability of NAR. The association collects $150 in annual dues from its vast membership of over 1.5 million agents. The organization, which last year outspent even the US Chamber of Congress with a whopping $80 million on lobbying, now faces an “existential threat,” David Greer, who has spent over a decade working with NAR, said.
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 30-year fixed mortgage rate hits staggering 7.7%, dampening homebuying activities.
Mortgage applications plummeted to their lowest level in 28 years after weeks of consecutive increases in mortgage rates. The Mortgage Bankers Association (MBA) reported today that its Market Composite Index – a measure of loan application volume – fell 6.9% in the week ending October 13, marking the lowest level since 1995. This decline is attributed to the surge in the 30-year fixed mortgage rate, which has been on an upward trajectory for six consecutive weeks, reaching 7.7% – a peak not seen since November 2000. MBA's data also revealed a 10% decrease in the refinance index from the previous week and a 12% decline compared to last year. The seasonally adjusted purchase index fell by 6%, while the unadjusted version saw a 5% reduction, representing a 21% year-over-year decline. MBA deputy chief economist Joel Kan highlighted the impact of increased rates on potential homebuyers. "Purchase applications were 21% lower than the same week last year, as homebuying activity continues to pull back given reduced purchasing power from higher rates and the ongoing lack of available inventory," Kan said. Amidst these challenges, some borrowers are exploring alternative solutions to mitigate their monthly expenses, leading to the ARM share rising to 9.3%, the highest in nearly a year. The refinance share of mortgage activity also took a hit, dropping to 30.5% from 31.6% in the previous week. In contrast, the FHA share of total applications slightly increased to 14.8% from 14.4%, and the VA share rose to 10.7% from 10.2%. The USDA share remained stable at 0.5%. "Refinance activity was at its lowest level since early 2023," Kan said. "There is very limited refinance incentive with mortgage rates at multi-decade highs." The 30-year fixed-rate mortgage is on the brink of 8%. Even though the Fed paused any rate hike at its last meeting, long-term mortgage rates still continued to approach 8%, according to Freddie Mac. As of October 19, the average 30-year fixed-rate mortgage rose six basis points to 7.63%, while the 15-year loan saw a three-basis-point increase to 6.92%.  Freddie Mac chief economist Sam Khater noted the broader implications of the rising rates, saying, "Not only are homebuyers feeling the impact of rising rates, but home builders are as well. Incoming data shows that the construction of new homes rebounded in September, but as rates keep rising, home builders appear to be losing confidence. As a result, we expect construction to trend down in the short-term."
Marty Green, principal at Polunsky Beitel Green, weighed in on the Federal Reserve's stance on rate hikes: "Powell's remarks confirm what Patrick Harker, President of the Philadelphia Fed and a member of the Open Market Committee, told the Mortgage Bankers Association earlier this week, that the Fed is likely done with rate hikes in this cycle. [Still] mortgage rates increased, making further adjustments by the Fed less necessary." "Higher-for-longer" is the current expectation, meaning that we expect rates to hover around 8% for the foreseeable future, likely well into 2024," said Erin Sykes, chief economist and broker at Nest Seekers International. "I believe that moving against the tide is the best way to get a deal. Inventory has been sitting, and prices are negotiable, even if they are not posted as such online. "Generally speaking, we are not hearing pushback regarding loan rates or pricing but more so concern about uncertainty and geo-political issues. People are hesitant to spend money unless they feel very confident that it will have long-term benefits. With current 30-year rates near 8%, and the potential of going higher in the short to mid-term, there is a good chance that today's purchasers would be able to refinance at lower rates in the coming years." |
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