In real estate, the year 2024 in real estate will be defined by a single date: August 17th.
On August 17th, as part of the National Association of REALTORS®’ settlement in a class-action lawsuit, new practice changes went into effect impacting how real estate agents are compensated for their work. On that date, buyers began looking at how they compensate their agent in an entirely new light.
Now, all home buyers need to sign written agreements with an agent that clearly outline the amount or rate of compensation the agent will receive. Listing agents can no longer put the amount of compensation offered to a buyer’s agent on the multiple listing service (MLS). These changes were designed to increase transparency for customers on both sides of a real estate transaction.
Here’s how I see these changes impacting the future of the real estate industry.
Short-term: Consumer costs are likely to remain stable
At the time I’m writing this, less than a month has passed since the August 17th implementation deadline — which means we only have a small data set to look at in terms of how the process changes have impacted consumer spending on housing. Looking at our internal data and at broad market patterns and some preliminary indicators, it’s safe to assume that consumer costs will remain relatively stable in the coming months.
The cost to purchase a home is impacted by two main factors: home prices and mortgage rates. U.S. home prices hit a record high this past June, with the median American family paying 26.8% of their income on a median-priced home, up from 16.9% in 2021. While price inflation seems to be slowing, we should not anticipate a significant drop in home prices any time soon.
The second factor, mortgage rates, looks slightly more promising. It’s looking like the Federal Reserve will cut interest rates when they next meet in September. But today’s rates, hovering around 6.74% as of writing, already take the anticipated cut into account. If the Fed continues to cut rates throughout 2024 — unclear at this point, but certainly possible — then we’re likely to see further decline in mortgage rates as well. Would-be buyers are dreaming of this day.
Will a decline in mortgage rates be enough to offset rising home prices? It’s reasonable to expect that no, it won’t. Especially since we expect that once rates fall, buyers who have been on the sidelines will pour back into the market, increasing demand and further driving up home prices.
The above patterns are playing out alongside, but not because of, the August 17th changes. Where the settlement has the biggest impact is on one very specific line item of the home buying or selling process: how much the agents involved are compensated. In the past, buyers never gave this a second thought, but now it’s an additional expense they must factor into their budgets.
It’s reasonable to expect a certain degree of compression in the future. Those consumers, who never realized compensation has always been negotiable, are more likely to negotiate. And some agents, particularly those who have never had to justify their compensation to a consumer, will slash their compensation as a result. That process will put overall downward pressure on agent compensation.
While we’re still in the early days, I don’t see the overall compensation compression as being all that significant for either consumers or agents. I’ll use some early data from Side’s operations in Florida to illustrate: Since August 17th, we have been seeing buyer’s agents collect roughly 2% of the purchase price in compensation, down from roughly 2.3% before August 17th. For an average Florida home price of $399,130, that’s a change of $1,197 — not insignificant, but not monumental. And while buyers do compensate their agents directly now, more often than not we are seeing a specific concession in the purchase agreement that covers those costs, meaning the buyer has not been paying extra out of pocket. Like everything, it will be hyper-local. Compensation movement may take shape locally but not yet nationally, which mirrors how the landscape works.
Of course, a 13.04% decrease in compensation could have a meaningful impact on an agent’s take-home pay. But ultimately, I predict that agents — specifically the very best agents out there — will be making more money, not less, as a result of these changes.
Which brings me to my next point:
Long-term: Expect fewer, better agents
Over the next few years, we are going to see a significant decrease in the number of licensed real estate agents, and that this will be a direct result of the practice changes brought on by the NAR settlement.
The hobbyists will fall away, the experts will thrive – and sell more than ever before. Here’s why.
The real estate industry has never been incentivized to hold agents to high standards. That’s because the industry is structured around fees and dues; the more agents there are, the more money the brokerages and associations make. In fact, since inexperienced, low-volume agents are typically on higher splits that are favorable to the brokerage, and those brokerages typically make more money from more low-volume agents than they do from a single, exceptional agent transacting the exact same amount in volume.
As a result, there are now a massive 1.5+ million licensed REALTORS® competing for somewhere around 4 million home sales per year (4.09 million in 2023, the last full year of data). And according to a 2024 study from the Consumer Federation of America, 49% of agents sell just one home a year — or none at all.
We’ve been dealing with a massive imbalance between the number of homes available for sale and the number of agents licensed to sell them. And that’s primarily because up until this point, it’s been simply too easy to become a real estate agent. The barrier to entry has been too low.
The practice changes from August 17th are raising that bar. While formal licensing requirements have not changed, the day-to-day job of an agent has become measurably more complex: Agents are now contractually obligated to explain how they are compensated and justify their compensation. Buyers are eyes-wide-open and skeptical.
Great agents have always been having some version of this conversation with their clients. For the so-so agents, this challenge will prove insurmountable. And over the next few years, it will lead to part-time agents leaving the industry in droves.
Traditional brokerages, who have always prioritized quantity over quality, are terrified of what this will mean for their bottom lines. But this will be excellent for both the consumer and the most professional, highest-performing agents out there.
With fewer unprofessional agents in the industry, consumers will have a greater chance of working with an exceptional agent who can deliver real value. And those agents, facing less competition in the marketplace, will be able to serve even more families each year, making up for any impact they might feel from compensation compression.
We’re already seeing signs of this happening. At Side, we have always taken a different approach from traditional brokerages; our goal is to partner exclusively with a select group of high-quality, top-producing agents. So looking at how the agents on our platform are performing, you can get a good sense of how the top end of the production distribution curve is performing.
Since the August 17th implementation date, agents within the Side community have actually sold 10% more real estate than we initially forecasted. Inventory hasn’t changed, interest rates haven’t meaningfully dropped, and they’re producing more. That tells us that in this post-settlement world, where proving your value is more important than ever before, top agents are already starting to pick up market share.
That’s only going to continue. In a few years, the real estate industry will be comprised of a much smaller — and much better — group of agents. And that will be a huge win for consumers.
