Section 1:A Path Well Trodden

This is far from the first time threats of this existential nature have come (and gone) over the last 70 years, and in all that time, average commissions have not been hugely affected. From the days when local REALTOR® boards were openly colluding to maintain commission structures to the advent of the internet, the National Association of REALTORS® (NAR) has been forced to change a number of major policies. In the end, commissions have remained relatively static.

J.B. Goodwin, founder and CEO of JBGoodwin REALTORS® in Texas, described a phenomenon he called the “threat of the year.” Not always relating to commissions, Goodwin says that over his 52-year career, regulators have continued to challenge traditional real estate.

“The real estate business and brokers and agents would get all lathered up, and they would all predict that this was going to change everything about the way real estate was ever done,” Goodwin says. “And quite frankly, it’s never happened.”

That isn’t to say that regulators and legal challenges haven’t modified the practice or rules of real estate over the years. While it is true that the basics have remained broadly the same—sellers market houses, and pay buyer agents a portion of their commission—plenty has changed over the years.

Ironically, though, it is the fact that commission rates have not changed that appears to have invited increased scrutiny from regulators. Numerous studies over the years—including RISMedia’s Contract & Commission Study—have found that real estate commissions are relatively inelastic, and tend to cluster around a few industry-accepted numbers.

Plaintiffs in various lawsuits, as well as antitrust regulators, are claiming that certain NAR rules—most prominently the Buyer-Broker Commission Rule—artificially inflate commissions at the expense of consumers. Sellers, they argue, essentially pay both sides while buyers have no chance to negotiate, even though the price of the house (and the agents’ commissions) are tied to what they are willing to pay.

Two real estate giants (RE/MAX and Anywhere) settled in the Burnett case before it went to trial, and simultaneously settled in the nearly identical Moehrl case (filed in a different jurisdiction). They paid out a total of $138 million and agreed to change practices.

The entities that did not settle—NAR, Keller Williams and HomeServices—were held liable for just under $1.8 billion in damages, though that is under appeal and is likely to be reduced. 

Dr. Ian Ayres is an economist and law professor at Yale University. He says that assuming there is real competition and negotiation of prices, it is hard to see how this dynamic by itself is driving costs up.

“What I don’t understand is how this agreement tends to raise prices. I haven’t gotten my head around that,” Ayres says. “You could still have competition, and it’s just bid down to the point where it is equivalent to what would happen if the buyers were paying for their own agent.”

But are agents and brokers truly competing on price, and negotiating with consumers? Or more importantly, can the industry convince judges (and the public) that the current structure is not anti-consumer?

The jury in the Burnett case took less than three hours of deliberation to deliver a verdict of full damages—seemingly not a great sign for real estate defendants. And the plaintiffs’ attorneys were clearly emboldened by this, filing an identical, nationwide class-action lawsuit within minutes of the verdict, naming several more real estate companies.

At the same time, defendants point out that significant evidence was excluded during the course of the trial, including state laws the explicitly allow the sharing of real estate commissions. Additionally, the Moehrl trial, which is scheduled to take place in the first half of 2024, will be held on NAR’s home turf in the Chicago area, with a very different jury pool compared to Kansas City, where the Burnett trial took place

With the outcome of this current legal battle very much in doubt, it is important to understand how we got here, what the current regulatory landscape is, and what the practical repercussions of various possible resolutions may be, as real estate professionals continue to prepare for a changing industry.

The Early Days
Initially, the industry was entirely open with its practices of what would now be considered illegal price fixing. The 1914 edition of the REALTOR® Code of Ethics says this, in the section titled “Duties of the Broker to His Fellow Brokers:”

“If the commission which it is usual to charge in the locality in which the broker is operating, is a fair one to the owner and broker alike, each broker owes it to himself, to his other clients as well as to his fellow brokers, to maintain the rate.”

Eventually, 5% was the norm across most of the country, with the national association (then called the National Association of Real Estate Boards, or NAREB) explicitly condoning the number. In the late 1940s, the Department of Justice (DOJ) stepped in, leveling both criminal and civil charges against both the local Washington, D.C., board and NAREB for price fixing. 

Speaking to a reporter for the Washington Evening Star in 1947, shortly after the initial indictments, the executive secretary of the Washington Board of REALTORS®, Charles J. Rush, defended commission-setting by saying that everyone knew it was happening.

“This is the first indictment for the violation of Federal antitrust statutes I have ever heard of where the allegations are based on evidence so generally known, understood and appreciated by the public,” Rush said.

Notably, attorneys for NAR used this same argument unsuccessfully in the opening days of the Burnett trial, with lawyer Ethan Glass asking jurors, “What kind of conspiracy is done out in the open? There isn’t one.”

After working its way through the court process, NAREB was acquitted in the criminal case. But the civil case was appealed all the way to the Supreme Court, where precedent would be set for the next couple of decades in regard to how regulators police real estate commissions.

While the D.C. board was found liable, the court declined to include NAREB as a part of price-fixing conspiracy, based on the vague policy language and the fractured nature of REALTOR® governance—though in the ruling, the justices made it clear that they believed the national body still exerted influence on commissions across the country.

How did real estate professionals react to this mixed, but extremely ominous ruling? Mostly, it appears, by continuing to practice business as usual.

Roger J. Whiteford, the attorney who represented NAREB in the 1950 Supreme Court case, told reporters following the decision that its effect will be “nil,” calling it a “pyrrhic victory.” Local real estate boards continued to openly collude to keep commissions at either 5% or 6%.

In 1958, the president of the Montgomery County Board of REALTORS® James C. Conley announced publicly that local REALTORS® would begin joining this effort.

“The issue of the 6% commission is no longer an issue,” Conley said, according to local media. “It has already been put into effect in most sections of the country with truly outstanding success.”

Ayres says that today, this kind of behavior is blatantly and immediately an antitrust violation. While more recently, real estate professionals have been trained to avoid any discussion of commission rates between each other, for many decades, those conversations continued to happen.

“Any horizontal agreement or agreement among competitors concerning pricing of goods or services…is per se illegal,” he says.

In the wake of the Burnett verdict, the reaction has been very different. While NAR has vowed to appeal and continues to defend its policies and practices, brokerages quickly began making changes. Though both the 1950 ruling and the Burnett case focused on similar allegations, regulators in the wake of the Supreme Court decision did not present the same threat as millions of consumers (and hundreds of lawyers).

Throughout the 1960s and 1970s, the Department of Justice went after REALTOR® organizations all across the country, often having little trouble showing that price fixing was happening. Most resulted in modest settlements and consent orders, where the boards agreed to eliminate any suggestions, policies or practices that encouraged a standard or inflexible commission fee, and to make it clear to consumers that fees were negotiable.

But in the long run, these moves do not appear to have actually had the desired impact—at least nationally. A widely cited report by the non-profit Consumer Federation of America in 2019 found that 73% of agents are not willing to negotiate commissions, and also that consumers mostly don’t understand how real estate commission works. And despite all this pressure from regulators (and massive advancements in tech and efficiency and housing preference over the last 65 years), commissions remain stuck in that range—between 5% and 6%.

Just this year, RISMedia’s exclusive study of real estate compensation found that the average rate was 5.21% nationwide—not significantly changed from 70 years ago. 

It was this inelasticity in commissions that made regulators suspicious and prompted consumer complaints in recent years. In the Burnett trial, NAR and the other defendants cited the uniqueness of the industry, as well as the fractured nature of how it is governed in arguing there is no conspiracy—commission rates are set independently by local, individual companies and agents in accordance with the free market. But the plaintiffs successfully flipped that narrative, notably telling the jury that all it takes is allegedly anti-competitive rules and an implicit agreement to enforce them.

They also cited NAR’s continued resistance to changes in technology—specifically the internet—and highlighted anecdotal evidence that commission negotiation is discouraged by real estate leadership. Those examples, which included training materials and executives highlighting specific rates, along with methods for refusing to change those rates when questioned by consumers.

Notably, in 2008, NAR settled with the DOJ over accusations of anti-competitive behavior and policies that attempted to exclude discount internet-based brokers from MLS access. 

Although ostensibly about mandatory offers of buyer compensation (which NAR has recently backed down from), these trials are really questioning the fundamental structure of real estate. Plaintiffs have repeatedly compared domestic markets to overseas markets, where commissions are lower and buyer agents are rare.

John de Souza, a former lecturer at the University of Notre Dame’s Mendoza College of Business and president of Cressy & Everett Real Estate, argues that “many aspects” of real estate in the United States are actually highly efficient, and that at the basic level, broker services are competitive.

“Every commission is negotiable, from the first conversation all the way to closing,” he says. “So if we’re trying to price fix it, we’re not doing a very good job at it.”

But despite the fact that the rules allow negotiation and REALTORS® are not openly collaborating to set commissions, critics continue to argue that policy set at the top is preventing competition—an argument that was foreshadowed almost 75 years ago in the 1950 Supreme Court ruling.

“Subtle influences may be just as effective as the threat or use of formal sanctions to hold people in line,” reads the opinion.

It is those “subtle” influences that are now central to the current cases, with controversy and scrutiny over things as small as the minimum commission offer in MLS buyer compensation fields (with many MLSs already making changes). The fact that agents can see what the offer of commission is on the MLS, while consumers cannot, is another focus, creating the potential for “steering,” where buyer agents subtly guide their clients away from low-commission properties.

DOJ lawyers summed up arguments against the current transaction structure in their July petition to the D.C. Court of Appeals, singling out NAR’s Participation Rule, which requires that MLSs include some offer of buyer compensation:

“By effectively affording sellers’ brokers control over what buyers pay their brokers, the rule could curtail price competition among buyer-brokers,” they wrote. “Potentially exacerbating these effects, buyer-brokers could steer customers to higher-commission listings—or discourage sellers’ agents from offering lower commissions.”

The ongoing Burnett trial was the first modern case to really test these arguments in front of a judge and jury. As the proceedings continue, it is not a hyperbole to say that at least to some degree, the American structure of real estate is on trial across the country.