For decades, Americans have paid some of the highest real estate agent commissions in the world, amounting to roughly $100 billion annually. But a recent settlement agreement will soon change that. After multiple class-action lawsuits nationwide alleging anticompetitive practices, the National Association of Realtors (NAR) has agreed to pay more than $400 million in damages and rewrite its current agent commission fee rules.

Traditionally, sellers and their agents agree on a commission fee, typically 5 to 6 percent of the home value, with the amount paid out of the seller’s proceeds and split between the seller’s agent and the buyer’s agent. Most buyers have not had input into the fee and were not aware that it was negotiable.

Starting in July 2024, the settlement mandates that compensation for real estate brokers cannot be listed on multiple listing services and that buyer-side real estate agents have to “enter into written agreements with their buyers.” There has been much speculation about how this change will work in practice. Here, we offer three predictions of our own:

• Sellers will pay buyers’ agents’ fees out of sales proceeds, as they do today.
• Real estate fees will go down, especially for owners of expensive homes and repeat buyers.
• Affordability challenges will remain and will require long-term solutions.

Why the seller-paid model will remain

We foresee two potential commission fee models: one in which the seller pays the buyer’s agent and one in which the buyer pays the buyer’s agent. We predict the seller-paid model will be adopted because it is closest to the status quo and there are no regulatory hurdles or required government action. Under a seller-paid model, fees could be paid either through direct payments or by giving the funds to the seller’s agent to pass through to the buyer’s agent. The exact distribution method doesn’t matter, though the former is more straightforward.

Here is how a seller-paid model would work: The buyer would sign an agreement with their agent at the beginning of their home search, laying out the services the agent would perform and the fee they would be paid. Separately, the seller would enter into an agreement with their agent when the home is listed, laying out the services to be performed and the fee to be paid. When a buyer makes an offer, they would specify both the price being offered and the fee the buyer’s agent expects to be paid. The buyer, seller, and their agents would settle on the final terms of the sale contract.

Suppose a seller wanted to make $400,000. If the buyer negotiated a 1.5 percent fee with their agent and offered $406,000, the seller would make the money they expected, less their own agent’s fee. But if another buyer offers $404,000 and has negotiated a flat fee of $2,000 with their agent, the seller would do even better, making $402,000 before paying their broker.

Some worry that the seller paying the buyer’s commission would be treated as a seller concession, forcing the buyer to come up with the money from their own pocket or borrow it as part of the loan. But the seller already pays the buyer’s commission today, and it is not treated as a seller concession. The buyer’s agent’s fee remains a part of the sales price, keeping the status quo for financing and for appraisal considerations. The government-sponsored enterprise and Federal Housing Administration rules are clear that seller-paid buyer’s agent fees are not subject to seller-paid closing cost restrictions.

Why the buyer-paid model wouldn’t work

Consider the other possible model, in which buyers would pay their agents directly and not out of the sale proceeds. In this scenario, first-time homebuyers would need to find an additional $6,000, based on the median-price existing home sale, with a reduced fee of 1.5 percent of the house price.

Many buyers won’t be able to come up with the cash, which would limit the buyer pool, squeezing out first-time homebuyers in particular. For federal programs, which use the lower of the sales price or the appraised value, commissions not included in the sales price could not be financed. Even if this rule was changed, which is unlikely and could take years, buyers would still have higher loan-to-value ratios, which could inject unneeded risk into the system.

Ultimately, with the buyer-paid model, sellers would have to accept a lower price because the buyer has to pay their own agent directly and because the pool of potential buyers is smaller. The choice is clear—the seller would pay the buyer’s agent, with heavy encouragement by the seller’s agent, instead of having the buyer pay directly. We don’t believe federal intervention is necessary to obtain this result; the market will quickly figure it out.

Fees will go down but not as much for first-time homebuyers

This settlement will result in consumer savings. Under the new rules, buyers must sign contracts with their agents, and fees will be based on the level of service they request. Uncoupling buyer’s commissions from the multiple listing of the property will allow the seller to evaluate the total offer from the buyer. In addition, the seller will have greater ability to negotiate with their agent, as the buyer’s agent will not steer buyers away from lower-commission homes, which is currently the case. Through transparency and negotiation, agent fees will be lower across the board.

Although costs will come down for all—making both buyers and sellers better off—costs will come down more for more expensive homes. Many of the costs of selling a home are fixed, meaning it costs the same to market a more expensive home and a less expensive home. Also, more experienced buyers may need fewer brokerage services, cutting their costs. As a result, first-time homebuyers who are more likely to buy a less expensive home will realize less savings from this settlement than a repeat homebuyer, which could exacerbate the disadvantage they already face in today’s market.

Reducing fees will bring down homebuying costs, but the deep shortage of homes will work in the opposite direction. As such, fee reductions will not substantially affect home affordability, so policymakers should continue focusing on increasing housing supply to make homeownership more attainable in the long run.