Transcript of What The Realtor Rule Changes Mean for You

At the Democratic National Convention in Chicago on Thursday, Vice President Kamala Harris laid out some of her plans if she wins the presidency. Not a ton of specifics here. It was mostly emotion and vibes up there on stage. But one thing she did mention involved housing.

And we will end America's housing shortage.

Again, that's a huge promise with very, very little meat on the bone. But whatever the fix may be, the problem is undeniable. This key part of the American dream has become more and more unaffordable for so many, especially first-time home buyers and minority groups.

New rules are shaking up the real estate industry in the US. Starting tomorrow, these rules will change how realtors get paid.

And while it-So what happens when the rules for how you go about buying and selling a home get turned upside down? My guest is CNN business writer Samantha DeLuya. We're going to talk about what you should know about these new rules and why the ultimate impact of them is still open to interpretation. From CNN, This is One Thing.

I'm David Wright. Sam, long-time listeners of this podcast may have picked up on the fact that my wife, Angie, who is a whole human being in her own right, and I are looking to buy a house. But we've been in this waiting game to try to figure out when the best time is going to be, when the best marketing conditions are. I don't say this, I don't want anybody to shed any tears for me, but I know so many Americans out there are dealing with the same thing. I guess my question is, when is it going to be easier to buy a house?

Yeah, David, the US housing market is in a pretty tough spot right now. Home prices are at record highs. There's a lack of inventory, and mortgage rates are at elevated levels by recent historical standards. There is good news, which is that mortgage rates are falling this summer as more people expect the Federal Reserve to cut interest rates in September in its fight against inflation. But, lower mortgage rates could translate to lower monthly payments for new home buyers, but it could also be a double-edged sword. Lower mortgage rates encourage more potential home buyers to come off the sidelines and into the market, and they could flood the market, creating more competition for the houses that are currently on sale.

So there'd be more competition, more rush for houses, and bids could go up, and you just get into a situation where There's just a lot of people looking all at once.

Exactly. And that could drive the price of homes even higher. So that's a concern that many economists have right now. And to top it off, there are these new rules that went into effect last week that throw a wrench into the whole home buying process for many people.

Yeah, that's really why I wanted to have you on, because I've been hearing about these rules. Realtors are freaking out. So can you just explain what's going on here?

Yeah. So there's a new set of rules that went into effect on August 17th. They affect the members of the National Association of Realtors. That's this powerful real estate trade group and lobbying group that counts 1.5 million real estate professionals as members. If you've worked with a realtor before, odds are they're a member of this organization. And fun fact for you, N-A-R, which is how most people call them, is so powerful that they trademarked the word realtor, and that's why you have to capitalize the R when you write it out.

What Do you have to capitalize the R?

Yeah, no. They own the realtor word. And yeah, these new rules are designed to transform the way realtors get paid and who pays them.

Okay, so take me back. How did these rules that you talked about, how did they used to work?

Yeah, so the old way of doing things before August 17th was that when you bought a home, you didn't directly pay the realtor who helped you, actually. That fee was paid by a home seller. The seller traditionally paid a commission, usually around 5 or 6% of the home selling price, and it was split between their own realtor and the realtor representing a home's buyer. That offer of commission sharing was posted on these databases that realtors used to look up homes for sale. Critics basically accused buyer's agents of hunting for homes on these listing databases that paid them the most commission instead of showing their clients homes that would be the best for them.

Because this number was publicly visible, they could look around and say, Hey, that one might make me a lot of money.

Exactly. So that was the accusation, which, of course, NAR denies, but this new rule attempts to eliminate it altogether. Got you. But there's another Another rule that's important. This one specifically impacts the relationship between home buyers and their realtors. From now on, home buyers will have to sign a legally binding representation agreement with a realtor before they can even tour a house together. This agreement has to make clear how much that realtor is going to get paid for the transaction. It also has to make clear that that payment is negotiable, and it says that if a seller chooses not to offer compensation to a buyer's agent, the buyer themselves will now be on the hook for that payment. That's a big change.

This is potentially a lot of money that the buyer might be on the hook for that they weren't in the past. But you're saying that it could be negotiated, like when you go to buy a car, you haggle down the price?

Exactly. That's the hope of these changes. Experts say that the 5 to 6% commission paid out to realtors was artificially high, and these changes should bring that down. So it should eventually bring down the cost of using a realtor. At least that's what experts say. But of course, it's pretty unclear how long this will take. Many critics of the rule say that the changes could actually hurt home buyers who may now obviously be on the hook to pay their own realtor out of pocket. But the proponents of the rules say that under the old way of doing things, buyers didn't actually get the services of a realtor for free because sellers would bake that commission into a home's listing price, inflating home prices across the country.

So just because they didn't see an IOU from their own realtor, it was still money that they were going to pay one way or the other.

Exactly. Buyers were the ones bringing money to the table at closing, not the sellers. So all the money that was being paid in the end really did come from the buyer's pocket, even if they didn't realize that part of it was going to their realtor. Buyers now have to know how their realtors are getting paid, and they have the freedom to negotiate, which is something NAR said that they always had, but many critics said that buyers didn't realize that they had that freedom.

So obviously this could be a big change for buyers, depending depending on how they hash it out with their realtors. How is this impacting the realtors themselves?

Yeah. So the realtors are the ones that are feeling the real immediate pain here. They are right now scrambling to adjust to what could end up being the biggest change to their industry, maybe in their entire careers.

We did not know how this would impact our business and what it would mean for how we work with clients and all that thing. So it's just uncertainty.

Some tell me that they fear that they'll have trouble getting some home buyers to sign these legally binding agreements, especially if home buyers speak to friends and their friends say that a few A few months ago, I didn't have to sign that. That's going to be confusing to people touring homes, and it's going to be the realtor's job to make the case to the home buyer that you should sign this with me, and this is how much I should get paid.

So the word of mouth is negative from the jump.

Exactly. And over time, that could get easier, obviously, as word of these new rules spreads. We are obsessively putting out as much content education on every platform you can imagine internally and to the industry, because I think this is an education exercise, right? And there is some home buyers and sellers who do know that these rules are out there, but they're very confusing. And so it's now up to the realtor to explain I mean, these are what these rules are. And also this is my value proposition. This is why you should pay me. And a lot of people are predicting that younger or more inexperienced agents may have a pretty tough time convincing home buyers that their services are worth that 2 % or 3 % of their home's purchase price, which is what they were getting in the past when they would share that commission with a seller's agent. Think about that for a second. For a $500,000 home, that might mean that a home buyer has to cough an extra $15,000 to pay their realtor. That could be a pretty tough sell.

I have not been super concerned. I know there are a lot of agents that have large fears that this is going to really drastically change the way that we do business.

And I think- I spoke to some younger realtors, and they said that they think that it's a tough industry. They've seen people will drop out all the time. There are these estimations that a big portion of realtors drop out in the first two years of the business anyway, because it is so competitive and so tough. These younger realtors say that they're not concerned. They think that if they continue to push in their top performers, they'll make it, but they do think that other people will drop out.

And I think just new agents in general will have a hard time breaking into the market, not just necessarily from the consumer side, but on the agent side also. The whole concept of the MLS was built off of cooperating with other agents. If you're in a position where now you have to advocate your value, not necessarily just to your client, but to the cooperating agent to justify that you're worth paying a code record commission to, that's double the challenge.

Basically, everyone I've spoken to said they think some people will drop out, but not them. It'll be interesting to see how this plays out.

Well, yeah, that's what I wanted to ask. So these rules have been in place for a week now. How has it actually looked in practice?

So it's been a few days so far, and there's definitely still confusion out there. Realtors are still struggling to explain to home buyers and sellers what these changes actually mean. They're still adjusting to how much commission they should be asking from these home buyers, especially because whatever commission they sign that agreement saying that they're to get paid, they cannot get paid more at the end, even if a seller is willing to pay them more money, which is a little bit confusing, but it basically is designed to prevent realtors from steering home buyers to homes that will pay them the most.

That's interesting. So you're saying a seller might be motivated to say, Hey, I'll chip in a little bit more at the end if we can get this done. But you're saying under these new rules, the realtor can't accept that.

Exactly. If a realtor proposes to a home buyer, Hey, I get paid 2% of the home sales price at the end. And if a seller doesn't agree to pay it, you're going to be on the hook for that. The buyer might negotiate that down. Oh, I don't feel comfortable paying 2%. Maybe, Can you take 1.5? Now the realtor is locked into 1.5 %. Even if the seller does ultimately agree to pay that 2 % or even 3 %, the realtor cannot accept that money. So far, I've spoken to realtors who say that so far, most sellers are still willing to pay out the buyer side of the commission, meaning that in the first few days, the initial aftermath of these rules going into effect, it hasn't been so drastic of a change just yet. There are some people who are taking advantage of this moment to offer more creative real estate services. I know of at least one new platform that launched this week offering lower cost flat fee real estate services in an attempt to appeal to people who might not don't want to pay that percentage commission anymore. Overall, though, it's still early days.

The changes are still making their way through the housing market, so we don't fully yet know how much of an effect that they're actually going to have.

Yeah, an interesting new moment here. Sam, thanks for explaining it for us.

Thank you. One Thing is a production of CNN Audio.

This episode was produced by Paula Ortiz and me, David Reind. Our senior producers are Felicia Patinkin and Fez Jamil. Matt Dempsey is our production manager. Dan Dizula is our technical director, and Steve Ligtai is the executive producer of CNN Audio. We get support from Haley Thomas, Alex Manisari, Robert Mathers, John Dianora, Lanie Steinhart, Jamis Andres, Nicole Pessereau, and Lisa Namarau. Special thanks to Wendy Brundage and Katie Hinman. I say this a lot, but if you like the show, just leave us a rating and a review on Apple podcast. Drop me a line on social media. Love to hear from you, and we'll be back on Wednesday with another episode. I will talk to you then.